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Profitability set to improve from current lows

Bosch India’s (BOS) Q1FY23 EBITDA margin at 12.7% (down 47bps QoQ) was largely in line with our estimate at 12.5%, amidst peak of raw material (RM) costs and seasonally weak quarter in terms of volume. Revenue growth of 45% YoY was driven by 47%/61%/54% YoY growth in powertrain solutions/aftermarket/nonmobility areas, respectively, with growth being elevated on a low base. With UVs settling at ~50% of PVs, BOS is expecting diesel PV mix to stabilise in the current ~15-20% band, thus, providing a base to diesel system revenue other than M&HCVs. With gross margin levels ~700-800bps lower vs pre-FY20 levels, decline in raw material prices would help margin reversal soon but increasing localisation of BS6 diesel fuel injection systems is a time-taking process and thus, would limit margin reviving beyond 15% in near term, we believe. BOS is investing 1.5-2% of revenue in advanced automotive technologies like fuel cells/hydrogen cells/EVs for a smoother transition from a diesel-dominated portfolio, in turn impacting near-term margin. Pickup in auto OEMs, improving semiconductor supply and reversal in commodity costs would drive FY22-FY24E EBITDA CAGR of 37%, post remaining flat in FY20-FY22. We maintain ADD and value BOS on a DCF-based target price of Rs18,390 (earlier: Rs15,273), implying 25x FY24E earnings. Increase in price target is led by a combination of ~11% increase in FY24E earnings and rollover of DCF valuation.

Key takeaways from conference call and our inferences:

* Gross margin (GM) continued to remain under pressure and lower by ~700-800bps from pre-FY20 levels on account of a combination of the following: 1) Lower mix of diesel products in portfolio, 2) higher mix of traded products under BS6, many of them would take time to get localised, c) continuity of supply-chain bottlenecks (China lockdown) and subsequent elevated logistics costs impacting cost of importing key parts, d) this quarter Q1FY23 absorbed the peak of commodity prices in the recent inflation, e) BOS is spending 150-200bps of revenue on advanced automotive technologies by reinvesting its profits. We believe ~300bps of the lost GM is recoverable with commodity cost normalisation and supply-chain issues getting resolved gradually. Thus, from present 12-13% EBITDAM levels currently, we expect it to stabilise at 16-17%, 200-300bps lower than pre-FY20 levels, aided by a decline in RM costs and improving scale. Also, EV-related components are more profitable as per our interactions with peers, helping BOS improve margin mix.

* In terms of revenue growth, BOS is targeting PV/M&HCV industries to reach a scale of 3.2mn/0.3mn in CY22, which should drive a healthy mid-teen revenue growth for BOS in FY23, we believe, assuming market share structure remains steady. Focus on growing after-market business at a pace much faster than automotive portfolio would also add on to the growth potential, we believe

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