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Near term outlook cautious amid global chip shortage

About the stock: Bosch Ltd (Bosch) is a technology leader providing solutions in automotive, industrial technology, consumer goods, energy & building technology.

* Mobility solutions (automotive products) formed ~85% of FY21 sales with share of Business Beyond Mobility at ~15%

* Within mobility, it has large presence in diesel-dependent vehicles & tractors

Q1FY22 Results: Bosch posted muted Q1FY22 results.

* Total operating income fell 24.1% QoQ to | 2,444 crore with domestic revenues down ~27% QoQ, outperforming the OEM sales decline

* EBITDA margins were lower by ~670 bps QoQ to 12.5%

* Consequent PAT declined ~46% sequentially to | 260 crore

What should investors do?

The stock price has underperformed Nifty Auto index over past five years, declining from ~| 24,500 levels in August 2016 at ~9% CAGR.

* We retain HOLD rating on impending sectoral recovery, value addition focus

Target Price and Valuation: We value Bosch at 28x P/E on FY23E basis for a revised target price of | 15,730 per share (earlier | 16,550).

Key triggers for future price performance:

* Outperformance vs. base industries set to continue amid focus on higher content per vehicle; CV revival an added tailwind. Bosch also intends to increase the share of aftermarket sales from present levels of ~20% to ~25% in due course of time. We model 20.5% FY21-23E net sales CAGR

* Future regulatory changes (TREM-IV & V in tractor & off-highway, phase 2 of CAFE norms & BS-VI) to provide further value addition opportunities

* Resolution of semiconductor shortage to aid topline, margins. Operating leverage gains seen aiding margin improvement to 15% by FY23E

Alternate Stock Idea: In the auto ancillary coverage, we also like JK Tyre.

* Walking the talk on b/s deleveraging, sweating of assets & capital efficiency

* BUY with target price of | 180

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