Bosch Ltd - Margins fall short of expectations - ICICI Securities

Bosch's (BOS) Q3FY21 operating performance was below consensus estimates as EBITDA margin was down 81bps YoY at 11.8%. Gross margins slipped 580bps YoY at 42.1% on account of higher commodity costs, weaker product mix. Automotive revenues rose ~25% YoY driven by mobility division (up 35%) while non-automotive revenues fell ~11%. Restructuring costs (Rs1.5bn) finally ended in Q3, has had a cumulative impact of ~Rs15bn over past six quarters. We believe the efforts to right-size the core business has laid a good foundation; however, underlying business challenges (market share loss in M&HCV, decline in diesel share in PVs, rising share of trading goods, semiconductor issues) remain hurdle for superior growth. We believe margins scale back >15% remains a key challenge considering the product mix/ cost considerations. Downgrade to SELL.

- Key highlights of the quarter: BOS' domestic mobility solutions business improved ~35% YoY due to better sales in powertrain solutions (up 46% YoY) aided by 2W segment growth. Business ex-mobility shrunk 7.7% due to weakness in solar and building security technology segments. Higher RM costs (up 580bps) due to commodity price inflation and product mix led to EBITDA margin contraction of 81bps to 11.8% even as employee costs fell 392bps (credit to the restructuring). Other expenses were higher due to increase in development costs w.r.t to localisation for BS-VI products.

- Key takeaways from concall: a) Domestic sales were up 25% YoY as revenues from mobility grew ~35% (industry growth 17%). b) Material costs were higher by 33% mainly due to higher freight costs, product mix change, higher traded goods and forex impact. c) Outcome of the 3R restructuring program has started to be visible in the lower employee costs (down 20% YoY); ~1k workers have opted for voluntary retirement under the restructuring and reskilling program. d) semiconductor shortages are impacting ECU production for BOS, the same is expected to continue till H1FY22. e) Aftermarket sales, which contribute 20-22% of sales, has been strong with better reach and secondary sales. f) BS-VI product sales fell significantly in 9MFY21 to Rs190bn against acquisitions of Rs270bn. g) growth has been aided by strong tractor demand where BOS has dominant position

- Downgrade to SELL: We remain conservative on BOS as it faces structural industry (diesel decline) and company-specific (MHCV market share loss) challenges, growth is being aided by lower margin increased bought-out-goods. While the industry issues seem to be bottoming out, the company-specific concerns persist. We trim earnings by ~18%/10% for FY21E/FY22E and increase the same for FY23E by 9% factoring-in the better industry growth prospects, margin improvement. We maintain our target multiple at 25x FY23E EPS of Rs513, and downgrade our rating to SELL (from Reduce) with a revised target price of Rs12,831/share (earlier: Rs11,250).

Shares of BOSCH LTD. was last trading in BSE at Rs.15686.3 as compared to the previous close of Rs. 15619.95. The total number of shares traded during the day was 3031 in over 1414 trades.

The stock hit an intraday high of Rs. 16019.85 and intraday low of 15650. The net turnover during the day was Rs. 48051147.

Source : Equity Bulls

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