Bosch Ltd

NSE:BOSCHLTD

Earnings Call Transcript 2024-Q1

[Operator]

Ladies and gentlemen, good day, and welcome to Bosch Limited 1Q, FY '23, '24 post-result conference call hosted by B&K Securities. We also congratulate and welcome the Bosch Limited new leadership team to the investors call. We have with us today the new Managing Director and Chief Technology Officer; Mr. Guruprasad Mudlapur, New Joint Managing Director; Mr. N Sandeep; and Ms. Karin Gilges, Chief Financial Officer. [Operator Instructions].

Over to you, sir. Sir you can start.

[Guruprasad Mudlapur, executive]

Everyone, do you hear me?

[Operator]

We could hear you, sir.

[Guruprasad Mudlapur, executive]

Okay. Good afternoon, everyone, and thank you for being part of this call. Today, I'll start with a brief on the macroeconomic policy followed by an automotive market update, and then I'll walk you through our financials. Finally, I'll end with the highlights of the quarter affecting our business.

As per the recent IMF report, the global economy is expected to grow at 3% in 2023, up from 3.5% in 2022. And the advanced economies to grow by 1.5% in 2023 from 2.7% 2022. Amongst this backdrop, the Indian economy is doing well and is expected to grow by 6.1% in FY '23, '24. More importantly, our inflation remains controlled, and the financial sector is resilient.

Next slide, please. Overall, the automotive industry displayed a mixed performance with certain segments showing resilience and while others faced hurdles due to the prebuying effects and exports decline. Passenger Vehicle segment saw growth driven by the SUV category, supported by strong order books from OEMs. However, the Commercial Vehicles segment saw moderation while the Medium and Heavy Commercial Vehicle segment showed a better performance. LCVs experienced a decline of 2%. 3-wheeler segment continued to recover in the domestic market, while exports remained sluggish. The [ Tractor ] segment declined by 9% year-on-year due to a high base of FY '23, coupled with inventory moderation in Q1 FY '24. Two-wheeler demand recovery sustained during the marriage season. However, the export market remains a concern with sluggish demand.

Let's now look at the automotive outlook for 2023. Next slide. From the lows of COVID, Indian automotive industry bounces back and reached a new peak in the year 2022. From this high base, we expect the market to grow in 2023 compared to '22. This shows the robustness of the Indian auto industry and the economy despite global headwinds and reduction in exports. Let's look at how the company performed in April to June '23 quarter compared to April, June 2022. I mean above mentioned factors.

Next slide, please. Sector wise sales start with the Mobility Solutions sector. The Mobility Solutions sales have grown by 13.6% in Q1 FY '24 as compared to Q1 FY '23. 12.5% growth in product sales of powertrain solutions is driven mainly due to the growth in overall automotive sector, an increase in share of content per vehicle, mainly in exhaust gas treatment. Automotive aftermarket has grown by 12.7% quarter-on-quarter, mainly due to increase in export of spark plugs and higher market [ centration ] of lubricants.

Two-Wheeler business sales have also increased by 42.8% quarter-on-quarter due to improvement in semiconductor supplies as compared to previous quarter. The Beyond Mobility Solutions sales have grown by 21.5% in Q1 FY '24 as compared to Q1 FY '23. Consumer goods business comprising of Power Tools segment has increased by 17.9% quarter-on-quarter, mainly due to increased sales of blue tools due to higher demand. Building Technologies area grew by 13.6% at 36.9%, mainly on account of higher number of orders for installation of our security systems.

Our profitability statement, the overall revenue from operations for April, June 2023 stood at INR 41,584 million which is an increase of 17.3% as compared to the corresponding period of previous years, mainly driven by growth in product sales by 14.5%.

The Mobility Solutions area sales grew by 13.6%, while sales from business Beyond Mobility Solutions increased by 21.5%. Income from services, mainly comprising of engineering and application services provided to OEMs and Bosch Germany. Service income for the quarter is towards completion of BS-VI Stage 2 projects for OEMs.

Other operating income mainly includes income from lease rentals and miscellaneous income and, of course, export incentives. In the current quarter, increase is mainly on account of rental income going to additional space let out in the [indiscernible]. Material cost as a percentage of total revenue from operations is at 64.5% in April, June 2023 as compared to 64.6% in April, June 2022.

