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Weak results; higher imports continue to hurt margins

Power Tools business: India now a regional hub for SAARC

Bosch’s (BOS) 1QFY25 performance was weak as EBITDA/PAT came in lower than expected at INR5.2b/INR4.7b (est. INR5.99b/INR5.4b), due to a higher import mix and other expenses (warranty provision). While the management focuses on boosting localization in the long term, it expects a rise in imports in the interim due to the transition to common rail systems.

* We cut our FY25E/26E EPS by ~8%/7% to reflect moderate demand in underlying industries and higher operating expenses. At ~44x/37.2x FY25E/FY26E EPS, the stock appears fairly valued. We reiterate our Neutral stance on the stock with a TP of INR29,540 (based on ~32x Jun’26E EPS).

Weak operating performance

* Revenue/EBITDA/adj. PAT rose 4%/11%/14% YoY to INR43.2b/INR5.2b/ INR4.7b in 1QFY25 (est. INR44.1b/INR5.99b/INR5.4b).

* Mobility business grew 4% YoY, driven by growth in mobility aftermarket (8% YoY), power solutions (2% YoY) and 2W segment (14.6% YoY).

* Consumer goods segment grew ~5% YoY, while the building technologies business grew 19% YoY. ? Gross margins largely remained flat YoY (+90bp QoQ) at 35.4% (est. 35.8%), led by a higher import mix.

* However, higher other expenses sequentially (+290bp as % of sales) restricted EBITDA margin to 12% (+70bp YoY/-120bp QoQ; est.13.6%).

* Other expenses include one-offs related to forex loss and a provision for warranty.

Highlights from the management commentary

* Domestic demand outlook: BOS expects overall positive growth across segments in FY25. The anticipated slowdown in 1QFY25, primarily caused by the elections, aligns with its forecast for this period.

* In Apr’24, Bosch inaugurated a second production line for lambda sensors to support BS6 OBD Stage 2 regulation, effective Apr’25 for 2Ws. BOS started production of lamda sensors with an initial capacity of 1.2m pieces p.a. in Apr’22, which will now ramp up to over 8m pieces by 2025.

* In power tools, India is now one of five independent regional bases of Bosch Power Tools (globally), covering India, Sri Lanka, Bangladesh, Nepal, Bhutan, and the Maldives (SARC). BOS will focus on cordless tools, handling sales and exports from the Chennai plant to these regions. The rationale for setting up a regional base in India is the similarities in market demand and proximity to these regions from India.

* As it moves from conventional products to common rail systems, BOS anticipates increased imports in the interim until it scales up to justify the localization of these systems.

Valuation and view

* While the management focuses on boosting localization in the long term, BOS anticipates a rise in imports over the next four years due to the transition to common rail systems. This will restrict any significant recovery in EBITDA margin.

* Given the weak 1Q, we lower our earnings estimates by 8%/7% for FY25/FY26. While BOS is outperforming the underlying auto industry growth with new order wins, visibility for margin recovering to 15-16% is low. At ~44x/37.2x FY25E/FY26E EPS, the stock appears fairly valued. Hence, we reiterate our Neutral rating with a TP of INR29,540 (premised on 32x June26E EPS).

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