Can margins alone drive Bosch performance?
Earnings before interest, taxes, depreciation and amortization, or Ebitda, margins expanded 1.9 percentage points to 21.5% as costs softened
Bosch Ltd surprised investors by reporting record margins for the March quarter. Earnings before interest, taxes, depreciation and amortization (Ebitda) margins expanded 1.9 percentage points to 21.5% as costs softened. Margins are the highest in at least two years, a Motilal Oswal Securities Ltd report says.
Bosch is divesting the less profitable starter motor and generator business. The unit generates 10% of Bosch’s sales but contributes only 1% of operating profit (Ebit). So the sale can further strengthen Bosch margins. “We expect the business post the exit from the segment would get a margin boost to the extent of ~100 bps,” Antique Stock Broking Ltd said in a note. One percentage point is 100 basis points.
Tracking the firm margins, some analysts have upgraded Bosch earnings for the next fiscal. But such upgrades are few. That is because of Bosch’s premium valuations and subdued revenue growth outlook.
Revenues during the last quarter grew by a healthy 14%. But the growth happened on a favourable base. In the same quarter, a year ago, revenue fell marginally. For the full fiscal year, revenue grew a little less than 10%, which is uninspiring, considering the premium valuations of the stock, which trades at about 31 times one-year-forward earnings estimate.
Exports, which are estimated to generate 13% of Bosch’s revenue, are under pressure because of weak demand in international markets. The Indian business registered impressive growth in the past quarter. But the growth is driven by replacement demand in commercial vehicles, and a favourable monsoon forecast led push to tractor sales. If replacement demand is not supplemented by a sustained pick-up in new vehicle sales, growth in the automotive segment, Bosch’s core business area, can remain subdued.
Also, the changing nature of automobile sales—the shift from diesel to other fuels and the accelerated implementation of new pollution norms—means Bosch will have to tweak its product portfolio to address changing market needs. The share of diesel units in passenger vehicle sales has begun to fall. According to Antique Stock Broking, Bosch management expects higher value vehicles to cushion the sales impact. Bosch is the market leader in diesel fuel injection technology for passenger cars and commercial vehicles in India.
The adjustments can take time. Its MNC pedigree and access to technology gives Bosch a competitive advantage. But the changing market dynamics can result in uneven growth rates. While the company did well to get a grip on margins, the premium stock valuations call for better growth visibility.
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