Sell Bosch Ltd For Target Rs.12,327 - ICICI Securities
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Margin challenges likely to persist
Bosch’s (BOS) Q1FY22 operating performance was ahead of consensus estimates as adj. EBITDA margin fell just 176bps QoQ to 12.5%. However, we believe the gross margin expansion of 250bps QoQ to 41.1% was aided by inventorisation (unsustainable) benefit to unit costs. Automotive revenue declined ~22% QoQ on the back of mobility division (down ~24% QoQ) while non-automotive revenue fell ~38%.
We expect growth tailwind of tractor segment to slow down in FY23 while lack of diesel growth in PVs, market share loss in MHCV is likely to keep growth in check. Delayed localisation leading to higher share of imports is likely to hinder EBITDA margins expansion vis-a-vis previous cycle levels (17-19%). Given modest FCF generation (yield: 2.7% for FY23E), high exposure towards ICE engine components remains a key risk to premium valuations. Maintain SELL.
* Key highlights of the quarter: BOS’ mobility business was down 23.6% QoQ. Powertrain solutions business was up 316% YoY as two wheeler division witnessed 151% YoY growth while business beyond mobility declined 38% QoQ. Higher finished good inventory (~Rs2.1bn QoQ) creation aided gross margins optically via better fixed cost absorption. EBITDA margin contraction thus was limited to ~ 176bps at 12.5%. Other operating income was higher due to one-time write back of Rs376mn. On a reported basis, employee costs rose 194bps impacted by reversal of excess wage provision and retirals. Adjusted PAT was down 28%QoQ at ~Rs26bn.
* Key takeaways from concall: a) Domestic sales were down 27.5% QoQ as revenue from mobility business declined ~26% and business beyond mobility fell 38.7% QoQ; b) traded goods portion of costs is likely to remain elevated due to new emissions changes and technology adoption needed higher imports; c) capex for FY22 is expected at Rs3.7-4bn for BOS and Rs10bn from Bosch India and associates; d) supply chain disruptions due to local lockdowns and semiconductor shortages are impacting production for BOS, and this situation is expected to continue till the end of FY22, albeit at lower intensity; e) aftermarket sales contribute 20% to sales, is expected to growth to ~25% over long run with the company focussing on expansion of distribution reach through Bosch car services (200 currently to 400 by FY23); and f) royalty rates increases have to be done to support new technology transfer from the parent.
* Maintain SELL: We remain cautious on BOS due to multiple challenges: 1) margin headwinds due to structurally higher bought out content in new programs, 2) structural industry decline in diesel PV segment, 3) market share loss in M&HCV, and 4) likely moderation of key growth driver (tractors) due to high base effect. We upgrade our earnings by 8.5%/4.7% for FY22E / FY23E on the back of better fixed cost management. We retain our target multiple at 25x FY23E EPS of Rs493. Maintain SELL with a revised target price of Rs12,327/share (earlier: Rs11,773).
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