Home >Market >Mark-to-market >Bosch’s production cuts to hit earnings

German auto-components maker Bosch Ltd’s announcement to cut production will impact the company’s revenue and earnings growth almost immediately. It will suspend production partially for five days in Bangalore and for four days in Jaipur this month. This was perhaps expected, as the firm has been indicating since June that it would align production to demand and avoid unnecessary inventory.

Among the earliest and largest global auto-parts firms in India, the parent sources products from Indian units. However, with nearly two-thirds of its exports going to Europe, slowdown in that region could also hit Indian operations. June quarter performance showed a modest 7% rise in net revenue from a year earlier. Compare this with a 22% growth in June 2011 quarter from the year-ago period.

Besides, the outlook is not so promising either as growth in two of its key client segments—trucks and tractors—where both industry and analysts concede there would be marginal or flat growth for the year to March. A report by Indian Foundation of Transport Research and Training says truck sales (5-49 tonnes) in August declined by 13.5% in spite of hefty discounts and manufacturers pushing sales to dealers. Tractor sales have also slid in the past 10 months.

Further, Bosch’s net profit declined by 11% year-on-year in the June quarter to 247 crore, which missed analysts’ expectations. Its earnings estimates were, therefore, lowered by most brokerage firms. They now expect earnings to grow at a compounded annual growth rate of 13% between 2011 and 2013, instead of 15% earlier. This could drop further, if the situation does not stabilize.

Apart from tepid sales, falling profitability could impact earnings, too. Operating margin fell by a huge 330 basis points (bps) to 15% in the June quarter. A basis point is one-hundredth of a percentage point

A report by Angel Broking Ltd has cut its operating margin forecast by 150 bps to 17.8% for 2012. Yaresh Kothari, an analyst at the brokerage firm, said Bosch has also cut back its capital expenditure from 600 crore to 400-500 crore.

Bosch’s stock has taken a beating since the June quarter operations clearly signalled a slowdown. At 8,407.60, it trades at a rich valuation of 19 times one-year estimated earnings, almost twice that of its Indian peers. This is backed by a debt-free balance sheet and its parent’s long-term commitment to India. Besides, management attempts to buy back shares at a premium to market price have also sustained its rich valuation.

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