Bosch, a dominant diesel fuel injection systems manufacturer, has traditionally been considered a play on advanced technology for emission norms. Given the excitement around the impending BS IV standard, it has been among the better performing auto stocks in the past year (even after the recent fall, it has outperformed the market by ~35% since Nov-14).
We believe that with the new emission norms, the industry structure will change, putting Bosch’s dominant position in CVs (over 80% share) at risk. BS IV will entail a shift from mechanical fuel injection systems (used only in India among the major countries globally) to electric systems such as common-rail. Bosch’s monopoly position stems from its first-mover advantage in India, having already incurred sizeable investments in mechanical systems. The new emission norms should create a level playing field for Bosch’s peers.
Our checks with leading CV (commercial vehicle) OEMs (original equipment manufacturers) indicate that while all mechanical systems on existing models are supplied by Bosch, common-rail application is supplied by both Bosch and its competitor (exclusively by the competitor for new models). Another competitor of Bosch expects profitability to fall in BS IV, even with higher realisations, as OEMs are demanding more. Initial-year margins will likely be additionally impacted by lower levels of localisation.
With most diesel PVs (passenger vehicles) already BS IV compliant, there won’t be any incremental benefit on that front. The share of diesel vehicles has already come down sharply in the past two years (from 60% in FY13 to ~45% now) on reducing price differential with gasoline; the future emission norms may accelerate this trend further. Experience from the recent VW issue shows that there is a trade-off between NOx emissions and fuel economy (a key advantage for diesel vehicles), and this may make diesel vehicles less attractive in the future. Tractors (~25% of profit) remain a cash-cow, with Bosch having a ~100% share (most basic mechanical systems are used only in India). Any movement of Indian tractor emission norms towards global standards remains a major risk to Bosch’s earnings, in our view.
New initiatives will take time
The market is also excited about some of the new initiatives which the company has been talking about, but we don’t expect them to become material enough in the medium term. The most promising among these is eClutch for the PVs, given the large potential for non-manual transmission in India. However, AMT has the first-mover advantage here with key OEMs such as Maruti, M&M, Tata already having shifted to it.
Most of the two-wheelers in India are carburetor based, and we don’t see a shift to Bosch’s fuel injection systems, given the price sensitive nature of the market, unless mandated by emission norms (not required in BS IV). Moreover, most of the OEMs already have partners (Hero Motocorp with Magneti Mareli) or in-house solutions (Bajaj). Similar is the case with the gasoline direct injection system, which is much more competitive than diesel.
We also note that with Bosch having eight other group entities in India, many of the emerging automobile trends, such as connectivity and safety (ABS), will be captured outside the listed entity. In the past five years, the Bosch group’s revenue from India has witnessed a 20%-plus CAGR vs 14% for Bosch Ltd, implying much higher growth for the unlisted entities.
Rich valuation with no material growth acceleration
In the past year or so, Bosch’s valuation has re-rated from ~20x to ~40x on the street’s expectations of a significant acceleration in growth. However, we expect the company to clock a revenue growth trajectory of mid-teens only, which is similar to its long-term average, and hence consider its valuation as too demanding. Not only will the delta from emission norms and new products be less than expected, nearly half of Bosch’s revenues are from outside core diesel—starters and generators (which the parent wishes to exit, hence not a focus), traded goods in after-market, etc—all of which will have stable 10-12% growth only. On PEG (product information), the stock trades at a large (~100%) premium to other auto component stocks.
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