Bosch - Keeping head above water... - Antique

Business getting less cyclical and more profitable!

The company shies away from disclosing segment-wise details, but with buoyancy in the more profitable CRDi segment, we estimate that Bosch's dependence on CVs is on the decline - we estimate - from 53% of total revenues in CY07e to ~32% currently. Also, based on our analysis, ~1/ 3rd of CV segment sales is to the aftermarket. This not only makes the business less cyclical, but also more profitable.

Post the next emission norm change (2014), most CVs will become eligible for CRDi as well, which is another long-term margin catalyst. In the interim, an appreciating INR would bode well for margins given that net imports are 20% of sales.

Indian cars would continue to dieselize...

Diesel cars have bucked the trend ever since petrol prices were de-controlled. Notwithstanding an absurd tax on diesel vehicles that could pop-up in the future (unlikely, in our view), we expect this buoyancy in diesel cars to continue.

We aren't extrapolating this huge petrol~diesel disparity over a longer period, but we remain structurally positive on dieselization of the Indian car industry going ahead simply due to the inherent economics of a diesel vehicle (~25% more fuel efficient than its petrol counterpart).

Near monopoly in fuel injection systems (FIS) to keep margins firm

Besides this structural uptrend in margins, Bosch's almost monopolistic position in fuel injection equipment gives it strong pricing power (stark contrast to other ancillaries!). Being a highly consolidated industry, with few players having the required technology, the fuel injection industry has very high entry barriers.

While new players can enter when new models are being introduced, the probability of OEMs moving towards new entrants for such critical engine equipment is low. OEMs involve the FIS player right from the R&D stage (much before the commercial production begins) and once a FIS system is developed for a vehicle, the OEM generally sticks to that player/system for the entire lifecycle of the model.

Structurally strong, but cyclically weak... HOLD!

We recommend a HOLD on account of near-term cyclical headwinds in CVs coupled with the rich valuations. However, we remain convinced about the structural positives in Bosch's business model and we'd advise using the expected weakness in the stock (due to cyclical headwinds) as a buying opportunity.

Source : Equity Bulls

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