Bosch growth prospects may sustain valuations

Bosch growth prospects may sustain valuations

The March quarter results of Bosch Ltd pleased investors; its shares surged 5% to close at 6,970 on the Bombay Stock Exchange.

Beating the Street’s estimates, the multinational auto component firm’s revenue rose 30.7% in the March quarter, compared with the year-ago period. More impressive was the whopping 35.5% growth in net profit to 274.4 crore.

Bosch’s revenue rode the country’s booming auto sales. Auto sales account for nearly 90% of its revenue. The commercial vehicle segment, which is its mainstay within the auto space, has displayed robust growth in the last three quarters. Of course, its near monopoly in safety and critical auto parts also gives it the power to pass on costs to its clients.

Still, operating margin fell by a marginal 21 basis points from a year ago to 18.9%. The company did not escape the wrath of rising raw material costs (mainly metals), which rose by a little over three percentage points. One basis point is one-hundredth of a percentage point.

This was offset by savings in employee costs, which helped maintain profitability. Operating leverage driven by higher volumes in the auto segment helped. Its operating margins expanded by a significant 250 basis points sequentially.

Bosch, like most multinational subsidiaries, has benefited from a strong parent company. It is debt-free, with cash of 1,326 crore as of December. Interest income jumped 86% from a year ago, contributing significantly to net profit growth. Higher interest rates would have also contributed to higher interest income. The company’s net profit growth was impressive, despite a higher tax incidence and decline in other income.

Bright growth prospects, given that the commercial vehicle sector would grow at about 10-12% a year for another two years, could sustain Bosch’s rich valuations of 23 times its estimated 2012 earnings per share.

Meanwhile, new products in the petrol and non-automotive segments are expected to give a fillip to the company’s revenue. Bosch’s parent company, Robert Bosch GmbH, states in its 2010 annual report that it expects India and China to beat the emerging market growth rate expectation of about 6%.

No wonder, Bosch has committed about 1,300 crore towards its capital expenditure plan in India over the next three years, which will drive the company’s revenue growth and profitability.

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