Quarter falls short of expectations
Bosch’s (BOS) Q2FY21 operating performance was below consensus estimates as EBITDA margin came in at 11.6% (down 295bps YoY). Automotive revenues increased by ~9% to ~Rs21.3bn (mainly due to 7.5% YoY improvement in mobility division) while non-automotive revenues declined 3% to ~Rs3.5bn. Restructuring costs (Rs4bn for Q2) continued to remain elevated (past 6-qtrs cumulative hit of Rs13bn), company expects this to rundown in H2FY21. We believe the efforts to right size core business lay a better foundation for the future; however, underlying business challenges (market share loss in M&HCV, decline of diesel share in PV’s) and uncertainty on current demand sustenance remain key risks. We believe margins scale back (>15%+) is likely an uphill battle considering the product mix and pricing considerations. Upgrade to REDUCE (from Sell).
* Key highlights of the quarter: BOS’ domestic mobility solutions business improved ~7.5% YoY due to better sales in the powertrain solutions business (up 6.7% YoY) in auto segment while 2-W segment grew mid-double digit. Business beyond mobility was down 4.6% due to weakness in solar and security technology businesses. Higher RM costs (up 396bps) impacted by forex appreciation and product mix led to EBITDA margin contraction of 294bps to 11.6% as employee costs declined 204bps. Provision of ~Rs4bn has been made as part of restructuring, redeployment and reskilling initiatives and the management expects additional provision in Q3FY21.
* Key takeaways from concall: a) Capex for FY21 has been trimmed by 50% (Rs2.3bn-2.4bn) as the company focuses on strong cash conservation and liquidity management; b) domestic sales were up 7.2% YoY with mobility segment improving 9.6% YoY while business beyond mobility declined 4.9% YoY; c) as part of its 3R restructuring program, BOS has already provided for ~Rs13bn till date; payback period is expected to be 5-6 years; ~1k workers have opted for voluntary retirement program under restructuring and reskilling program; d) recovery in tractor and 2W segments has been strong; domestic plants in the mobility business are currently operating at peak utilisation; and e) BOS has acquired 7.14% stake (~Rs148mn) in Nivaata Systems to expand its mobility/cloud solutions offering.
* Upgrade to REDUCE: Our conservative view on BOS (past few years) has been centred on both industry and company specific challenges. While the industry seems to be bottoming out the company specific concerns still remain, the stock too has underperformed during this period. While we trim earnings in FY21E/FY22E by 56%/6.3% in FY21/22 we also rollover to Sep’22E factoring in better industry growth prospects in FY23. We cut our target multiple to 25x (earlier: 26x) on Sep’22E EPS of Rs428, upgrade our rating to REDUCE (from Sell) with a revised target price of Rs10,712/share (earlier: Rs10,698/share)
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