No material catalysts visible for re-rating of Bosch stock: Motilal Oswal

One way that the company can improve margins is by increasing the localisation content

The stock of automotive (auto) component maker Bosch has risen by 9 per cent over the past fortnight. Although the company’s July-September quarter results disappointed the Street, near-term upsides from festival demand, a recovery in exports, higher localisation, and increased content per vehicle are key positives supporting the stock. Ongoing investments and forays into new opportunities should further contribute to expanding its revenue base.

While the company’s September quarter sales performance was broadly in line with estimates, with the auto segment growing by 

13 per cent and non-auto rising by 8 per cent, it was the operating performance that came up short. Its gross margins fell by 

190 basis points (bps) over the year-ago quarter and 230 bps sequentially to 33.2 per cent due to a weak product mix, as the share of tractors was lower. This, coupled with a higher proportion of traded goods and unfavourable foreign exchange, impacted gross margins.

The impact on operating profit margins, at 11.9 per cent, was limited to 10 bps. While gross margins were lower and employee costs rose as a proportion of sales, the company was able to offset this through lower other expenses, which were down 320 bps as a proportion of sales.

Lower other expenses were a result of reduced new business investments following the sale of a business and a reduction in technical fees for localisation in electronic control units and common rail injectors. One way the company can improve margins is by increasing the localisation content.
 

Analysts of Motilal Oswal, led by led by Jinesh Gandhi, state Bosch remains committed to localisation, and this commitment is expected to yield results in the medium term, thus aiding margins. However, they do not foresee margins recovering above 15 per cent over the next two to three years due to structural changes in the business.
 

The brokerage has reduced its 2023-24/2024-25 earnings per share estimates by 2-5 per cent to reflect slower growth in both auto/non-auto divisions and weaker margins.
 

Valuations have been derated due to a dilution in its competitive positioning and an increasing risk of electric vehicles (EVs). While these negatives are priced in, there are no visible material catalysts for a rerating of the stock, according to the brokerage.

Sharekhan, however, has retained its ‘buy’ rating, expecting a rise in localisation, increased content per vehicle, and emerging opportunities in alternative powertrain solutions.
 

Given its technological expertise and support from its parent Bosch, the company would be a key beneficiary of the implementation of stringent emission norms in the domestic auto market, as the increase in complexity offers an opportunity to enhance its content per vehicle.
 

The company commenced road trials for hydrogen fuel engines in the second quarter of 2023-24. With a strong hold on gasoline, compressed natural gas, and diesel now, Bosch is targeting expansion in the EV and hydrogen energy segments, according to the brokerage.