However, material costs as a percentage of net sales that's excluding income from services and other operating income is at 68.7% in April, June 2023 as compared to 67.2% in April, June 2022. The increase is mainly on account of higher share of traded goods in the current quarter as compared to the same quarter of the previous year impact on account of price increase even to import suppliers on account of higher energy costs. The employee costs -- employee costs for April, June 2023 is INR 3,094 million as compared to INR 2,702 million for April, June 2022. As a percentage of revenue from operations the employee cost is better as compared to the same quarter of the previous year.

Other expenses stood at INR 6,977 million, which is 16.8% of the total revenue in April, June 2023 as compared to INR 5,334 million, which 15% of the total revenue in April, June 2022. The current quarter has seen certain onetime impacts in other expenses. Increased spending on new businesses, higher spending on customer projects for engineering and application services, which is in line with higher income from our services. Depreciation for the current quarter is at INR 921 million, which is 2.2% of the total revenue as compared to INR 648 million, which was 1.8% of the total revenue in April, June 2022.

Increase in depreciation in current quarter is majorly on account of major additions to plant and machinery and buildings during financial year '22, '23. With this, the operating profit stood at INR [ 3,758 ] million in April, June 2023, as compared to INR 3,847 million in April, June '22, a decrease of 2.3%.

Other income primarily comprises of interest on fixed deposits and change in market value of mutual funds. The Other income has increased from INR 566 million in April, June '22. INR [ 2,875 ] million in April, June 2023. Mainly on account of higher mark-to-market gain on mutual funds, higher FT interest income and dividend received from investments in equity shares.

For the quarter ended April, June 2023, your company posted a profit before tax of INR 5,325 million as compared to INR 4,377 million in April, June 2022. As a percentage of total revenue from operations, profit before tax stood at 12.8% of total revenue in the current quarter. Profit after tax for the quarter ended June '23, stood at INR 4,090 million, which is 9.8% of total revenue from operations. Profit after tax in April, June 2022 was INR 3,342 million, which was 9.4% of the total revenue from operations.

Next slide, please. Thank you all for your contribution and for listening patiently through the call. We will now address your queries. Thank you. And Annamalai questions, please.

[Annamalai Jayaraj, analyst]

Yes. Thank you, sir. We shall now begin the question-and-answer session. [Operator Instructions]. The first question is from Pramod Amthe. Please unmute and ask your question.

[Pramod Amthe, analyst]

Jayaraj, can you hear me?

[Annamalai Jayaraj, analyst]

Yes, I could. Please go ahead with your question.

[Pramod Amthe, analyst]

Yes. Sir, 2 questions. First one, you have explained in detail in the annual report and also alluded in the call about spark plug export opportunity. Can you just tell -- is this a trend that you have one of the low-cost production base and long-standing in this business and it's opening up an opportunity and which all areas, India -- is components, you feel such opportunity can emerge for Bosch India or exporting to the global markets in the next 1 to 2 years.

[Guruprasad Mudlapur, executive]

Yes. Thank you, Pramod. Yes, indeed, you are right. The timing is right for us. Also, there have been some shifts of our production out of Russia. So a lot of spark plugs, which were earlier made in our Russian location have moved out, and they have been relocated into India and that helps us produce more out of India and specifically with regard to spark plugs. There is a possibility that this phenomenon will extend to other areas. We are in discussions right now. We are looking at all possible opportunities. And right now, I would not like to comment on any specific area that we may expect to.

[Pramod Amthe, analyst]

And the second question is with regard to the electric vehicle space. We are seeing new MNCs making inroads into India, like recently [ Chrysler ] winning a big order in axles. My question related to that is Bosch has a similar product lines globally and enjoys amazing customer relationship in India for many of these clients. So wanted to know where is the gap in terms of when you see to win such orders versus others already handing in the back? And how you plan to cover those gaps in the next 1 to 2 years to make inroads into EV orders?

[Guruprasad Mudlapur, executive]

Okay. I'll let my colleague in JMD, Sandeep answer this.

