Mixed bag; Guidance for very bleak industry outlook
Beginning to outperform underlying industry growth, led by content increase
* 4QFY20 saw the first quarter of BOS outperforming underlying industry growth; this was led by the initial benefit of a BS6 content increase and the 2Ws segment addition. We expect this trend to continue, barring substantial divergence in segmental trends. We believe stock price is largely reflecting for all the negatives, but a re-rating catalyst may emerge within two to three quarters.
* We downgrade our FY21/FY22 EPS by 10%/3% to reflect volume decline. We maintain Neutral, with TP of ~INR10,250 (~25x Mar’22 EPS).
Beat on revenue growth, miss in margins, and in-line adj. PBT
* Bosch (BOS)’s revenues/EBITDA/PAT declined 19%/34%/26% YoY in 4QFY20 and FY20 revenue/EBITDA/PAT declined 18.6%/31%/23% YoY.
* BOS’ Auto sector revenue declined ~24%, impacted by ~30% decline in Powertrain Solutions, but diluted by growth in 2Ws.
* Operating deleverage impacted EBITDA margins (-90bp YoY) to ~15.3% (v/s est. 16.2%). However, tax write-backs restricted adj. PAT decline to ~26% YoY to ~INR3b (v/s est. ~INR2.8b).
* The company provided (INR3b/INR7.2b in 4Q/FY20) for restructuring expenses linked with structural changes in the business, which may continue in FY21, if required.
Highlights from management commentary
* Bleak FY21 outlook for Auto industry: BOS expects FY21 production to decline sharply across segments: 2Ws (-41%), PVs (-42%), 3Ws (-12%), LCVs (-47%), M&HCV (-15%), and Tractors (-40%). The industry is expected to take four to six years to recover to the previous peak of FY19, with BOS likely to make a faster comeback owing to good BS6 order wins, improving content, adjacencies, and new-age business areas.
* For BS6, it has won over 79 projects across segments; these projects are valued at ~INR240b across the life cycle (pre-COVID-19 estimates). This also includes hybrid vehicles. Acquisitions for RDE/CAFÉ 2 norms have just commenced. OEMs are looking at their engine roadmaps and bringing back diesel in their plans.
* BOS has formed a wholly-owned subsidiary for new-age and high-tech manufacturing. We believe this subsidiary was formed to avail concessional income tax of 15% and would house future businesses, such as EV components.
* Status of operations: BOS has resumed operations with 15–20% utilization on a single-shift basis and expects to operate at this level for May and June. However, ramp-up beyond the first shift would depend on ramp-up at tier-2 / tier-3 vendors, which may face a labor shortage if migrant labor takes time to return.
Valuation and view
* We downgrade FY21/FY22 EPS by 10%/3% due to lower volume estimates for the underlying industry, diluted by higher other income.
* Valuations at ~30.7x/23.3x FY21/FY22E EPS largely factor potential market share loss during the BS6 transition. Maintain Neutral.
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