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Margins hurt due to high RM and other costs

Won pilot project on hydrogen engine for CVs

* BOS’s performance divergence continued in 2QFY23 with good revenue evolution but it continued to disappoint on profitability. We expect continued revenue outperformance on account of a CV cycle revival, higher content, and increase in exports; however, we are waiting for margins to recover to 14-15%. With CMP reflecting all the negatives, we expecting no major re-rating catalysts on the anvil.

* We raise our FY23 estimates by 5% to factor in for higher ‘other income’ while broadly maintaining our FY24 estimates. We reiterate our Neutral rating on the stock with a TP of INR16,250 (~25x Sep’24E EPS).

Auto business growth supported by easing chip supplies

* Revenue/EBITDA/Adj.PAT grew 25.5%/21%/flat YoY to INR36.6b/ INR4.3b/INR3.7b in 2QFY23, respectively. The same grew 34%/33%/12% YoY, respectively, for 1HFY23.

* Revenue from the Auto segment revenue grew 29% YoY to INR31.5b, whereas the same from the non-Auto segment grew ~5% YoY to INR5.24b. Growth in revenue could also be attributed to the easing of supply chain bottlenecks at the end of 2QFY23.

* Gross margins eroded 210bp YoY (30bp QoQ) to 35.1%, primarily due to a weaker mix and higher RM cost. Further, higher-than-estimated ‘other expenses’ diluted the benefit of operating leverage, leading to EBITDA margins to decline 50bp YoY to 11.8% (v/s est 13.4%) in the quarter.

* However, higher ‘other income’ led to flat PAT on YoY basis (in-line) in 2QFY23.

* 1HFY23 cash flow improved to INR9.95b (v/s negative operating cash flow in 1HFY22 at INR2b). FCFF improved to INR6.8b (v/s negative FCFF of INR3b in 1HFY22) due to strong operating performance despite higher capex of INR3.1b (v/s INR1b in 1HFY22)

Highlights from the management commentary

* It has localized a new common rail injector for commercial vehicles, benefit of which is expected to reflect gradually from 3QFY23 onwards.

* It has received a pilot project from an Indian OEM for converting ICE CV to Hydrogen engine CV.

* For imports, it has a hedging policy as well as provision in contracts with customers to pass through volatility in Foreign exchange.

* Capex for FY23 is expected to be at INR5.2-5.6b (1HFY23 at INR3.1b).

Valuation and view

* Valuations at ~34.9x/27.1x FY23E/FY24E EPS largely factor in changes in its competitive positioning since its shift to BS-IV emission norms. While the negatives are priced in, there are no material catalysts visible commanding a re-rating of the stock.

* Hence, we reiterate our Neutral rating with a TP of INR16,250 (~25x Sep’24E EPS).

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