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Below our estimate; better than industry growth continues

INR20b investment over the next five years in localization and digital platforms

* Though revenue growth for BOS continued to outperform the underlying industry volume trends, revenue/EBITDA missed our estimate due to weakness in the Power Tool business. We expect this outperformance to continue on account of a CV cycle revival, higher content, and increase in exports. However, a margin recovery is still awaited. Since the CMP reflects all negatives, we see no major re-rating catalysts on the anvil.

* We reduce our FY22E/FY23E EPS by 9%/3% to account for lower revenue from Tractors and 2Ws. We maintain our Neutral rating.

Weak Power Tool business hurts sales; higher staff cost hits margin

* Revenue grew 3% YoY to INR31.1b, EBITDA was flat at INR3.6b, and adjusted PAT declined by 25% to INR2.35b in 3QFY22. Revenue/EBITDA/ adjusted PAT grew 30%/88%/35% YoY in 9MFY22.

* Auto revenue grew 3% YoY as against the 12% production decline in the underlying Auto industry (excluding 2Ws), driven by 29% growth in the Aftermarket. Non-Auto revenue grew 7% YoY, led by 41.5% growth in the Building Technologies business, but the Power Tools business fell 9%.

* Gross margin contracted by 290bp YoY (+200bp QoQ) to ~39.2% (est. 40.5%). EBITDA was flat YoY and QoQ at INR3.57b (est. INR3.93b). EBITDA margin contracted by ~30bp YoY (-80bp QoQ) to 11.5% (est. 12%), impacted by higher staff cost (up 19% YoY and 16% QoQ).

* Lower other income and higher interest cost restricted adjusted PAT to ~INR2.35b (est. INR3b).

Highlights from the management commentary

* BOS outperforms the Auto industry: Product sales grew 3.6% YoY in 3QFY22 driven by Aftermarket growth of 29% (v/s revenue for domestic OEMs decline by 6% YoY).

* The non-Auto business grew 7% YoY due to strong growth of 41.5% in the Building Technologies division, led by increased orders for security systems and energy efficiency projects.

* Growth in the Aftermarket division was driven by diesel products and strategic change in supply chain, which led to higher sales fulfillment. Revenue crossed pre-COVID levels. BOS has gained market share. It targets to take Bosch Car Service network to 1,000 outlets (v/s 400 outlets currently) in a few years.

* Power Tools: The business grew 30% in CY21. BOS is a market leader with over 30% share. In 3QFY22, the division focused on optimizing inventory at the plant and dealer level, leading to a 9% decline in revenue. It targets to double revenue over the next five-to-six years.

* Exports to be ramped, with the management targeting a healthy double-digit contribution to revenue (but under 25%). Exports in FY21 stood at 11%.

* EVs: It expects BEVs in PVs (including LCVs) at 5% in CY25 and 12-18% in CY30.

* Investments: It plans to invest INR20b over the next five years for the localization of advanced Automotive technologies (INR10b) and expansion into digital platforms (~INR10b in the mobility marketplace, mobility Cloud platform, etc.).

* It acquired a 14% stake in Zeliot Connected Services for INR40m. Zeliot is a Bengaluru-based B2B start-up offering connected mobility solutions for vehicle tracking, fleet management, and telematics offerings to enterprises, urban, school, employee transport, and the Logistics space.

Valuation and view

Valuations ~29x/25.7x 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 for a re-rating of the stock. We maintain our Neutral rating with a TP of INR17,650 per share (~28x Mar’24E EPS).

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