Bosch Q4 results portray that there’s more pain before any gain

Bosch Ltd’s shares rose 2.4% despite reporting weak March quarter (Q4FY20) results. Investors believe Bosch is among the component makers that will gain from the auto sector’s transition to BS-VI emission standards. Revenues are expected to ramp up on the back of higher “content per vehicle”. Note, a few months ago, the firm had said BS-VI will open up new projects worth ₹24,000 crore, and that will fructify in the coming years.

According to Bharat Gianani, auto sector analyst, Sharekhan, the 18% year-on-year (y-o-y) drop in net sales in Q4 was far lower than the drop in volumes of original equipment manufacturers (OEMs), which reflects higher content per vehicle. However, net sales at ₹2,236.9 crore was slightly better than the Street’s forecast.

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Be that as it may, short-term pain for global auto component suppliers due to the prolonged auto sector slowdown after the covid-19 pandemic is inevitable. Weak demand is bound to hurt profitability in the quarters to come.

In Q4, too, earnings before interest, tax, depreciation and amortization (Ebitda) margin fell by 380 basis points year-on-year (y-o-y) to 15.3%. As a result, Ebitda, too, was 34% lower y-o-y, despite beating estimates.

Be that as it may, the quarter’s financials bore the brunt of Bosch’s adaptation to current technological changes. Reported net profit fell 80% y-o-y to ₹81 crore on account of an exceptional charge of ₹297 crore from asset impairment due to the ongoing restructuring and transformational projects.

Adjusted for this, the net profit of ₹377 crore would have been ahead of Bloomberg’s consensus estimate of ₹234 crore.

Notwithstanding its small exposure to the mobility business segment, Bosch’s performance has largely toed the line of the domestic auto sector.

Although the management reiterates gains in the BS-VI era, it would certainly take several years to return to the peak performance of 2018. Bosch’s capital expenditure is expected to drop 30-40% in FY21.

A note by ICICI Securities Ltd said growth prospects were subdued due to the covid-19-led disruptions and the expectations of a delayed revival in the commercial vehicle space.

Against this grim backdrop, the silver lining for investors is that the stock trades at about 24 times FY22 estimated earnings, which is lower than the decade’s average of 31 times earnings.