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Above estimates; strong traction in revenue continues… …

but margin recovery yet to happen due to higher traded content

* Revenue continued to grow faster than underlying industry growth in 4QFY21. While the current situation will impact demand in the near term, we expect growth to rebound faster on account of strong Tractor demand, addition of the 2W segment, and higher content. The stock price largely reflects all the negatives, but there are no major re-rating catalysts on the anvil.

* We cut our FY22E EPS by 4% to account for near term challenges, while maintaining our FY23E earnings estimate. We maintain our Neutral rating with a TP of INR15,850 per share.

Stronger revenue growth in both businesses, but margin falters

* Revenue/EBITDA/adjusted PAT grew 44%/35%/13% YoY in 4QFY21 to INR32.2b/INR4.6b/INR3.5b. The same in FY21 declined ~1%/32%/21% YoY.

* Auto revenue grew 47% YoY, driven by 65.6% growth in Powertrain (driven by both volume and content) and growth in the 2W business. Non-Auto revenue grew 25%, led by growth in the Power Tool segment.

* Gross margin declined 750bp YoY (-340bp QoQ) to 38.6% due to changes in the product mix (higher traded goods), BS-VI, and higher inward freight cost. Operating leverage restricted adjusted EBITDA margin, which fell 100bp YoY to 14.3% (est. 15.3%).

* Reported staff cost was lower by ~INR1.58b due to one-time reversal of wage settlement/retirement benefit for employees who were part of the restructuring exercise. Adjusted for the reversal, staff cost stood at INR2.9b.

* PBT before EO grew 33% to INR4.8b (est. INR4.6b). Adjusted PAT grew by 13% to INR3.46b (est. INR3.2b) as the base quarter had a tax reversal.

* It declared a final dividend of INR115/share for FY21 (v/s INR105 for FY20).

Highlights from the management commentary

* Outlook: The demand situation in India remains uncertain due to a localized lockdown, supply chain issues, and unavailability of oxygen. The macroeconomic indicators can be compared to Jul’20.

* BOS’ parent is the largest suppliers of e-drive, e-axle, and power electronics (inverter and converters). Its current order book exceeds USD20b. In India, it would like to replicate its similar success across segment from low voltage (2W/3Ws) to high voltage (PVs/CVs). It expects the Indian market to be dominated by ICE engines (~80% till CY30), with 2W/3W to be the first disrupted.

* The management reiterated that any electric vehicle-related business will be part of the listed entity, including fuel cell technology for CVs.

* After successfully navigating to BS-VI, the next emission milestones involve transitioning to TREM5 (for Off-Highway engines), adoption of Café Norms (Phase II), and BS-VI (Stage-2).

* The company will follow a two pronged strategy for its non-Auto business: 1) ‘fit for market’ solutions, and 2) increase its ‘go to market’ footprint using both offline and digital platforms.

* Trade payables have increased due to extension of credit by suppliers, resulting in higher credit period to BOS.

Valuation and view

* Valuations of ~34.2x/28x FY22E/FY23E EPS largely factors in changes in its competitive positioning since BS-IV. While the negatives are priced in, there are no material catalysts for the stock over the next 2-3 quarters. Hence, we maintain our Neutral stance with a TP of INR15,850/share (~28x Mar’23E EPS).

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