Auto Slowdown Hurts Bosch

Auto component manufacturer Bosch announced results for the quarter ending June 2012 on 13 August 2012. This announcement has come shortly after the company last week announced the closure of its production facilities over a few days, partly or fully, at the company’s Bangalore, Nashik and Jaipur plants. In all, there would be part suspension of production lines at Bangalore and Nashik for 5 days and 2 days respectively and full suspension of production at Jaipur for 6 days in August 2012. This closure has been announced in order to match the production and demand for products to avoid an inventory pile up. For a company with approximately 90 per cent of revenue coming from the automotive segment, the slowdown in the automobile sector has clearly hit the performance of the firm. Moreover, tractors and Commercial Vehicles (CV) form nearly half of its revenues which, in terms of sales volume have seen stagnation or de-growth in the Q2 CY12. High cost of funding, lower activity in the areas of construction and mining, delayed monsoons, among other reasons have caused sluggishness in the sale of both tractors and CVs in every month of the quarter under review.

These factors have drastically affected the financial performance of Bosch, moderating the growth in topline to 6.9 per cent when compared to the corresponding quarter in the previous year. The net sales from operations were seen at Rs.2157.22 crore in Q2 CY12 as compared to Rs.2018.43 crore in Q2 CY11. The weakness noticed in the demand coming in from domestic clients, is also accompanied by weakening demand on the exports front due to lower demand from Europe and North America.

In term of profitability the company’s results were majorly hit by the depreciating rupee and the cost of depreciation. Bosch has been importing roughly 42 to 47 per cent of the total raw material consumption over the last 5 years. With an import component this high, the depreciating rupee is bound to show up significantly in the margins of the company. This spike in raw material costs is accompanied by a steep rise in depreciation costs too. Bosch has been investing heavily towards the launch of new products and also towards increasing production capacity. This has caused the depreciation to increase from Rs.49.92 crore in Q2 CY11 to Rs.76.05 crore in Q2 CY12, marking an increase of 52.34 per cent. These factors have severely affected the margins of Bosch with the Operating Margin and the Net Profit Margin at 15.25 per cent and 11.47 per cent respectively. These margins have seen a reduction of 353 basis points and 235 basis points as compared to Q2 CY11.

We think the demand for tractors and CVs will remain sluggish over the next few quarters and would only improve with a positive change in industrial output, interest rate reversal and increased consumer confidence. Considering the fact that about half of Bosch’s revenues are dependent on products and services provided to these segments and the fact that about 90 per cent of the revenues are contributed by the automotive segment, these would dominate the overall performance of the company sidelining the performance of the company’s other businesses in the sectors of Industrial Technology and Consumer Goods & Building Technology which registered robust growth figures in the past quarters. Moreover, the scrip is currently trading at a trailing PE of 23.975x which makes it a tad higher than the industry average. We thus recommend investors to avoid the scrip till macroeconomic cues improve and eventually positively affect the overall automotive industry.