Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16. Volume No.. I Issue No. 65 Bosch Ltd Apr 4 th, 2016 BSE Code: 500530 NSE Code: BOSCHLTD Reuters Code: BOSH.NS Bloomberg Code: BOS:IN Readying itself for next leg of growth Bosch Ltd, promoted by Robert Bosch GmbH, is India s leading auto ancillary company. It is a dominant player in the diesel engine segment with ~70% market share. In FY15, Bosch derived 88% & 12% of its turnover from auto & non-auto segment respectively. Investment Rationale Pricing power to remain intact on the back of leadership position & technological excellence: Bosch has a dominant ~70% market share in India for diesel fuel injection products. It is the leading provider of groundbreaking automotive technologies and services. Being a dominant player in fuel injection (FI) segment, FI products contribute ~70% to the company s revenue. Bosch Group (parent) spends ~10% of its turnover every year on R&D. Further, Bosch Group provides most of its technologies at a low royalty rate (1.6% of its turnover) to the Indian arm (Bosch Ltd). Thus, Bosch Ltd, stands to benefit from the technology leadership profile of its parent as implementation of new and advanced technologies pick up ground in India. Hence, pricing power would be maintained given its leadership in technology. Early implementation of stricter emission norms to drive growth ahead: In order to tackle air pollution, the government has announced to upgrade to stricter fuel standards (BS VI) from 2020 (skipping BS V altogether). BS VI was originally proposed to come in by 2024. Further, BS IV emission norms would be applicable across India from April 2017. Therefore, Bosch emerges as one of the main beneficiaries as it is a key supplier for fuel injection system for vehicles. As per industry estimates, implementation of BS IV on pan-india basis offers ~Rs 5,000 crores opportunity annually. Hence, we expect FI segment to grow at a CAGR of 18.3% over FY15-FY18E. The commitment of government to combat pollution would lead to content increase with common-rail in BS IV (2017) and selective catalytic reduction (SCR) in BS VI (2020). Moreover, major competitors such as Delphi and Denso do not have presence in India with SCR, a key technology for BS VI. Going forward, this would boost realisations for Bosch. Non-Auto business aids in providing revenue diversification: During CY11-FY15, the non-auto business grew at a CAGR of 13.3%. While non-auto business of Bosch Ltd contributes ~12% to the overall revenues, global non-auto business contribution is ~32%. This business has a robust growth potential and is expected to benefit from the pick up in the economic activity. We expect this business to grow at a CAGR of 15.2% over FY15-FY18E. Valuation: Bosch is in a sweet spot given its leadership position, technology focus and unique positioning in the Indian auto industry. We expect revenue and PAT to grow at a CAGR of 4.5% and 11.6% over FY15-FY18E. Further, we rate the stock as BUY assigning a forward P/E of 36.5x (given acceleration in growth trajectory due to advanced emission norms) arriving at a target price of Rs. 22,083 which implies potential upside of ~10% for next 12 months. Market Data Rating One year Price Chart 150 100 50 0 BOSCHLTD NIFTY BUY CMP (Rs.) 20,082 Target (Rs.) 22,083 Potential Upside (%) 10 Duration Long Term Face Value (Rs.) 10.0 52 week H/L (Rs.) 26,797/15,736 Adj. all time High (Rs.) 27,990 Decline from 52WH (%) 25.1 Rise from 52WL (%) 27.6 Beta 0.6 Mkt. Cap (Rs.Cr) 63,057 Y/E Fiscal Year Ended Revenue (Rs.Cr) Adj. Profit (Rs.Cr) FY15 (15 months) FY16E FY17E FY18E 12,086 10,705 11,720 13,800 1,366 1,188 1,505 1,900 EPS (Rs.) 434.9 378.4 479.2 605.0 P/E (x) 58.4 53.1 41.9 33.2 P/BV (x) 10.9 7.6 6.7 5.8 ROE (%) 20.0 15.2 17.0 18.7 Shareholding Pattern Dec-15 Sep-15 Chg. Promoters (%) 71.2 71.2 0.0 FII (%) 7.7 8.4 (0.7) DII (%) 11.5 11.0 0.5 Others (%) 9.6 9.5 0.1
