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Sales growth remains strong, one-off RM cost hurts margin

Strong growth in Power Tools and exports; semiconductor supplies to ease gradually

* Operating performance was impacted by a one-off RM cost in 2QFY22, though BOS continues to grow faster than the underlying Auto industry. We expect revenue to continue to grow faster on account of a CV cycle revival, content increase, and higher exports. However, a margin recovery is still awaited. The CMP is largely reflecting all the negatives, with no major rerating catalysts on the anvil.

* We maintain our FY22E EPS estimate and increase our FY23E EPS estimate by 4% to account for higher other income. We maintain our Neutral rating with a TP of INR18,250 per share.

Adjusted EBITDA margin in line, lower tax drives PAT beat

* Revenue/EBITDA/adjusted PAT grew 18%/24%/33.5% YoY and 19%/ 17%/43% QoQ to INR29.2b/INR3.6b/INR3.7b in 2QFY22. In 1HFY22, revenue/EBITDA/adjusted PAT grew 54%/257%/91% YoY.

* Auto revenue grew 14.5% YoY and 13% QoQ as against an underlying Auto industry (excluding 2Ws) production growth of 12%. Non-Auto revenue grew 41% YoY and 68% QoQ.

* Gross margin contracted by 340bp YoY and 390bp QoQ to 37.2%, impacted by a one-time adverse impact of 2.6% on account of pricing adjustment on traded goods. EBITDA grew 24% YoY and 17% QoQ to INR3.57b (est. INR4.2b). Lower staff costs led to an EBITDA margin expansion of 60bp YoY (-30bp QoQ) to 12.3% (est. 14.8%). Adjusted for one-time RM cost impact, EBITDA margin stood at 14.9%.

* Substantially lower tax led to a PAT beat of ~INR3.7b (est. INR3.4b), a growth of 33.5% YoY and 43% QoQ.

Highlights from the management commentary

* Within Auto, the Powertrain division grew 16%, led by Tractors and HCVs. The Aftermarket division grew 27% on a low base, driven by exports and OEM spare sales. The 2W business saw a small decline on account of the semiconductor shortage in the Premium segment.

* The non-Auto segment grew 41%, driven by 38%/29% growth in Power Tools/Energy and Building Technology. The Power Tools segment benefitted from pent-up demand, improved dealer network, and high growth in ecommerce sales.

* Domestic revenue grew 15% YoY, whereas exports grew ~66% (~12% of 2QFY22 revenue v/s 8.5% in 2QFY21).

* Semiconductor availability is gradually improving, but is not expected to normalize in FY22.

* BOS would apply for the PLI schemes for Autos, with a focus on safety and electrification domains, which will help in overcoming some of the shortcomings linked to industrializing such technologies.

* The board has approved an investment of INR133.5m for a 26% stake in Autozilla. The startup offers a B2B e-commerce marketplace for buying and selling Auto parts. It will enable pull through for BOS' ‘extra’ loyalty program for independent car workshops and Bosch Car Service outlets in the Aftermarket division.

Valuation and view

Valuations ~39.8x/30.3x FY22E/FY23E 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 INR18,250 per share (~28x Sep-23E EPS).

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