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Another quarter of subdued profitability

Bosch India’s (BOS) Q1FY24 EBITDAM at 11.3% (down 160bps QoQ) missed consensus and our estimate of ~12.5%. This was because higher mix of traded goods pulled down GM and new business-related expenses increased other expenses, thus impacting overall profitability. Decline in EBITDAM by 160bps QoQ is despite delivering record-high revenue during the quarter driven by increased sales of exhaust gas system components in PVs/CVs along with higher revenue from engineering services business related to BS6-2 transition. We believe, with limited visibility of EBITDAM going back to 15%+ levels along with BOS being set to face the CV industry downcycle headwinds from mid-FY25E itself, earnings growth outlook for 2-3 years beyond FY24E looks muted. Maintain REDUCE with a revised DCF-based target price of INR 17,599 (earlier: INR 18,175), implying 25x FY25E earnings. We have cut our FY24E/FY25E earnings by 7%, mainly due to ~100bps EBITDAM cut.

Key takeaways from the conference call, and our views

* Revenue growth of 17% YoY was driven by powertrain system business growth of ~13%, non-mobility solutions growth of 22%, security systems growth of 37% and elevated revenue related to engineering services income on back of solutions provided for BS6-2 transition. Growth outlook for OEM segments in general remains at single-digit levels post robust growth delivered by PVs/CVs/2Ws in FY23. Focus on e2Ws remains towards hub motors and controllers other than the non-powertrain system solutions in the form of ABS, entertainment systems and digital dashboard systems. With limited local application of digital mobility solutions along with rising need for this segment at a global level for parent Bosch, this segment got transferred from the listed entity to parent, This resulted in saving capex costs annually in the listed entity. There is incremental scope for selling spark plugs in India as production of spark plugs is shifting from Russia to India.

* GM remained subdued and was impacted by a combination of 400bps increase in traded goods mix YoY and higher content of exhaust gas treatment solutions business. Additionally, other expenses were up 14% QoQ as against revenue growth of 2% led by higher expenses on account of elevated services revenue and towards new business solutions development. Thus, overall, with no visibility in reduction of traded goods mix on a structural basis, rising dependence on a commoditised 2W EV product segment and continued need for investments into new business areas, we believe, it would be tough for BOS to go back towards ~15% EBITDAM levels, as against pre-FY19 levels of ~16- 18%. We are cutting EBITDAM estimates for FY24E/FY25E by 100bps each year to ~13% as against ~11.5% in Q1FY24.

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