Smooth ride for Bosch on auto recovery, margin gains

Higher content share in BS-VI, 2-wheeler EVS offer incremental opportunities

Bosch has gained over 25 per cent on the bourses since the last couple of months, after having underperformed the broader markets for the better part of last year.

Double-digit volume growth across key auto segments, increased content per vehicle after the implementation of BS-VI norms, and expectation of margin gains have led to the recent rally in the stock of India’s largest auto component maker.

The broad-based recovery in auto segments (including commercial vehicles) and expectations of improvement were major triggers for the parts supplier. While it supplies injectors, nozzles, starters, and generators, its largest segment continues to be fuel injection equipment, which accounts for half its revenues.

With BS-VI norms in place, analysts at Motilal Oswal Research expect content per vehicle to increase in terms of value with rising volumes, in FY22.

In addition, they expect normalisation of the product mix in favour of commercial vehicles.

The company highlighted that its BS-VI order book has improved as compared to the year-ago level. At close to ~19,000 crore, it offers revenue visibility over the next few years.

The supply of electric vehicle (EV) components to two- and three-wheeler makers is another potential trigger. The fir supplies the drive system for Bajaj Auto’s EV Chetak, hub system for TVS’ Qube, as well as components to Tata Motors’ Nexon EV.

Analysts at Ashika Stock Broking believe that the company is better positioned in the two-wheeler and three-wheeler EV spaces, given the limited competition as compared to passenger vehicle EVS.

With its cost restructuring exercise expected to be completed soon, the company’s margins could head north.

After falling to 10-11 per cent in the current financial year (FY21) from over 15 per cent in FY20, margins could recover to 14 per cent in FY22 driven by lower costs and localisation of BSVI components, estimate analysts.

Imports account for 22 per cent of the firm’s sales.

Return ratios, which have been trending down over the last four years (including estimates for FY21) could see an uptick in FY22.

The spurt in prices indicates that valuations at 34.4x are close to the long term average of 36x.

Investors should await consistent performance over the next few quarters, before considering the stock.