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Outlook improves, to reach FY19 revenue levels in FY22

EVs: Good presence in 2Ws/PVs | PLI opportunity attractive, but awaits clarity

We hosted the senior management of Bosch. Our meeting with Mr. Soumitra Bhattachrya, MD, Bosch, and Regional President, Bosch Group India, included discussions on the business, its preparedness for technological disruptions, and the PLI opportunity.

* Demand recovery better than originally estimated: The outlook has improved from initial expectations as the recovery has been better. It expects FY22 revenue to be similar to FY19 levels. Depending on the level of economic activity (high case assumes 11% GDP growth in CY21 and 8.5% in a low case), it expects growth in CY21 as follows: a) PVs 25%/35% (low/high case), b) M&HCV: 87%/106%, c) LCVs: 46%/54%, d) Tractors: 2%/19%, e) 2Ws: 21%/27% and f) 3Ws: 9%/25%. It forecasts M&HCV volumes to reach near previous peak levels in FY23, with volumes crossing ~400k units (v/s FY19 peak of ~444k units).

* EVs – BOS supplies to relevant 2Ws, PVs models: BOS expects electrification to start with 2Ws/3Ws and has relevant solutions for e-2Ws, e-3Ws, and e-LCVs. It is already supplying to: a) Bajaj Chetak (drive, battery, ECU, connectivity box, and App/Cloud services), b) TVS iQube (ECU and in-hub drive system), and c) Tata Nexon. For M&HCVs, it expects fuel cells to be relevant solution and is globally strong in this technology. For EVs, the parent had a total upfront investment of EUR5b and invested EUR700m in CY21. It has won 90 projects and orders worth EUR7.5b.

* PLI scheme seems attractive, but details awaited: Of the four PLI schemes for Auto, BOS would benefit from three of them (excluding the OEM scheme). The group, it indicated, can claim up to USD1b under this scheme. It will work on these schemes once the final details are out.

* Other takeaways

* Supply chain challenges more widespread beyond semi-conductors: The semiconductor issue is impacting the EU, US, China, and Japan more than India. While the semi-conductor issue is well known, supply chains are under pressure globally due to a shortage of steel, plastics, rare earths, etc.

* 100% subsidiary to offer manufacturing as a service: Its 100% subsidiary, Robert Bosch India Manufacturing, would offer manufacturing as a service in the Automotive segment for both external customers as well as group companies.

* Margin to see steady improvement based on mix improvement/content increase, restructuring/reskilling, and cost controls.

* BS-VI confirmatory factors are ahead of regulatory norms, with 9%/70% of projects confirming to the factor of 2.1/1.43.

* Its smart campus (75 acres) in the heart of Bengaluru will be operational in Jun’22, its 100th year in India. It has invested INR8b on this smart campus and would house the second highest number of Bosch employees in the world.

Valuation and view: The transition to BS-VI led to further market share loss in CVs as well as a continuous decline in its stronghold PV diesel, although the 2W segment has opened up for BOS (one of the 3-4 players in 2W EFI). Valuations have corrected in line with muted earnings over the last four years, dilution in its competitive positioning, as well as on concerns due to EVs. While it is too early to assess the competitive landscape in EVs, BOS is very well-prepared to leverage electrification in 2Ws. We expect it to outperform underlying industry volumes, barring the substantial divergence in segmental trends, driven by an increase in content under BS-VI as well as additional revenue from 2W EFI. The stock trades ~29.3x/25.4x FY22E/FY23E EPS. The stock price largely reflects all the negatives, but a re-rating catalyst may emerge in 2-3 quarters. We maintain Neutral with a TP of ~INR15,550/share (~28x Mar’23E EPS at a 20% discount to its 10-year LPA of 35x).

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