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Op. performance below expectations; excited about 2W opportunity in BS6/electric era
* Revenues miss estimates:
Revenues were flat YoY (-3.3% QoQ) at INR31b (our estimate: INR32.6b). Auto revenues were flat YoY (powertrain revenue down ~3% YoY), while non-auto revenues grew by 6.9% YoY (driven by the security systems and solar energy divisions).
* Margins hurt by forex, product mix:
EBITDA declined 6% YoY (-29% QoQ) to INR4.2b (below our estimate of INR4.6b). EBITDA margin contracted by 90bp YoY (-490bp QoQ) to 13.7% (our estimate: 14.1%), led by higher RM cost (55.5% v/s our estimate of 53.5% due to currency headwinds for imports) and an adverse product mix. Higher other income and lower tax led to PAT growth of 19% YoY to INR3.4b (higher than our estimate of INR3.1b). For 9MFY19, revenue/PAT grew 11%/27% YoY.
* Other highlights:
(a) Aftermarket business growth is likely to recover to double-digits over the coming quarters (~6.8% growth in 3Q). (b) For BS6, customer acquisitions (incl. 2Ws) are at an all-time high for BOS. (c) For BS6, BOS will source after-treatment from its partner and BOS will be the system integrator. (d) BOS is excited about the opportunity in the 2W segment driven by BS6 (EFIs) and EVs by FY21, and expects to be a big part of that ecosystem. (e) Mobility solutions business would be in the listed entity, which will be the face of BOS for customers.
* Valuation view:
We cut our FY20/21 EPS estimates by 7%/9% to factor in the weaker demand environment and lower margins. The stock trades at 28.3x/24.0x FY20/21E EPS. Maintain Neutral with a target price of ~INR20,147 (27x FY21E EPS – ~15% discount to 10-year average).
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