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For Bosch’s investors, margin challenges are a key concern ahead

Shares of Bosch are trading marginally lower than the pre-covid highs seen in January 2020. (Photo: Mint)Premium
Shares of Bosch are trading marginally lower than the pre-covid highs seen in January 2020. (Photo: Mint)

  • With 80% of our revenues driven through mobility business, we have been affected adversely. The challenge will be to manage the fluctuating demand, supply chain crisis and changing consumer behavior all at once, Soumitra Bhattacharya, managing director, Bosch said

MUMBAI: Auto parts maker, Bosch Ltd’s March quarter results are not bad, but they aren’t particularly inspiring either. Reported earnings before interest, tax, depreciation and amortisation (Ebitda) margin is optically high at 19.2%. That’s primarily owing to a sharp 51% year-on-year drop in employee costs due to one-time employee benefit reversal. Naturally, adjusting for this, Ebitda margin is lower.

Bosch’s March quarter operating performance missed consensus estimates as adjusted Ebitda margin fell 95 basis points year-on-year to 14.3%," said analysts from ICICI Securities Ltd in a report on 21 May. One basis point is one-hundredth of a percentage point. Gross profit margins have contracted about 745 basis points year-on-year, as raw material costs increased sharply and product mix was weaker. To be sure, decline in other expenses as a percentage of revenues did offer some comfort at the Ebitda level.

Nonetheless, it's not as if margin outlook is exciting. ICICI Securities’ analysts said, “Higher share of bought out components and imports is likely to hinder Ebitda margins towards previous cycle levels (17-19%)."

Analysts from Incred Research Services Pvt. Ltd said in a report on 20 May, “Considering prolonged profit margin pressure due to increased competition and higher bought-out items to meet new emission norms, we feel its return on equity profile will remain below historical trends thereby demanding a valuation derating."

As things stand, shares of Bosch are trading marginally lower than the pre-covid highs seen in January 2020. “We value it at 27 times 1-year forward price-to-earnings ratio which is at a 10% discount to the mean level, leading to our target price of Rs11,921," said Incred analysts. The broker’s target price is around 20% lower than Bosch’s current market price.

Meanwhile, Bosch’s March quarter revenues rose nearly 44% year-on-year to Rs3,218 crore. Within this, automotive revenues, which contributed about 86% to total revenues, grew 47%. The remaining revenues rose 25%.

In general, the second covid-19 wave has led to uncertain business conditions, which would have an adverse impact on Bosch as well. Commenting on the outlook for fiscal 2022, Soumitra Bhattacharya, managing director, Bosch said, “With 80% of our revenues driven through mobility business, we have been affected adversely. The challenge will be to manage the fluctuating demand, supply chain crisis and changing consumer behavior all at once."

Overall, it won't be surprising if margin and growth concerns keep sentiments muted for the Bosch stock from a near-term perspective.

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