[Sandeep Nelamangala, executive]

I think on the e-axle portfolio, we, as Bosch, have quite a widespread portfolio globally, especially coming out of our operations in China. Now the market in India is in a formative phase, and we are basically trying to align best the portfolio, what we have globally to the requirements regionally in India, and this is going to take time. And we are making progress in the field of electronics and software. But coming back specific to your question about e-axle, we are in the process of aligning the portfolio. I don't see a gap, but this would take time before we are able to bring together the specifications of the global platforms and the local requirements.

[Annamalai Jayaraj, analyst]

The next question is from Jinesh Gandhi. Please unmute and ask a question.

[Jinesh Gandhi, analyst]

Can you hear me? This is Jinesh here.

[Annamalai Jayaraj, analyst]

Yes, yes a bit louder.

[Jinesh Gandhi, analyst]

Just continuing on e-axle, just to clarify, would e-axle be opportunity coming in the listed entity, given it's not per se powertrain related? Or would it be part of the unlisted entities?

[Sandeep Nelamangala, executive]

Well, we are, at the moment, first focusing on, like I mentioned, very generic level, the requirements engineering, which includes multiple domains. So we are yet to get to this point about where would the technology lie. So our focus primarily is to mobility level focus on requirements engineering.

[Jinesh Gandhi, analyst]

Okay. Okay. Got it. Second question pertains to a broader direction of margins from where we are today. So we have seen our margins stabilizing in 11% to 12% range on a sustained basis. Given many of the headwinds which we faced over the last few years are going away plus we are seeing ramp-up in our BS-VI localization solution. So how should one think about margins from where we are today?

[Karin Gilges, executive]

Okay. So I would go first and then if you can my colleagues can add. So if you look at the margins and if you are looking at the margins in the ICE business for manufactured goods here in India and limited for the Indian market, then we are seeing actually that we have for this self-manufactured, quite good margins on the market. But we also have to see that in the overall operating margin of the 9%, we have currently a high part of traded goods, goods, which we are importing from other Bosch groups, mainly or from other countries and then traded here in the market. And therefore, it is a mix.

What we currently see is we have an increase in the content, especially in the exhaust gas treatment but also an increase in the demands in the market of the common rail systems where we have compared to the conventional products we have, we have up to now not reached the level of localization if you compare it to conventional products like the APAC.

So what we are doing looking forward? We are investing and going ahead with the localization. I told you last time, for example, the injector for the commercial vehicles where we started in October last year with the testing and assembly. And now we are currently ramping up the production of the child parts here in India. So this is overall where we have different transfers in the next 2 to 3, 4 years, where we have to drive the localization before we see the real stabilization, let's say, also in the margins.

[Jinesh Gandhi, analyst]

Okay. Okay. And this increase in traded goods is effectively the structural change in the business, right? I mean EGT or SCR, those things will -- where content has increased materially post BS-VI, this will remain as it is, I mean we can't -- many of these things, we won't like to make it in house. Is that the correct understanding?

[Karin Gilges, executive]

That is the correct understanding. It will -- so it will not reverse anymore, and therefore, because we have now a good view on the market and see the volumes we need. And now we are going for localization and start also in the exhaust gas treatment, the localization of different products.

[Jinesh Gandhi, analyst]

Yes. And that would be localized by our supplier partner, not at a Bosch level?

[Karin Gilges, executive]

No. This is -- of course, we're also trying to ramp up the supplier base for the products but the finished goods itself for the exhaust gas treatment will be mainly our self-manufactured goods.

[Jinesh Gandhi, analyst]

Then we are calling out for one-off expenses for the storage part, that there is a commensurate benefit on the service income, right? So both will go away as things normalize.

[Karin Gilges, executive]

Yes. If you look at the higher spending, we also have to see the other part, we have higher income from service. That means whenever we -- whenever we see in the revenues, the service income, then we book it also, of course, the related spendings with it.

[Jinesh Gandhi, analyst]

Got it. Got it. I'll come back in queue.

[Annamalai Jayaraj, analyst]

Next will be Ravi Purohit, your line is unmute, you can ask the question. Okay. I think he's not on the line. I will go for some questions in the chat box.

