Bosch: Hold

Although it is a company that supplies fuel injection systems to the ‘in demand’ diesel segment vehicles, >Bosch has had a tough time in the last few quarters.

For three quarters in a row, the top line growth (over the corresponding period in the year before) has been muted and profits have dropped between 11 per cent and 39 per cent year-on-year.

A fall in domestic sales of commercial vehicles and impact of rupee depreciation on import of components/materials have been the key dampeners.

The lacklustre domestic auto sales may continue to impact performance in the next one or two quarters; but with several measures undertaken to boost economic growth, commercial vehicle (CV) sales is expected to revive in the second half (July-December) of the current year.

While the prospects seem promising considering the company’s market leadership position, its technological edge and the expected improvement in CV sales, the stock appears fairly valued at this juncture.

At the current market price of Rs 8,305, the stock trades at 22 times estimated earnings for CY13 (January-December) and 19 times its estimated earnings for 2014 (January-December). The 1-year forward valuation is in line with historical averages.

Hence, fresh exposures need not be considered now. Existing investors can, however, continue to hold the stock.

Bosch has over 70 per cent market share in India for diesel fuel injection products such as single/multi-cylinder pumps, distributor pumps and electronic injection control units (common rail systems).

It derives more than half its revenues from supplies to diesel engines and caters to segments such as passenger cars, commercial vehicles, tractors and locomotives.

Diesel poised to grow

With medium and heavy commercial vehicles (MHCVs) forming a chunk of the diesel segment, the company has borne the brunt of the slowdown in domestic sales of these vehicles. MHCV volumes have dropped about 22 per cent so far in 2012-13.

However considering that CV sales is at its cyclical trough, truck and bus off takes can be expected to pick up beginning the second half of the current year.

The Government has announced in the Budget the revival of the JNNURM scheme for procurement of buses by state transport undertakings.

Excise duty on truck chassis has also been cut. This apart, other measures undertaken to boost economic growth should help improve truck sales.

Trends in the diesel passenger vehicle market are also expected to favour the company.

Currently, diesel cars and utility vehicles constitute about 45-50 per cent of the total passenger vehicles sold.

Diversification benefits

The higher duties on utility vehicles imposed in the budget may dampen UV sales a bit in the near-term. But advances in diesel engine technology such as the use of common rails, higher thrust and lower noise levels will continue to attract customers.

Even if diesel prices inch up in small amounts, the price differential vis-à-vis petrol is expected to remain.

A diversified revenue base also adds in Bosch’s favour. While starters and generators, gasoline systems and car multimedia devices (which bring in a small portion of the revenues) are linked to auto sales, Bosch's wide distribution and service networks in the automotive after-markets are a positive.

Despite the slowdown in auto sales, the after-market sales has seen reasonably good growth in the recent quarters. In addition, the company derives about 10 per cent of its revenues from the manufacture of packaging machines, power tools and electronic security systems.

The company has also started assembling photovoltaic modules and producing thermal solar panels. Bosch expects strong growth in both these areas.

Financials

For the quarter ended December 2012, net sales grew by 5 per cent year on year to Rs 2,132 crore while net profits dropped by 39 per cent to Rs 172 crore from Rs 281 crore in the December 2011 quarter. Operating margins stood at 12 per cent vis-à-vis 16 per cent a year ago.

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