Bosch Limited - Weakness in diesel PVs catch up! - Antique

PAT at INR2.6bn (down 23% YoY/up 51% QoQ) was marginally below our estimate of INR2.67bn (consensus - INR2.65bn). Disappointment stemmed from lower than expected revenue growth (down 3% YoY/up 7% QoQ). This was the first revenue de-growth in the last 16 quarters (last time revenues declined YoY was in March '09). While the slowdown in CVs and tractors is nothing new, the weak revenue growth reflects moderation in off-take from diesel PV players. We continue to believe that Bosch is an excellent structural play on Indian Autos, but maintain our HOLD reco owing to cyclical weakness in user-segments coupled with rich valuations.

Remain constructive on Bosch's future outlook... Maintain HOLD on rich valuations!

We remain convinced about the structural positives in Bosch's business which makes it an excellent play on the eventual recovery in the CV and tractor segments. Being a highly consolidated industry with few players having the requisite 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. In Bosch's case, it's almost monopolistic position in fuel injection equipment (especially in the CV market) gives it relatively stronger pricing power as compared to other Auto ancillaries.

Furthermore, the buoyancy in diesel PVs over the last couple of years doesn't seem to be a flash in the pan. Sure, it was aided by an immensely favourable fuel disparity, but in our view, the Indian car industry will continue to dieselize (albeit at a less rampant phase) given the inherent economics of a diesel vehicle (~25% more fuel efficient than its petrol counterpart) coupled with most new launches also offering a diesel variant (unlike earlier).

We await cyclical relief in Bosch's user industries before turning buyers. Further, current valuations (CY13/14 P/E at 30x/24x), is closer to the higher band of its valuation range and not reasonable by any means. Maintain HOLD with a target price of INR9,422 (25x CY14e EPS).

Source : Equity Bulls

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