Bosch Ltd is a dominant player in the diesel engine segment with ~70% market share. Bosch Ltd: Dominant player in the fuel injection segment Bosch, promoted by Robert Bosch GmbH (holds 71.18% stake), is India s leading auto ancillary company. It is a dominant player in the diesel engine segment with ~70% market share. The company has a broad-based product portfolio of diesel and gasoline fuel injection systems, automotive aftermarket products, starter motors & generators, special purpose machines, packaging machines, electric power tools, security systems etc. The automotive segment contributes 88% to the overall revenues. The company also has one of the largest distribution network of spare parts in the country, with aftermarket business accounting for ~20% of revenues. Its key manufacturing facilities are located at Bengaluru, Nashik, Naganathapura, Jaipur, Gangaikondan, Goa and Bidadi. Segment-wise Revenue Mix Non-Auto, 12% Automotives Products, 88% Business divisions of Bosch Ltd The Board has approved the sale of its starter motor &generators (SG) division to a 100% subsidiary of its parent for Rs 486 crores. SG constitutes ~10 % of Bosch Ltd turnover and around 1% of Bosch Ltd EBIT. Diesel Systems Gasoline Systems Packaging Technology Power Tools Automotive Starter Motors * Energy & Building Solns. Security Technology Aftermarket & Generators & Thermo-technology Bosch Product Portfolio Business Line Segments Products Target Segment Gasoline Direct gasoline injection PV Gasoline port injection Automotive Non-Automotive Diesel Common rail systems CV, PV, Tractors Electric drives Actuators All Pumps & Valves Electronics Electronic control units All Mechatronic modules Power tools Surveying equipment, Range Finders Construction, Wood & Impact wrenches, Drill Machines Metal working Industrial equipment Metal cutting machines Assembly equipment Industrial Packaging solutions Form, fill & seal machines Pharmaceuticals, Food Security systems Flow wrap machines IP-based CCTV surveillance & Access Control Systems Fire Alarm & Intrusion systems Source: Company, In-house research Source: Company, In-house research; *: Assuming shareholders nod for the sale of SG division Hotels, Metro Rail, Stadium
(%) Engine parts constitute ~31% of the total auto ancillary demand. Cyclical recovery in CVs and PVs to drive strong growth During FY11-15, automotive volumes (excluding 2Ws) grew at a CAGR of ~2%. Of late, there has been a visible traction in the CV space (YTD FY16 growth was 9% YoY) aided by growing demand from the infrastructure sector and the opening up of the mining sector. Going forward, with meaningful recovery in overall capex cycle, CV segment in India is expected to grow at a CAGR of ~14-17% over the next two years. With, CVs contributing about 50% to the company s revenues, demand recovery in the CV space coupled with BS-IV compliance on pan-india basis by April 2017 bodes well for the company. Similarly, PV segment is expected to grow at a CAGR of 11-13% over the next two years on the back of new product launches (PV contributes nearly 15% to the overall revenues). While pressure on the tractor segment is likely to continue in the near term, it may improve, going forward. After two consecutive years of poor monsoon, it is predicted that India will receive normal rainfall this year. Besides, government has recently taken several initiatives (crop insurance, enhanced allocation for NREGA in Union Budget) to revive rural growth. Bosch caters to ~40% of Indian auto ancillary industry Electrical Parts, 9% Others, 7% Equipments, 10% Suspension & Braking Parts, 12% Source: ACMA, In-house research Body & Chassis, 12% The government has decided to implement stricter emission norms of Bharat Stage (BS) VI from April 1, 2020, by skipping BS V altogether. Engine Parts, 31% Drive Transmission & Steering Parts, 19% Bosch s revenue growth is in sync with auto industry volumes 50.0 0.0-50.0 39.6 28.2 13.9 6.0 10.0 1.0 9.1-1.0 5.0-5.8 FY11 FY12 FY13 FY14 FY15 Automotive Industry Volume Growth (%) Bosch Net Sales Growth (%) Early implementation of stricter emission norms to drive growth ahead In order to tackle air pollution, the government has announced to upgrade to stricter fuel standards (BS VI). India will be the first country worldwide to skip one level of emission legislation (BS V). Implementation of the BS V standard was earlier scheduled for 2019. BS VI, originally proposed to come in by 2024 has been now advanced to 2020, instead. Further, BS IV emission norms would be applicable across India from April 2017. Already, BS-IV is applicable in almost all