Stock Review: BOSCH

BOSCH


THE country's largest auto component maker, Bosch, has posted double-digit growth in revenue during the June quarter on a year-on-year basis. But the company may find it difficult to repeat its performance in coming quarters, given the likely deceleration in auto sales. Also, rising input costs may start hurting its margins. The firm makes diesel engines for commercial vehicles with close to 80% market share in the segment. The June quarter was the third consecutive quarter of impressive topline growth. This was on account of high demand for commercial vehicles that forms the bulk of Bosch's business. However, the revenue growth is tapering down in line with the broader outlook of the automobiles market. Growth is slowing down on the back of a high double-digit growth over the last few quarters largely due to a low base effect. Demand was weak in 2008-09 due to the economic slowdown.

   Bosch's revenue grew by just over 5% sequentially compared with a faster 20% growth in the previous quarter. This closely tracks sales of commercial vehicles, where the number of units sold in the quarter ended June 30 declined 16% to 1.49 lakh units over the previous quarter. Although demand for trucks and other heavy vehicles is expected to be strong, the growth rate is expected to moderate, which could curb the increase in revenue and profits.

   On the positive side, the company has been able to grow its operating margin by 200 basis points (bps) over the year-ago period as revenue growth was faster than the increase in raw material costs.

   The stock has been historically trading at a price that is 20 times its trailing twelve months earnings. It's currently available at a P/E of 23, which looks reasonable when compared with the industry's average P/E of 26.

   The extent of earnings growth in the coming quarter depends on the trend in demand for commercial vehicles. The rising cost of production due to higher commodity prices would be another concern. Investors need to wait for more cues on these fronts before making fresh investments.