Premium valuations, pressure on margins may restrict gains in Bosch

The management is cautious on the near-term outlook

Auto parts supplier Bosch was the biggest loser among BSE 100 stocks, shedding over four per cent on margin worries and premium valuations. The fall came in despite better-than-expected June quarter (Q1FY22) performance. Gross margins in the quarter were higher by 250 basis points on a sequential basis, to 41 per cent, on improved product mix, cost reduction and pass-through of commodity costs. Better gross margins aided the company in restricting the sequential decline at the operating profit level by 180 basis to 12.5 per cent, say analysts at Motilal Oswal Financial Services who had pegged this number at 11 per cent.

Nishant Vass and Pratit Vajani of ICICI Securities say the gross margin benefits in the June quarter are unlikely to sustain given inventory benefits in the quarter. Further they believe that delayed localisation leading to higher share of imports is likely to hinder operating profit margin expansion as compared to previous cycle levels of 17-19 per cent.

On the demand front, the company is cautious given the risk of a potential third wave and disruption in global semiconductor supplies. However, the ongoing trend of higher content per vehicle driven by the transition to BSVI norms, increased safety and convenience are expected to continue helping it gain market share. Within product segments, demand from electric two and three wheelers is a key opportunity; the company is working on low voltage products for two-wheelers and light commercial vehicles. The company expects penetration of electric vehicles in the two-wheeler category to cross the 10 per cent mark post 2025.

Bosch has increased the number of car service stations to 400 from 250 earlier, and is looking to more than double this number going ahead; the expansion should help it to increase the share of the aftermarket segment in sales to 25 per cent from 20 per cent in FY21.

While this is positive, Vass and Vajani of ICICI Securities are cautious on the company due to margin headwinds (lower localisation), structural industry decline in the diesel passenger vehicle segment, market share loss in medium and heavy commercial vehicles and likely moderation in tractor sales due to high base effect. Given the lack of rerating triggers, the stock, which is trading at 26 times its FY23 earnings estimates is unlikely to see major upsides in the near term.