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Yet another quarter of subdued profitability

Bosch India’s (BOS) Q2FY23 EBITDA margin at 11.8% (down 91bps QoQ) missed consensus estimate of 13.4% due to increase in traded goods mix and elevated cost of sourcing of electronics, despite declining input commodity costs. Revenue growth of 25% YoY was driven by 31%/7.5% YoY growth in powertrain solutions and energy/building tech divisions, respectively, albeit on a low base. With gross margin levels ~800bps lower vs pre-FY20 levels, decline in raw material prices would drive BOS margin reversal. However, increasing localisation of BS6 CV fuel injection and EV components would take time and limit margin revival beyond 15% in near term, we believe. BOS is starting to witness its hydrogen engine systems reach pilot stage. It is investing 1.5-2% of revenue in advanced automotive technologies like fuel cells/hydrogen cells/EVs. Demand revival in auto OEMs, better semiconductor supply and reversal in commodity costs would drive FY22-FY24E EBITDA CAGR of 33%, post remaining flat in FY20- FY22. We are cutting our FY23/FY24E EBITDAM by ~150bps each led by limited scope and benefit from localisation in near term. We downgrade the stock to HOLD from Add and value BOS on DCF-based target price of Rs17,105 (earlier: Rs18,390), implying 25x FY24E earnings.

Key takeaways from conference call:

* Revenue growth of 25% YoY led to record revenue of ~Rs36.7bn in Q2FY23 and was led by strong traction in PVs/CVs. Robust revenue momentum is likely to continue with PV/CV demand outlook remaining strong ahead, too. As per the management, the rising trend of premiumisation (Rs1.2mn+ on road priced models) is clearly visible in PV market as against entry/mid-level cars and thus, need for higher value addition would drive revenue growth other than volume growth.

* With traded goods mix increasing ~400bps to 44% in Q2FY23 and elevating the cost of sourcing electronics components, despite declining raw material prices, gross margin declined 30bps QoQ. With minor increase in localisation of fuel injectors for CVs, rising localisation in power tools segment from ~40% currently, gradual decline in input commodity rates (net of currency moves) and declining container freight rates, management is looking forward to the gradual revival in EBITDAM from the current ~12% levels.

* Targeting to take exports up from ~7-8% of revenue to mid-teens in next 2-3 years. Bosch India is likely to push localisation with limited exports mix. Thus, taking technical support from Bosch global for various EV components, change in emission/regulatory norms etc.

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