major cities including Delhi-NCR, Mumbai, Chennai, Kolkata and Hyderabad. Bosch emerges as one of the main beneficiaries as it is a key supplier for fuel injection system for vehicles. Thus, implying incremental revenue opportunity for Bosch Ltd & we expect FI segment to grow at a CAGR of 18.3% over FY15-FY18E. While almost all PVs sold in India are already BS IV compliant, majority of the CVs are still running on BS III standard. Hence, the incremental changes required in CV segment would give an impetus to company s powertrain business. As per industry estimates, implementation of BS IV on pan-india basis offers ~Rs 5,000 crores opportunity annually. Nationwide rollout of BS Emission Norms in India: Timeline Emission Norm Deadline Bharat Stage I 2000 Bharat Stage II 2005 Bharat Stage III 2010 Bharat Stage IV 2017 Bharat Stage V Skipped Bharat Stage VI 2020 Source: Ministry of Road Transport and Highways Source: Company, In-house research
CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 FY15 (Adj) FY16E FY17E FY18E Historically, it has been seen that whenever advanced emission norms are implemented nation-wide, revenues rose sharply in that particular year. Generally, with each change in the stage of an emission norm, there is an increase in content, leading to Bosch outperforming the industry growth. In CY10, when BS III standard was implemented, Bosch s revenues grew ~40% aided by a sharp recovery post the global financial crisis. Similarly, revenues grew ~25% in CY05 when BS III standard was implemented. Going forward, the government is planning to skip BS V standard by migrating directly to BS VI from BS IV. This move would lead to content increase with common-rail in BS IV (2017) and selective catalytic reduction (SCR) in BS VI (2020). The major competitors such as Delphi and Denso do not have presence in India with SCR, a key technology for BS VI. Further, Bosch sees opportunities in the Indian two-wheeler market as this segment is expected to be covered under BS VI norms. Currently 2Ws in India are carburetor based & they too will be required to shift to fuel injection systems. Implementation of advanced emission norms augur well for Bosch s sales growth BS II Implementation BS III Implementation 40% BS IV Implementation 22% 23% 28% 27% 13% 6% 5% 20% 6% 1% 10% 11% 9% 18% Source: Company, In-house research Bosch Group offers most of its technologies at a low royalty rate (~1.6% of its turnover) to the Indian arm. Pricing power to remain intact on the back of leadership position & technological excellence Bosch has a dominant ~70% market share in India for diesel fuel injection products. It has been the leading provider of groundbreaking automotive technologies and services for over nine decades in India. Being a dominant player in fuel injection (FI) segment, FI products contribute ~70% to the company s revenue. Bosch Ltd enjoys the benefits of its global parent s strong technology dominance and, thereby, has a higher new product acceptance rate among OEMs. Over years, Bosch Ltd has imported newer technologies in the wake of emission changes, which have helped it to cater to the Indian market. Bosch Ltd has generally followed the policy of importing the technology and then gradually localising it as its acceptance increases in the market. The Bosch Group enjoys a strong technological leadership in fuel injection systems and is a trusted ancillary partner for most global auto manufactures. This is on account of the huge R&D spend that is carried out by Bosch Global. In 2014, the Bosch Group spent ~5 billion euros (around 10% of sales revenue) and filed 4,593 patents worldwide. Interestingly, Bosch Group (parent) offers most of its technologies at a low royalty rate (~1.6% of its turnover) to Bosch Ltd. The major competitors of Bosch Global are Delphi & Denso Corp. Both these competitors supply products in segments ranging from fuel injection systems to exhaust systems. However, Bosch Global remains the leader in the space. More importantly, in India, both the competitors have limited penetration. EBITDA margins have remained steady above 15% for all years (except CY13) in the last 5 years. Given its leadership in technology, it is expected that pricing power would be maintained going forward.
