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MOSL: BOSCH (Neutral)-Below est.-Slowdown structural and not cyclical; Preparing for it

BOSCH: Below est.; Slowdown structural and not cyclical; Preparing for it

(BOS IN, Mkt Cap USD5.6b, CMP INR13517, TP INR14715, 9% Upside, Neutral)

 

• Negative operating leverage dents margins: Revenues declined 13.5% YoY (+1% QoQ) to INR27.8b (est. INR28.9b). Auto revenue declined 13.5% YoY (domestic auto revenues/auto exports declined 17.5%/19%), while non-auto revenue declined ~13% YoY. EBITDA declined 23% YoY (-6.5% QoQ) to INR4.8b (below est. of INR5.4b). EBITDA margin shrunk 220bp YoY (-140bp QoQ) to 17.4% (est. 18.8%), impacted by negative operating leverage. Adj. PAT declined 22% YoY to INR3.3b (est. INR3.7b). The company provided for expenses (~INR821m) towards restructuring, reskilling and redeployment in preparation for potential structural slowdown in the auto industry.
• Call highlights: (a) Bosch believes that the Indian auto industry is going through a paradigm shift - the current slowdown is not cyclical but structural in nature - hence, recovery should take longer. While it expects FY20 to see a decline, FY21 should also remain muted owing to a spillover of the current weakness. (b) Hence, the company is investing in restructuring, reskilling and redeployment to align with adjustment of portfolios (towards EVs, mobility solutions, etc.) and competencies. (c) Aftermarket business also saw single-digit decline in 1QFY20; full-year FY20 is expected to be muted. (d) FY20 capex should be in the normal range of INR3.5-5b; the company would look at rightsizing investments given market conditions.
• Valuation view: We have reduced our FY20/FY21 EPS estimates by 7-9% to factor in the weak demand environment. The stock trades at 28.2x/23.4x FY20/FY21 EPS. BS6 transition poses risk of further market share loss in CVs as well as continuous decline in its stronghold - PV diesel, but opportunities are expected to open up for BOS in 2Ws (one of 3-4 players in 2W EFIs). We estimate EPS to grow just ~3% CAGR over FY19-21 as the changing competitive positioning poses a threat to our estimates. Hence, we lower our target P/E multiple from 27x to 25x, at ~25% discount to 10-year LPA of 33x. Maintain Neutral.