Speed breakers to keep Bosch in the slow lane

Market share loss, BS-VI transition key headwinds

Concerns for Bosch, which has seen a sharp de-rating, are unlikely to end any time soon. Higher competitive intensity and BS-VI transition challenges have led brokerages to forecast further downside in the near term.

It has shed over 26 per cent in a year, with sluggish demand and weak operating leverage affecting its financials.

The December quarter was the fifth consecutive one to record a sales decline. Revenues fell 16 per cent, driven by lower sales in the medium and heavy commercial vehicles segment. Its domestic revenue decline, at 25 per cent, was steeper than the industry’s (Bosch’s segments) at 11.2 per cent.

Revenues from its non-auto segment also fell 13.9 per cent. Brokerages expect near-term pressures to remain. Analysts at Motilal Oswal Financial Services believe there is no end in sight to the slowdown, given that the near-term weak demand environment will be followed by the BS-VI transition. This poses a risk of further market share loss in commercial vehicles, and a decline in market share for its diesel passenger vehicles. However, the two-wheeler electronic fuel injection units may offset the impact.

The key worry for India’s largest auto component supplier (by market capitalisation) has been the shift towards cleaner fuel options, which has disrupted its near-monopoly in diesel fuel injection systems.

Transition to cleaner fuels is a major challenge, as key components — like nozzles, injectors, and fuel pumps — that account for 70 per cent of its revenues, will be redundant in electric vehicles. Highlighting this, analysts at ICICI Securities say that rapidly changing strategies of auto makers on powertrain — with preference towards petrol and electric vehicles over diesel — is the reason for their bearish stance.

What adds to their ‘sell’ rating is the heightened competitive intensity across categories and increasing risk of obsolescence on past investments. The brokerage has cut its target price to ~10,926 a share, which, given the current price of ~13,602, indicates a 20 per cent downside. Valuations at 32x its FY21 earnings estimates are in the expensive zone.