While non-auto business of Bosch Ltd contributes ~12% to the overall revenues, global nonauto business contribution is ~32%. Non-Auto business aids in providing revenue diversification The revenue contribution of non-auto business to Bosch s topline has risen from 10% in CY11 to 12% in FY15. The non-auto business comprises of three verticals: Industrial Technology, Consumer Goods (Power Tools & Household appliances) and Energy & Building Technology. While non-auto business of Bosch Ltd contributes ~12% to the overall revenues, global non-auto business contribution is ~32%. This business has a strong growth potential and is expected to benefit from the pick up in the economic activity. We expect this business to grow at a CAGR of 15.2% over FY15-FY18E. Structure of Bosch s non-auto business Non-Auto Industrial Technology Consumer Goods Energy & Building Packaging Technology Industrial Equipment Security Technology Bosch Energy & Building Thermotech nology Non-Auto s contribution to the total revenues on the rise 14% 11% 11% 12% 12% 12% 13% 13% 8% 5% CY12 CY13 FY15 FY16E FY17E FY18E Source: Company, In-house research; Note: FY15 is a 15 month period due to change in accounting year Bosch derives about 20% of revenues from the automotive aftermarket division Traction in Automotive aftermarket business augurs well Bosch derives about 20% of revenues from the automotive aftermarket division. This division is responsible for the supply, sales & distribution of all Bosch-branded automotive parts in India and the SAARC region. The product range offered is the largest under one brand in India and finds extensive application in 2Ws, 3Ws, cars, MUVs, LCVs, HCVs, buses, tractors etc. The Bosch automotive aftermarket distribution network is the largest in India, with over 1,000 authorized distributors, over 3,000 authorized workshops and direct distribution reach beyond 60,000 semi-wholesale and retail points with presence in all the key markets. The products marketed by this division include diesel and gasoline fuel injection system & components, alternators, starter motors, spark plugs, automotive filters, automotive batteries, automotive belts, automotive software,2& 3 wheeler clutch plates etc. Besides, it is responsible for Bosch service workshop concepts for vehicle service and maintenance. It manages the largest independent service network in India with over 3,000 workshops/ service network comprising over 500 Bosch Car Service, 1,000 Bosch Diesel Service Centers, 600 Electric Modules, 250 Express Car Service and 150 Express Bike Service in India, covering ~1,200 cities. Hence, we expect this division to grow at a CAGR of 18% over FY15-FY18E led by new products introduction, increased use of electronics coupled with increased preference for authorised services.
Rs. Crores (Rs. Crores) Automotive Aftermarket revenues to grow at a CAGR of 18% during FY15-FY18E 3,500 2,500 1,500 500 3,323 1,917 1,965 2,024 2,327 2,746 CY12 CY13 FY15 FY16E FY17E FY18E Source: Company, In-house research; Note: FY15 is a 15 month period due to change in accounting year Overall EBITDA margins to expand significantly, going forward Engine parts are impacted the most by emission norm changes. We believe there is significant scope of margin expansion in the coming years led by the implementation of advanced emission norms (BS IV in 2017 & BS VI in 2020) across the country. The stricter norms would lead to content increase with common-rail in BS IV (2017) and SCR in BS VI (2020). Given limited competition in this space, we expect realisations to increase for Bosch. Further, the sale of starter motor & generator division would provide fillip to the overall margins (this division constitutes ~10% of Bosch Ltd turnover and merely 1% of Bosch Ltd EBIT). Thus, we believe Bosch s EBITDA margin to grow to 19.5% in FY18E from 16.4% in FY15. We expect top-line of the company to grow at a CAGR of 4.5% over FY15-FY18E. Revenue and PAT to grow at a CAGR of 4.5% and 11.6% respectively over FY15-18E During FY15-FY18E, we expect the top-line of the company to grow at a CAGR of 4.5% on the back of regulation requirements (BS IV in 2017 & BS VI in 2020) which will lead to greaterthan-normal content increase. Further, we estimate 11.6% CAGR in Adjusted PAT over FY15-18E mainly on account of EBITDA margin expansion. Moreover, we believe that the company would report improvement in its ROE and ROCE on the back of healthy profitability coupled with strong revenue growth. While ROE is likely to improve from 15.2% in FY16E to 18.7% in FY18E, ROCE is projected to increase from 22.6% in FY16E to 27.1% in FY18E. Revenue to grow at a CAGR of 4.5% over FY15-FY18E 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000-16.4% 16.5% 11.3% 11.1% 25% 18.5% 19.5% 20% 12.8% 15% 13.8% 10% FY15* FY16E FY17E FY18E Revenue EBITDA Margin (%) Adj. PAT Margin (%) 5% 0% 35% 30% 25% 20% 15% 10% 5% 0% Return Ratios expected to improve 28.9% 27.1% 24.6% 22.6% 20.0% 18.7% 17.0% 15.2% FY15* FY16E FY17E FY18E ROE (%) ROCE (%) Source: Company, In-house research; *: FY15 is a 15 month period due to change in accounting year Key Risks: 1 Slowdown in CV space may affect the revenue growth. 2 Any delay in implementation of advanced emission norms. 3 Upward revision in royalty rates may impact margins.
