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Bosch: Buy-back could keep valuations elevated

Bosch: Buy-back could keep valuations elevated

 

The stock of auto component player Bosch was up 5.2 per cent after the company said its board will meet on Friday to discuss a proposal for the buy-back of equity shares. Given the limit of 25 per cent of combined paid up capital and free reserves for buy-back, the company can utilise about Rs 2,070 crore for the purpose. At the permissible limit, it will translate to about three per cent of the current market capitalisation. But, if only the non-promoters (they hold 28.82 per cent stake in Bosch) participate, it could mean a 10 per cent reduction in the free-float, which will only increase the scarcity premium for the stock.

On the operational front, there are multiple triggers for the company, especially due to regulatory changes. The first is the mandatory implementation of anti-lock braking system from April 2018 for two-wheelers. Given the estimated size of two wheelers pegged at 25 million units by FY2020, Icra estimates market potential for the new braking system to be at Rs 4,000 crore (annually) by that year. They highlight that Bosch will be one of the key beneficiaries of this development given that it has developed low-cost solutions suitable for markets such as India.

Further, the implementation of BS-VI norms (bypassing BS-V) on emission by FY2020 should also help Bosch as it will force auto-makers to make use of electronics and new technologies such as direct injection and particulate filters. Bosch should benefit by gaining market share over conventional players as well as by supplying higher content per car. The norms not only apply to diesel-powered vehicles but also call for petrol engines to be more fuel efficient while limiting carbon monoxide emissions. The latter will lead to a shift towards gasoline direct injection systems helping Bosch, which is a leader in the technology.

In the near term, the company should benefit from the implementation of BS-IV norms (already in place in most cities) to come into effect across the country by April 2017. This will allow the company to increase in market share and realisations in commercial vehicles which account for 54 per cent of its revenues.

At the current price, the stock, which is up eight per cent in the last three trading session to Rs 22,657, is trading at 45 times its FY17 earnings. Analysts at UBS say the stock deserves a premium valuation and peg a target price of Rs 24,500, given the stronger medium term growth outlook. Investors however should await a correction before taking fresh exposure.