Look No Further - Bosch

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If there is a best possible bet in the auto ancillary space then there is none better than Bosch. Many compelling factors such as strong growth numbers in 9MCY2010, strong auto numbers, continuous capex, low debt to equity, consistent dividend track record of 19 years and fair valuations of PE at 22x its CY2010 estimates, make Bosch a must-have scrip at a CMP of Rs 6269. Bosch’s automotive segment contributes 89 per cent, while balance is from its non-automotive business. The auto segment is further divided into diesel systems, aftermarket, starters and generators, gasoline systems, car multimedia and contributes 61 per cent, 28 per cent, 6 per cent, 4 per cent and 1 per cent respectively. While the non-automotive segment is further bifurcated into industrial technology and consumer durables and building technology which contributes 14 per cent and 86 per cent to its segment revenues.

There are solid reasons for our belief that Bosch would do well. It is an undisputed leader in diesel fuel injection space with 80 per cent market share and is a major supplier to most of OEMs. This creates an almost monopoly-like situation for Bosch. Considering that OEMs don’t easily change their vendors when it comes to critical equipments such as injection systems, Bosch would continue to remain a preferred vendor to its OEMs. Besides, with stringent emission norms being deployed, OEMs have to adopt compatible technology and with Bosch’s products capable of meeting Bharat III and IV and even Euro V norms, Bosch stands to benefit from the same in long term.

In fact apart from OEMs, Bosch through its aftermarket segment is also the largest supplier of automotive parts for vehicles may it be cars, 2-3 wheelers, commercial vehicles, etc. Besides, what also augurs well for Bosch is the strong revival in the auto sector, especially the commercial vehicles its major market. While the overall auto sector grew by 33 per cent for April – October 2010, commercial vehicles category grew even stronger at 38 per cent. In fact to better cater to this incremental demand Bosch is expected to spend around Rs 1300 crore from 2010-2013 to augment its capacities at its various plants. That apart, India is being called the next auto hub for global auto biggies, thus creating a huge opportunity for Bosch in coming years. Besides, the Bosch group already caters to most of these auto biggies globally and would undoubtedly become their preferred vendor choice in India as well.

For 9MCY2010, Bosch’s revenues increased 41.1 per cent to Rs 5,006.92 crore (Rs 3550.61 crore) while profits increased 50 per cent to Rs 648.37 crore (Rs 432.46 crore). On a nine-month annualised basis, Bosch could post revenues and profits of Rs 6675 crore and Rs 864 crore for CY2010. At these estimates, the scrip is available at PE of 22.7x and EV/EBIDTA of 13x. Though this may look a bit steep, it is fair for this briskly growing bid daddy. With a low debt to equity of 0.08x and a consistent dividend track record of 19 years, Bosch still looks like a good grab with a one-year target price of Rs 7200.