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Above est; revenue outperformance continues

Margin recovery awaited; hinges on localization and operating leverage

* Bosch (BOS)’s 1QFY22 performance was driven by higher revenues and better gross margins. We expect growth in BOS to rebound faster on account of (a) the revival of the CV cycle, (b) the addition of the 2W segment, and (c) content increase. BOS’ stock price largely reflects all the negatives, but there are no major re-rating catalysts on the anvil.

* We upgrade our FY22/FY23E EPS by 4%, accounting for better sales growth. Maintain Neutral, with TP of INR16,650

Stronger revenue growth in both businesses, but margins falter

* 1QFY22 revenues / EBITDA / adj. PAT declined 24%/33%/25% QoQ to INR24.4b/INR3b/INR2.6b.

* Auto revenues declined 22% QoQ (+164% YoY) and Non-Auto revenues 34% (+60.5% YoY). On the other hand, other operating income grew on the reversal of provisions of INR376m.

* The gross margin improved 250bp QoQ (-120bp YoY) to 41.1% on a favorable product mix, cost cutting, and the pass-through of commodity costs. Better gross margins restricted EBITDA margin contraction (-180bp QoQ) to 12.5% (v/s est. 11%). EBITDA declined 33% QoQ to INR3.1b (v/s est. INR2.45b).

* Lower interest income was offset by lower depreciation, resulting in PAT of INR2.6b (v/s est. INR2.1b).

Highlights from management commentary

* Outlook: The management remains cautious on the business outlook amid the risk from a potential third COVID wave and unpredictability in the international supply chain.

* Content per vehicle is increasing yearly, driven by the PACE (Personalized, Automated, Connected, and Electric) trend.

* The semi-conductor shortage remains a global problem and is expected to normalize only in FY23.

* EVs: Bosch sees big opportunity in the 2W EV market as EVs are expected to increase to 10% during 2025–30. It is also working on low-voltage products for 2Ws and LCVs. BOS would localize EV components at the right time – as early localization may result in higher costs.

* Aftermarket business: After the complete rejig of the Aftermarket business, it has started to do well for the last two quarters. It aims to scale this to 25% of total sales (from 20% in FY21). It has already increased Bosch Car Service stations from 250 to 400 and aims to take the count to 1,000.

* Capex: Bosch is expected to incur capex of INR3.7–4b (v/s INR1.9b in FY21).

Valuation and view

* Valuations at ~32.2x/26.1x FY22E/FY23E EPS largely factor in the changes in its competitive positioning since BS4. While the negatives are priced in, there are no material catalysts for the stock over the next 2–3 quarters. Maintain Neutral, with TP of INR16,650 (~28x Mar’23E EPS).

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