(Graphic: Naveen Kumar Saini/Mint)
(Graphic: Naveen Kumar Saini/Mint)

Bosch: Structural challenges of auto slowdown weigh on outlook

  • Management’s grim outlook that the slowdown was more ’structural than cyclical’ will cap the stock’s upsides
  • Clearly, negative operating leverage dented profitability in all its segments

June quarter results of most auto component firms have been disappointing. Bosch Ltd was no exception.

The Indian arm of the German engineering giant had announced a series of production cuts, which impacted performance. The quarter’s Ebitda (earnings before interest, tax, depreciation and amortization) of 483 crore was 10% below the average estimate on the Street. It was also 23% lower year-on-year.

Clearly, negative operating leverage dented profitability in all its segments. Revenue declined across the board in domestic auto sales, export sales and non-auto sales. This dragged net revenues down 15% year-on-year to 2,778.8 crore, which was slightly below analysts’ forecasts.

To an extent, lower commodity prices alleviated the impact of lower capacity utilization. Raw material costs as a percentage of sales were stable. However, employee costs rose by 200 basis points year-on-year. Other expenses were slightly higher, too. Hence, Ebitda margin contracted by 220 basis points to 17.4%, which too was below forecasts.

While the pain in the sector due to the slowdown in automobiles is known, the grim management outlook of a long-term slowdown will cap the stock’s upsides. Bosch’s management said the slowdown was more “structural than cyclical". June quarter’s provision ( 82 crore) towards reskilling and restructuring operations to cope with the transition in the auto industry, was charged to profit and loss account as “exceptional items".

However, excluding this, net profit for the quarter was 22% lower at 334 crore. The Bosch stock has fallen by 7.3% since the results were declared on Tuesday. But there may be more pain. According to Soumitra Bhattacharya, managing director of the company, liquidity shortage and inventory build-up will pose a big challenge, and a recovery will take longer than expected.

On top of it, analysts are downbeat on the sector. A Motilal Oswal Financial Services Ltd report said; “We have reduced our FY20 and FY21 estimates by 7-9% to factor in the weak demand environment." Besides, with the earnings growth likely to be in low single-digits over the next two years, even the present price-to-earning multiple of 20-23 times the estimated one-year forward earnings looks rich.

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