Consistent revenue recovery key for Bosch to be seen as decent investment

Near term margin improvement will also be an area to watch out for

A weak September quarter showing weighed on the share price of Bosch, the country’s largest auto component player. The stock shed 1 per cent even as the benchmark indices rose 1.68 per cent and hit their all-time highs, owing to higher costs and lower margins. 

Though revenues have recovered from the dip during the June quarter, the overhang for the stock was the weak margin performance. Margins for the quarter, at 11.6 per cent, were down 295 basis points (bps) over the year-ago quarter. In fact, they were way below expectations of 15 per cent.

This was largely due to its weak product mix, adverse forex, and higher other expenses. While a higher proportion of traded goods and lower proportion of diesel led to a margin loss at the gross level, higher Covid-related and non-incurring expenses impacted margins at the operating profit level. 

A positive from the ongoing restructuring is that staff costs as a proportion were nearly 210 bps lower than the year-ago quarter, at 12.4 per cent. 

The Street will keep a watch on the progress of restructuring, which led to a one-time hit of Rs 400 crore in the quarter. The company has, so far, spent over Rs 1,300 crore in this programme, and also implemented most of the manpower rationalisation — with the pending phase to be covered in the coming quarters. 

Exceptional charges that the company has incurred over the past few quarters have been a drag on overall profitability and return ratios, highlight analysts at ICICI Securities. 

The company is hopeful of a recovery on the demand front. Double-digit growth in the two-wheeler business, and a 7-per-cent growth in the powertrain segment, led to auto business revenue growing 9 per cent.  The near-term outlook has improved over the past couple of months, and remains strong going into the festive season. The company indicated that volume visibility had improved sharply for tractors, followed by light and heavy commercial vehicles, and passenger cars. 

Most brokerages are cautious about the firm’s prospects, given the shift away from diesel-powered vehicles following implementation of the BS-VI norms.  However, analysts at Motilal Oswal Research believe valuations at 27x the firm’s FY22 earnings estimates factor in the loss of market share due to the transition to BS-VI norms. 

Given the nascent recovery, investors are better off awaiting an improvement in revenue and margins, before considering an investment.