Stock Review: BOSCH

Bosch, the country's largest auto component maker, has given an 18% return on bourses in the past six months, in line with the ET auto ancillary index's gains. The stock's performance, in an otherwise weak broader market, is partially explained by a sustained growth in the automobile segment, especially in commercial vehicles that form a bulk of its business. It is also visible in the financial performance of the company with more than a 30% growth in top line and bottom line in the past four consecutive quarters. Bosch's major attraction is its almost zero-debt status due to a strong cash generation from its core activities and the market leadership in its segment. During the June 2011 quarter, net sales grew 22% and net profit 33%.

The demand in the automobile segment is tapering down due to higher base effect in the past two years that followed the slump in FY09. This is visible in Bosch's performance on a sequential basis. Its topline dropped by nearly 2% sequentially in the June 2011 quarter for the first time in the past six quarters.

Bosch has planned a capacity expansion for . 500-600 crore in the current calendar year since most of its plants are working at full capacity. It has allocated 10% of the total expenditure in the first half of 2011. This could increase depreciation cost in coming quarters.

Bosch is a leader in diesel engines for commercial vehicles with close to 80% market share in the segment. This helps it command a premium among peers. The Bosch's stock currently trades at over 23 times its trailing 12-month earnings, which is in line with the average P/E in the sector.

The outlook depends largely on growth momentum in the commercial vehicles segment. Given signs of slowing economic activity, the company may have to bear with slower off take of its products in coming quarters. The management of raw material cost will also be crucial to maintain operating margin in the near term.