Bosch sees auto on a slow road to recovery, faces valuation pressure

Bosch expects return to peak volume levels of 2018 only in 4-6 years, which will impact industry output and its own financials; stock has lost 30% over the past three months.

The management of the Indian subsidiary of German auto ancillary major Bosch expects the automobile industry to take four to six years to reach the peak volumes of 2018.

This gloomy outlook which the company shared with investors after declaring its March quarter results could weigh on its valuations.

The Bosch stock has lost 30% in the past three months with its value premium over the BSE Auto Index getting eroded to 49% from an average of 68% during this period.

Even before Covid-19 struck, the company had projected a shorter turnaround of three years at a time when automobile sales volumes were slowing in India. The pandemic has extended it by another year or perhaps two.

Bosch’s guidance implies a 12-47% drop in production for FY21 across various segments of the domestic automobile sector. The highest decline is likely in the light commercial vehicles (LCV) segment followed by passenger vehicles. This is harsher than most analyst projections of industry growth.

According to Bloomberg consensus estimates, analysts have pencilled in a decline of 1.2% and 16% in Bosch’s revenue and operating profit, respectively for FY21. This is an ambitious estimate and would put pressure on stock valuations.

A few brokerages, though, have downgraded their earnings estimates by 10-12% for FY21 and FY22.

The impact of declining auto demand is evident in the company’s financials. Auto segment revenue, which makes up 85% of Bosch’s total revenues, has fallen in each of the past six quarters.

In FY20, it fell 19% to ₹8,335 crore compared to 1.2% growth in the previous year. The company has been operating plants in single shifts with utilisation at 15-20%. This trend may continue in June as well and may drag margins down.

The one segment that works for the company is the BS-VI emission regime that kicked in April, which offers scope for incremental revenue growth. It has an order backlog worth ₹24,000 crore for vehicular components needed to achieve the emissions standards.

Analysts, however, are concerned about a potential loss in CV segment market share during the BS-VI transition. The potential downside in overall earnings due to this can be mitigated if Bosch improves earnings in the two-wheelers segment.

At Tuesday’s closing price of ₹9,399.1, the stock traded at 28.6 times trailing 12-month earnings compared with an average of 34 since the beginning of the year. The company’s bleaker outlook is likely to affect this in the near term.