Bosch Ltd: Buy

In a scenario where the auto industry growth is moderating, due to cyclical and macro-economic factors, an investment in the Bosch stock seems a safe bet. Although a major supplier of diesel and gasoline fuel injection systems for the auto industry, the company offers a good shield in times of a slowdown.

For one, exposure to the diesel segment itself is a positive. Considering the technological progress of the diesel engines and the benefits of lower running cost and higher mileage that they bestow, demand for diesel vehicles is on the upswing.

Two, it derives about 20 per cent of revenues from the automotive after-markets which include supply of replacement parts and servicing of vehicles. The demand for such services is largely independent of the auto industry cycle. Three, the company is also present in the non-auto segment, helping diversification of the revenue stream.

Hence, notwithstanding near-term concerns due to the ongoing workers' strike and shutdown at the Bangalore plant, investors with a perspective of about two years can consider exposures to Bosch. At the current market price of Rs 7,053, it trades at a PE of about 18.5 times its estimated 2012 earnings. Considering the volatility in the broader markets, investors can also accumulate the stock on dips.

Diesel to drive growth

A pioneer in diesel technology world-wide, Bosch has over 70 per cent market share in India for diesel fuel injection products such as single/multi-cylinder pumps, distributor pumps and electronic injection control units (common rail systems). These fuel injection equipment are used to inject a particular quantity of fuel at a pre-determined time and fashion, thus influencing the performance, emission and reliability of the engine. Bosch derives more than 50 per cent of its revenues from supplies to diesel engines and caters to segments such as passenger cars, commercial vehicles, tractors and locomotives.

Going forward, few trends in the diesel vehicle market are expected to play out in favour of the company. First, the expanding market for diesel cars. Advances in diesel engine technology such as the use of common rails, higher thrust and lower noise levels has encouraged customers to opt for this alternative. Moreover, although the initial purchase price may be higher, diesel as a fuel is not only cheaper than petrol, but also more fuel-efficient. OEMs (original equipment manufacturers) too are cashing in on this trend. Maruti Suzuki, for example, which offers diesel variants in the SX4, Swift, Dzire and Ritz models, now derives one-fifths of its total sales volumes from such vehicles is expanding capacities for the same. Contribution of diesel passenger vehicles to Bosch's sales is currently between 20-25 per cent.

A second source of support for Bosch lies in the currently healthy demand for tractors and LCVs (light commercial vehicles). As against the 7 per cent growth in medium and heavy commercial vehicles (MHCVs) in April-August 2011, LCVs have grown by a robust 27.5 per cent during the same period, showing that they are less sensitive to both cyclicality as well as high interest rates. Hence, the company's exposure to this segment helps in keeping revenues trickling in even as growth in other segments moderate. Besides, given the good farm growth in the first quarter, the increased rural incomes and good monsoons, the demand for tractors too could continue to hold up.

Technology, its forte

A third strength of the company lies in its technological competence. Bosch has already led the way in introducing common rail technology for low-priced vehicles (small three- and four-wheelers) which have a sizeable demand in India. The company also launched common rail systems for MHCVs last year. These common rail injection systems help improve fuel efficiency and reduce polluting emissions. Another major highlight is the introduction of inline fuel injection pumps meeting BS III norms, (implemented pan-India from October 1, 2010) for medium CVs. About Rs 2,500 crore is to be invested by the Bosch group in India between 2011 and 2013, of which Rs 1,300 crore will be used by Bosch Ltd., the flagship, as investments into further technological upgradation. Over the medium-to-long term, the parent's R&D activities in hybrid technology also hold promise.

Help from diversification

The diesel systems might bring in a chunk of the revenues, but the company's revenue base is also quite diversified, partially acting as a shield in times of a moderation in auto industry growth. While starters and generators, gasoline systems and car multimedia devices, which bring a small portion of the revenues, might still be linked to the vagaries of auto sales, Bosch's wide distribution and service network in the automotive after markets is a positive. In addition, the company derives about 10 per cent of its revenues from the manufacture of packaging machines, power tools and electronic security systems (CCTV, fire alarms, access control systems), which have witnessed strong growth in recent times.

Robust financials

Backed by good demand for diesel, starter and generator products, Bosch posted a 33 per cent growth in net profits to Rs 279 crore in the June 2011 quarter. Net sales rose by 22 per cent to Rs 2,024 crore. Operating margins stood at around 20 per cent, at the same levels seen in the year-ago period.

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