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Margin challenges persist

Bosch’s (BOS) Q4FY21 operating performance missed consensus estimates as adj. EBITDA margin fell 95bps YoY to 14.3%. Gross margins slipped 745bps YoY to 38.6% due to weaker product mix (traded goods share rose to ~71% of raw material cost) and higher commodity costs. Automotive revenues rose ~47% YoY on the back of mobility division (up 57% YoY) while non-automotive revenues grew ~25%.

We expect growth tailwind of tractor segment to slow down in FY22/23 while lack of diesel growth in PVs, market share loss in MHCV is likely to keep growth in check. Higher share of bought out components and imports is likely to hinder EBITDA margins towards previous cycle levels (17-19%). Given the modest FCF generation (yield: 2.5% for FY23E), high exposure towards ICE engine components remains a key risk to premium valuations. Maintain SELL.

* Key highlights of the quarter:

BOS’ domestic mobility solutions business improved ~57% YoY due to better sales in powertrain solutions (up 66% YoY) aided by 2W and LCV segment growth while business ex-mobility grew ~25%. Higher raw material costs (up 745bps) due to commodity price inflation and product mix led to adj. EBITDA margin contraction of 95bps to 14.3%. On a reported basis employee costs fell 332bps due to one-time reversal of provision of Rs1,586mn; we have adjusted the same below EBITDA. Adjusted PAT was up 33% at Rs36.1bn. Company declared a dividend of Rs115 per share.

* Key takeaways from concall:

a) Domestic sales were up 50% YoY as revenues from mobility business grew ~57% (industry growth: 28%); b) raw material costs were higher by 4.5% YoY mainly due to higher freight costs, product mix change, higher traded goods and higher input costs from BS-VI materials; c) outcome of the ‘3R’ restructuring program has started to be visible in the reduced employee costs (employee costs are likely to remain between 10-12% of net sales); ~2.4k reduction in manpower was achieved in FY21; d) supply chain disruptions due to local lockdowns, workforce absenteeism and semiconductor shortages are impacting production for BOS, and this situation is expected to continue till H1FY22; e) aftermarket sales, has delivered strong growth in H2 vis-à-vis H1 with company focussing on expansion of distribution reach; f) BS-VI product sales was >Rs190bn, but short of the initial targeted Rs240bn; g) tractor growth has been aided by higher rabi output where BOS has dominant position.

* Maintain SELL:

We remain cautious on BOS due to multiple challenges: 1) declining gross margins (down 550bps YoY), 2) structural decline in diesel PV segment, 3) M&HCV market share loss, and 4) likely moderation of key growth driver (tractors) due to high base effect. We trim earnings by 13.3% / 8.2% for FY22E / FY23E due to lower gross margins. We retain our target multiple at 25x FY23E EPS of Rs471. Maintain SELL with a revised target price of Rs11,773/share (earlier: Rs12,831).

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