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MOSL: BOSCH (Neutral)-Below-estimate; operating deleverage hurts; outlook cautious

BOSCH: Below-estimate; operating deleverage hurts; outlook cautious

(BOS IN, Mkt Cap USD5.7b, CMP INR13783, TP INR15150, 10% Upside, Neutral)

 

Fifth consecutive quarter of revenue decline; BS6 pain ahead

• BOS’ 3QFY20 operating performance was weak across operating parameters due to weak production at the OEM end. There is no end in sight as the near-term weak demand environment would be followed by BS6 transition, posing a risk of further market share loss in CVs and a decline in market of PV diesel, though 2W EFIs would dilute the impact.
• We downgrade our EPS estimate by ~5% for FY21 to factor in the emerging insights on BS6 competitive positioning. Maintain Neutral with a target price of ~INR15,150 (~30x Dec’21E EPS). 

Reasonable replacement market growth, lower RM cost offer support

• BOS’ revenue/EBITDA/PAT declined ~16%/22%/18% YoY to ~INR25.4b/INR3.2b/INR2.7b in 3QFY20. For 9MFY20, revenue/EBITDA/PAT were down ~19%/30%/23% YoY.
• The company’s domestic revenue decline was much steeper than the underlying industry decline (-25% v/s -11% YoY), primarily led by M&HCVs.
• Gross margin improved ~290bp YoY (+330bp QoQ) due to higher service income, cost reduction and inventory changes.
• However, higher other expenses impacted the EBITDA margin, which contracted 110bp YoY (-200bp QoQ) to ~12.6% (in-line).
• EBITDA declined ~22% YoY (-5% QoQ) to ~INR3.2b (our estimate: ~INR3.7b). However, higher-than-estimated other income and lower tax restricted adj. PAT decline to ~19% YoY (~INR2.7b v/s our estimate of ~INR2.8b).