With its core segment of commercial vehicles (CV) expected to register a decline in volume growth this year, prospects for auto ancillary company Bosch are not very bright. The CV space accounts for about a third of the company's revenue. Sales growth for the company is likely to drop to eight to nine per cent this year. This follows 38 per cent and 22 per cent growth in 2010 and 2011, respectively.
Reflecting the slowdown in the auto space, the company's net profit fell more than expected, led by a steep margin decline in the quarter ended June. At Rs 8,715, the stock has dropped 1.6 per cent since the results were announced. Given the sluggish performance, muted outlook and rich valuations, analysts have cut their earnings estimates and price targets for this year.
Profit, margins down
The results for the quarter ended June were below expectations, with net profit falling 11 per cent to Rs 250 crore due to low profitability. In a note, Goldman Sachs India's Sandeep Pandya stated, "The main driver of the miss (in net profit) was the earnings before interest, tax, depreciation and amortisation margin of 15.1 per cent, down 327 basis points annually, the lowest since March 2009 and the second-lowest in 24 quarters." What aggravated the situation was the rise in raw material costs (imports) due to the weak rupee. Other expenditure rose 20 per cent year-on-year due to lower volumes and an adverse product mix.
| DEMAND, MARGIN WORRIES | |||
| In Rs crore | Q2CY12 | CY12E | CY13E |
| Net sales | 2,173 | 8,881 | 9,612 |
| Y-o-Y change (%) | 5.6 | 8.8 | 8.2 |
| Ebitda | 329 | 1,626 | 1,696 |
| Y-o-Y change (%) | -13.2 | 7.4 | 4.3 |
| Ebitda (%) | 15.1 | 18.3 | 17.6 |
| Y-o-Y change (bps) | -327 | -30 | -66 |
| Net profit | 247 | 1,144 | 1,198 |
| Y-o-Y change (%) | -11.3 | 2.0 | 4.7 |
| P/E (x) | - | 24.0 | 23.0 |
| E: Estimates Source: Goldman Sachs | |||
Volume concerns, muted revenue
The weak medium & heavy CV volumes for the sector (down 15 per cent year-on-year for the June quarter) reflected on Bosch's revenue, which rose about five per cent (down five per cent sequentially). The management said revenue from the diesel division (which accounts for 60 per cent of sales) was flat year-on-year, owing to the fall in medium & heavy CV volumes. However, the fall was cushioned by better offtake in the passenger cars/utility vehicles and light CV segments. The revenue growth, therefore, was largely driven by other divisions such as power tools and auto electrical.
Though the company's dependence on the CV original equipment manufacturer business is decreasing and there is the buoyancy in diesel cars/utility vehicles, Ashish Nigam and Kunal Jhaveri of Antique Stock Broking say one cannot be oblivious to the weaker-than-expected CV cycle, which would keep near-term revenue growth subdued. The company says production cuts at various plants helped it keep inventory under control.
While the company may benefit from the increasing usage of diesel vehicles and its dominance in fuel-injection segment, analysts are not very optimistic about the near-term prospects, given the slowdown and the premium valuations. The stock is currently trading at 24 times its estimated earnings for this year, against the 10-year historical average of 19 times.
