BOSCH: High regulatory changes augur well | BS6 translation of LoI to business critical

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A report on Bosch from Motilal Oswal Institutional Equities:

According to the management of Bosch (BOS) to understand the evolving regulatory, technological and competitive landscape in the sector. Increasing complexity due to stringent regulatory changes augur well for a technology-focused player like BOS, though the seamless translation of LoI is important for BS6 business. BOS is confident of leveraging its global knowhow at the parent level for EVs and would offer solutions from strong hybrids to BEVs. Key highlights:

Changing regulatory/technological landscape augurs well for BOS

–       Given the changing regulatory context over the next few years, several technologies are expected to emerge. While there are numerous different technologies available for the requirements of OEMs, BOS has all the necessary solutions to offer to OEMs.

–       As a company, BOS is a technology-agnostic player and offers solutions such as future compliant ICE solutions, Battery EVs and futuristic fuel cell technologies. Globally, its parent has solutions across the spectrum.

–       Its endeavor is to offer lowest cost solutions (not just components) relevant to Indian OEMs by leveraging its global supply chain and India operations.

–       However, BOS will be recalibrating supply chain in this uncertain tech environment. It has also started reskilling and redeploying its employees.

BS6 – Working with all relevant OEMs; seamless conversion of LoIs to business key

–       Management is happy with BS6 client acquisition across its customer range. Except for Suzuki’s plans to exit diesel, it hasn’t lost any BS6 customers.

–       Company is aware of the plans of its key customers and competitors. While it might have lost some business due to aggressive competition, its client acquisition is the highest-ever for such a transition (Our view: Currently, BS6 is being implemented simultaneously across segments v/s different timelines in the past, and thus, 2Ws have emerged as an opportunity.)

–       Content per vehicle for BOS is expected to increase by low double-digit as it would be offering everything except diesel particulate filter and oxidation system for BS6.

–       BS6 vehicles will need more sophisticated service centers and this should open up new opportunities for BOS in the aftermarket business (through servicing). BOS operates the largest independent service network in India.

2W EFIs – BS6 to add 2W segment to BOS business

–       Thanks to BS6, the 2W segment (not contributing meaningfully earlier) will now get added to BOS’ business. For electronic fuel injection (EFI) system, BOS has relations and contracts with key players. Except for Japanese OEMs, BOS has a good share of the EFI business from others.

–       Like with any global technology, the challenge is to integrate technology and making it work in the Indian environment.

–       It believes e-carburetor is not a sustainable solution but offers a short-term fix. E-carburetor is unlikely to comply with future regulations on RDE with OBD (2022/23).

CAFE norms (2022) – Diesel and hybrids to play a big part

–       Corporate Average Fuel Economy (CAFE) 2 norms applicable from 2022 will require a substantial reduction in CO2 emission, which will make it difficult for the port fuel injection to comply (current petrol engines).

–       Compliance with CAFE 2 norms will require a multi-fuel strategy; diesel will be the best placed to meet these norms. Hence, BOS believes that the share of diesel wouldn’t come down dramatically post BS6.

–       Also, it expects hybrids to play a big part to meet these norms, as witnessed in the EU. It is already in discussion with OEMs for hybrids.

–       BOS has solutions for the entire spectrum of hybrid – from P0 to P4 level.

EVs: Working with all relevant OEMs

–       Globally, Bosch has covered substantial grounds on e-mobility and has solutions across the spectrum – e-motors (48v to 400v), converter, inverter, electronic devices, smaller batteries, etc.

–       EV adoption would entirely depend on total cost of ownership (TCOs), distance travelled on daily basis and infrastructure. It expects TCO for e-3Ws to be attractive, whereas e-2Ws and fleet PVs will soon become attractive.

–       It already has strong positioning in the China EV market (for 2Ws and PVs) and has several partnerships in place.

–       Since 2018, its parent has won orders worth EUR13b globally in the e-mobility segment.

Valuations & view: While the BS6 transition poses risk of further market share loss in CVs as well as continuous decline in its stronghold PV diesel, 2W opportunity should open up for BOS (one of the 3-4 players in 2W EFIs). Valuations have corrected in line with muted earnings over the last four years and dilution in competitive positioning. We estimate EPS to remain flat over FY19-21 as the changing competitive positioning poses a threat to our estimates. We value BOS at 25x Sep’21 EPS, at ~25% discount to its 10-year LPA of 33x. Maintain Neutral with TP of ~INR14,380.