The worst is behind Bosch
Last week, shares of Bosch Ltd, the Indian unit of German auto parts maker, suddenly rallied as investors blithely brushed aside two quarters of dim performance as mere blips.
Perhaps one reason was that the stock had plunged nearly 30% since its June quarter results and was among the worst performers in the Nifty, until it reversed sharply last week, gaining 8% in two trading sessions.
The prospects of an impressive growth in revenue and margins triggered the rally after a dull September quarter.
And the confidence came on the back of consistently robust auto sales in the past couple of months that accounts for about 85% of its revenue.
The management call addressed concerns of the lower-than-estimated revenue, saying that it was the impact of transition to the goods and services tax (GST) that caused a disruption in supply and sales, especially in the replacement automotive market.
Importantly, it was caught off guard for the sudden shift to BS-IV emission norms and could not fill its pipeline with the new, compliant products.
“Thus, it had a higher share of traded goods that led to lower profit margins during the quarter,” says a results review report by ICICI Securities Ltd.
However, the 18% operating margin was not a let down when compared with estimates. The steep rise in raw material costs was offset by lower employee costs and other expenses.
Yet, weak revenue dragged net profit down to Rs383 crore, which was half that of the previous year.
Considering this weak performance, last week’s stock rally is one of hope that profitability will get better in the long term as it indigenizes the technology of BS-IV emission standards.
Further, brokerage reports indicate that it is well poised to embrace even the next level of BS-VI compliance, given its German parent’s technological prowess.
The firm’s margins would also gain from the sale of its low revenue starter, motor and generator segment that had weak profitability.
At the current market price of Rs19,998, Bosch’s shares trade at 32 times its FY19 estimated earnings per share—a fair valuation, given its strong parentage and stronghold in the high end original equipment market.
With passenger and commercial vehicle demand set to rise in the next couple of years, Bosch is well poised to grow. The stock also has low liquidity on the bourse, which is one reason for sharp fluctuations on any news.
However, one uncertainty is how the country’s focus on electric vehicles in India will impact Bosch, which mainly caters to fuel injection systems for vehicles. This is still some years away. Yet, analysts reckon that the road ahead is uncertain due to technological changes expected in the Indian automobile arena, which may weigh on the stock from time to time.
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