Bosch - The "engine" of auto ancillary segment... - ICICIdirect

Bosch India (Bosch) is the largest auto ancillary player in the domestic automotive industry. With strong technology leadership and a wide product portfolio, it is one of the few ancillary companies with significant bargaining power with original equipment manufacturers (OEMs). Bosch holds ~90% share in domestic CVs and tractors in fuel injection systems (FIS). With strong technology parentage from the Bosch group, Bosch is poised to benefit from the growth in the tractor and CV segments in CY14E, CY15E. Implementation of new emission norms in CY15E also augurs well for Bosch as it is likely to coincide with an upswing in M&HCV segment volumes. Strong export potential from India operations can also provide potential revenue streams. With a stable margin profile across cycles, healthy return ratios, robust FCF, impressive product positioning and a strong technology moat, Bosch is truly a behemoth in the automotive component industry. We initiate coverage with a HOLD rating.

Automotive space to witness demand recovery; emissions to also aid growth

We expect the CV OEM segment to grow at a CAGR of 5% over FY13-15E, on the back of a recovery in the economic climate. The PV space is also likely to post ~9% growth CAGR in FY13-15E as pent-up demand translates into sales. The tractor segment is also likely to grow at a CAGR of 12% on improved agricultural incomes and increasing mechanisation of farms on paucity of rural labour. Another major growth trigger would emanate from emission changes in CY15E, which would lead to demand spurt from the replacement space. These situations aid Bosch as it remains the monopoly player in the engine components segment in the ancillary space.

Strong focus on R&D; global parent's technology support at low royalty rates

Bosch Group spends ~$5.5 billion every year on R&D. It is comparable with the R&D spends of global auto OEMs like Volkswagen, GM & Toyota. Bosch Group offers most of its technologies at a low royalty rate to the Indian arm. Bosch India, thus, stands to benefit from the technology leadership profile of its parent as implementation of new innovations pick up ground in India.

Earnings growth pace to be modest; re-rating post emission clarity

We believe Bosch will be a key beneficiary of any recovery in the automotive space & could reap high rewards owing to any emission norm changes in CY15E. We expect this to reflect in financials via CAGR of 11.6%, 16.9% in revenues, earnings, respectively, over CY13E-15E. Return ratios are likely to remain healthy, even with capex planned. On valuations front, the stock is at mid-cycle multiples. We value the stock at 14x EV/EBIDTA on rolling CY14E/15E EBITDA (Rs. 1812 crore) to arrive at a target price of Rs. 9360.

Source : Equity Bulls

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