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Stands to benefit from OEM cyclical revival

Bosch (BOS) reported its Q3FY22 EBITDA margin at 11.5%, down only ~30bps YoY, despite limited benefit from operating leverage and adverse raw material (RM) cost environment. Automotive revenues grew 3% YoY and returned to H2FY21 quarterly run-rate of Rs27bn as against the non-mobility segment growing 7% YoY. BOS is focusing on enhancing its vehicle servicing business along with growing its aftermarket segment at a rate faster than OEM industry growth in the coming years. It is planning to invest Rs1bn p.a. towards localising advanced automotive technologies, which would boost revenues and gross margins ahead. We believe, pickup in the auto OEM segment, semiconductor supply improvement, rising localisation and stabilisation in input commodity costs together would drive FY22-FY24E EBITDA CAGR of 33%, post remaining flat in FY20-FY22E. We roll over our estimates to FY24E and value BOS at 25x FY24E EPS of Rs691 (earlier: Rs597). Given the recent price correction (down 14% since Nov’21) and improving demand outlook for OEMs, we upgrade the stock to ADD from Sell with a revised target price of Rs17,281 (earlier: Rs13,774).

* Key highlights of the quarter: BOS’ mobility business revenues were up 2.6% YoY, driven by the aftermarket segment. Non-mobility revenues rose 7% YoY mainly due to higher sales in the power tool segment. Higher RM costs led to gross margin contraction of 283bps YoY even as lower other expenses helped curtail EBITDA margin drop to 32bps YoY at 11.5%, despite one-time impact of warranty provisions. Adjusted PAT was down 6% YoY at ~Rs2.6bn largely due to lower other income (down 28% YoY) and higher taxes (30%).

* Key takeaways from conference call: a) Limited growth of ~3% in mobility segment was due to weak demand across 2Ws, tractors and key PV customers, as against moderate growth from the CV segment. Non-mobility space grew ~7% YoY led by focus on aftermarket, servicing and power tool divisions, and BOS expects these segments to outperform OEM industry growth in the coming years. Thus, we are building in ~17% revenue CAGR for BOS in FY22-FY24E; b) company is focusing on building digital innovations and advanced electronic system capabilities for future growth as per needs of the market, in addition to continuous focus on electrification-led new component addition in the portfolio. BOS will spend Rs10bn in next 10-years w.r.t. the new-age technological aspects other than normal business capex; c) gross margin was down ~400bps from normalised levels due to higher usage of traded goods, elevated raw material costs and continued investments in mobility innovation solutions with expenses being routed through P/L. Staff costs fell ~100bps YoY through manpower cost restructuring exercise in past one year. We are building in ~200bps increase in gross margin by FY24E apart from the expected benefits of scaling up. This leads to an EBITDA margin of ~16% in FY24E vs ~12% in FY22E.

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