Bosch: Lower diesel demand limits growth

The stock of Bosch has corrected by 15 per cent over the last three months due to muted revenue growth on the back of a weaker than expected demand for passenger vehicles, light commercial vehicles (LCVs) and tractors. The fall in demand for diesel vehicles is also hurting. For the December 2015 quarter, while gasoline (petrol) and aftermarket business for the business grew in high double-digits, diesel vehicle segment growth was just 5 per cent. Analysts at Motilal Oswal Securities have cut their earnings estimates over the next two fiscals by 5-9 per cent to factor in for the continued pressure on the diesel segment.

About 41 per cent of its revenues come from fuel injection equipment while injectors, nozzles/nozzle holders account for 27 per cent. The company has decided to sell the starters and generators business (currently contributes 12 per cent of revenues) to its German parent for Rs 486 crore. The announcement in the first week of February did not go down well with the Street which thinks it does not capture the value of the business which generates revenues of Rs 1,133 crore. The management has justified the sale value as fair given the low margin nature (low single-digit) of the business; the decision to sell this segment globally was taken by its parent.

Among the key triggers include the implementation of BS-VI emission norms from 2020 and would entail installing filters and converters in diesel passenger and commercial vehicles. In addition, the norms would require petrol engines to be more fuel efficient and carbon monoxide emission levels need to controlled, leading to a shift towards gasoline direct injection engines. Analysts at Kotak Securities say that Bosch will be a key beneficiary as it is the leader in gasoline direct injection technology. Bosch has already indicated its readiness for BS-VI emission norms and plans to invest Rs 1,170 crore in India in 2016 on capacities, building infrastructure and in research to focus on solutions to meet future regulations.

Though Bosch is a direct play on the emission norms, given its product range (fuel injection systems, after treatment products), HSBC analysts say that a direct leap to BS-VI from BS-IV is likely to attract many international players to enter the Indian market. This will be a threat to Bosch's monopolistic positioning in the diesel segment. The analysts have a hold rating as they feel that the emission leap to a higher standard will result in lower localisation which will impact profitability in the initial years. Bosch's ability to maintain market share will be a positive but any slip up in diesel vehicle market share will be a negative signal for the Street.