Falling raw material prices, demand recovery to drive gains for Bosch stock

Aided by improving demand and a low base, the country’s largest listed auto component maker, Bosch, posted a better-than-expected June quarter results for the 2022-23 financial year (Q1FY23). The company, which gets most of its revenues from the auto segment (mobility solutions), reported a 45 per cent growth in the topline as compared to Q1FY22.

Within mobility solutions, sales growth (up 48 per cent year-on-year or YoY) was led by the bread-and-butter powertrain segment, followed by aftermarket and two- wheeler business. Gains in the powertrain segment came from a 55 per cent increase in sales to passenger vehicle makers while commercial vehicle customer sales grew in the 66-71 per cent range.

Rising proportion of utility vehicles in passenger car sales is expected to boost the diesel-based vehicle revenues in addition to the cyclical upturn in the medium and heavy commercial vehicle segment. The company expects sales in the passenger cars and light commercial vehicles to finish higher in FY23 as compared to the peak levels of FY18. This should keep the revenue momentum (operating leverage) going from improved volumes, which was missing over the last couple of years.

A low base and higher sales of diesel components, spark plugs and filters, aided the sales of the aftermarket segment which registered a growth of 61 per cent and surpassed its previous peak revenues. The only segment within mobility which saw a decline was two wheelers where sales fell 12.9 per cent due to the shortage of semi-conductors.

In addition to revenue trajectory, the Street will focus on margin trends. Gross margins in Q1FY23 were down by 570 basis points to 35.4 per cent due to steep increase in raw material prices and change in product mix. The current margins, according to the company, is 700-800 basis points lower than pre-FY20 levels due to unfavourable product mix (lower diesel products), higher proportion of traded goods, increased logistics costs due to China lockdown and investments in auto technology. Operating profit margins were marginally higher at 12.7 per cent, aided by operating leverage benefits.

After remaining flat in FY22, ICICI Securities expects operating profit to post a 37 per cent annual growth, led by volume growth in auto segment, improving semiconductor supply and reversal in commodity costs.

Basudeb Banerjee and Pratit Vajani of the brokerage believe that decline in raw material prices would help margin reversal soon but increasing localisation of BS6 diesel fuel injection systems is a time-taking process and thus, would limit margin reviving beyond 15 per cent in the near term.

While there are multiple triggers, both on the revenue and margin fronts, brokerages believe that the positives are factored into the price with the stock gaining 32 per cent over the last month.

Jinesh Gandhi and Aniket Desai of Motilal Oswal Research believe valuations of 38.2 times FY23 earnings estimates (28.7 times for FY24) largely factors in changes in its competitive positioning since its shift to BS-IV/BS-VI emission norms. While the negatives are priced in, there are no material catalysts visible for a rerating of the stock.