Profit & Loss Account Y/E (Rs.Cr) FY15* FY16E FY17E FY18E Total operating Income 12,086 10,705 11,720 13,800 Raw Material cost 6,457 5,654 6,179 7,169 Employee Cost 1,663 1,375 1,505 1,772 Other operating expenses 1,984 1,906 1,870 2,175 EBITDA 1,981 1,770 2,166 2,685 Depreciation 548 399 448 493 EBIT 1,433 1,372 1,719 2,192 Interest cost 14 5 2 2 Other income 565 399 464 563 Profit before tax 1,984 1,765 2,181 2,753 Tax 618 577 676 854 Profit after tax 1,366 1,188 1,505 1,900 Minority Interests - - - - P/L from Associates - - - - Adjusted PAT 1,366 1,188 1,505 1,900 E/oincome/ (Expense) (28) - - - Reported Profit 1,338 1,188 1,505 1,900 Cash Flow Statement Y/E (Rs.Cr) FY15* FY16E FY17E FY18E Pretax profit 1,956 1,765 2,181 2,753 Depreciation 548 399 448 493 Chg in Working Capital 132 (224) (130) (257) Others (551) (394) (462) (561) Tax paid (691) (577) (676) (854) Cash flow from operating activities 1,394 969 1,360 1,574 Capital expenditure (409) (500) (600) (600) Chg in investments (446) - - - Other investing cashflow (325) 399 464 563 Cash flow from investing activities (1,180) (101) (136) (37) Equity raised/(repaid) - - - - Debt raised/(repaid) (28) (20) (20) - Dividend paid (202) (280) (339) (406) Other financing activities (9) (5) (2) (2) Cash flow from financing activities (238) (305) (361) (409) Net chg in cash (23) 563 863 1,129 * Change in accounting year, FY15 is a 15 month period Note: Assuming company to receive shareholders approval for the sale of starter motors & generators division. But, we haven t included any Profit/Loss from the sale of this division. Further, assuming the company to carve out this division by the end of June 2016. Balance Sheet Y/E (Rs.Cr) FY15* FY16 FY17E FY18E Paid up capital 31 31 31 31 Reserves and Surplus 7,316 8,224 9,390 10,883 Net worth 7,347 8,256 9,421 10,915 Minority Interest - - - - Total Debt 56 35 15 15 Other non-current liabilities 479 526 579 637 Total Liabilities 7,881 8,817 10,015 11,567 Total fixed assets (inc CWIP) 1,244 1,345 1,497 1,605 Goodwill - - - - Investments 2,890 2,890 2,890 2,890 Net Current assets Other non-current assets 3,112 3,925 4,946 6,364 636 658 682 709 Total Assets 7,881 8,817 10,015 11,567 Key Ratios Y/E FY15* FY16E FY7E FY18E Valuation (x) P/E 58.4 53.1 41.9 33.2 EV/EBITDA 39.4 34.3 27.6 21.8 EV/Net Sales 6.6 5.8 5.2 4.4 P/B 10.9 7.6 6.7 5.8 Per share data (Rs.) EPS 434.9 378.4 479.2 605.0 DPS 85.0 74.0 89.7 107.5 BVPS 2,339.8 2,629.1 3,000.4 3,476.0 Growth (%) Net Sales 37.9 (11.3) 9.5 17.8 EBITDA 53.7 (10.7) 22.4 24.0 Net Profit 54.4 (13.0) 26.6 26.3 Operating Ratios (%) EBITDA Margin 16.4 16.5 18.5 19.5 EBIT Margin 11.9 12.8 14.7 15.9 PAT Margin 11.3 11.1 12.8 13.8 Return Ratios (%) RoE 20.0 15.2 17.0 18.7 RoCE 28.9 22.6 24.6 27.1 Turnover Ratios (x) Net Sales/GFA 2.6 2.1 2.0 2.1 Sales/Total Assets 1.2 1.0 0.9 1.0 Sales/Working Capital 10.0 7.8 7.4 7.6 Liquidity&Solvency Ratios (x) Current Ratio 2.2 2.6 2.8 3.1 Net Debt/Equity (0.3) (0.3) (0.4) (0.4)
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