Please quantify the one-off expenses included in other expenses? That is the question from Mr. Abhishek.

Can you hear me, sir. Hello? One of the questions. Can you quantify the one-off expenses included in other expenses?

[Karin Gilges, executive]

Okay. Yes. Actually, one important point, and this is the new business expenditures. And therefore, we have, in this quarter, increase in the spending related to the new business areas. And what we can also see in the other expenses is the higher spendings related to the higher service income. So these are the main 2 issues. On the professional charges, which is the spending to the higher service income, it's about 1.3 percentage points and the spendings in the new business expenditures is roughly 0.6 percentage points.

[Annamalai Jayaraj, analyst]

[Operator Instructions] This is from Ravi Prohit. Our current gross margins are the lowest ever. This is -- is this the new trend or new normal?

[Karin Gilges, executive]

So in principle, we do not talk about gross margins at all. But as I mentioned before, you have -- what we saw in the last quarter that we have a jump in the traded goods. We have -- we had high content or high revenues with exhaust gas treatment, which are currently traded. So and this overall we have in this quarter, to give you an idea and rated percentage from total of 54.4 percentage points versus the same quarter in the last year of 51.3%. And this is, of course, influencing then also EBIT. So is the EBIT the new normal, it highly depends on the mix, of course. But what we expect in the upcoming quarters is that we have a change in the mix that we have more manufactured goods in our revenues.

[Annamalai Jayaraj, analyst]

Okay. The next question in the chat box that Bosch worldwide has seen a supply agreement with the Tesla. If Tesla enter India ,we'll get open up opportunities for Bosch India?

[Sandeep Nelamangala, executive]

I think Bosch has a business relationship with Tesla. Primarily in the U.S. and partly in China, but these are more in braking and wiper components. So let's follow up on what happens with the Tesla plants in India and their value chain, and we will align accordingly.

[Guruprasad Mudlapur, executive]

We do not want to speculate at this point what's the Indian scenario for Tesla. But yes, we have global supplies towards Tesla, both in China and in North America.

[Annamalai Jayaraj, analyst]

So next questions in the chat box is, as the audit qualification issue started out by taking approval today's AGM. Please update.

[Karin Gilges, executive]

It has been sorted out.

[Annamalai Jayaraj, analyst]

Okay. So next question is, can we expect margins to improve from Q1 levels or it will remain flattish?

[Karin Gilges, executive]

Once again, the margins or the overall EBITDA is highly influenced by the mix we have between traded and manufactured goods. If you look only at the manufactured goods, then depending, of course, of that cluster of product, we see a stable situation. Nevertheless, it depends how much of our revenues are coming out of traded goods and how much coming out of manufactured goods.

So overall, if you say, yes, margins are stable, but of course, it depends what is the setup of the product portfolio behind the revenue.

[Annamalai Jayaraj, analyst]

Next question is, can you please highlight the rationale behind -- rationale for business transfer of Project House Mobility Solutions. What do we do here in this business segment and last year, sales and EBITDA of this segment.

[Guruprasad Mudlapur, executive]

Okay. So I think we've already explained the basic rationale for why we sold this. And let me quickly explain that one more time. So the project house for Mobility Solutions, which was handling the digital mobility solutions area. We realize that this requires global scale and global expansion, there is unstable growth globally. Of course, in the Indian market, we did not foresee a lot of currently. And it also required a massive infusion of capital to make the business across the world.

As Bosch Limited, we are chartered to take care of the India business, and we had not really focused on the global part of the business. Primarily, this was the reason that we decided that it's better to sell the business to our parent and the parent has the skills and the necessary capabilities currently to take the business global, and that's what happened in the previous quarter. So yes, the business has been sold, but links to the business remain in India, and we will continue to work together.

[Annamalai Jayaraj, analyst]

The next question is, how was engineering complexity in diesel versus gasoline versus hydrogen. Is there business entry barriers or superiority of part makers in each of these technologies.

[Sandeep Nelamangala, executive]

I think in the diesel technology, we have been having a long-standing footprint in that with system engineering, competence, component engineering competence and also a relatively higher depth of manufacturer. So when we move from diesel to gasoline, most part of the system and component engineering competence remains. However, in the value chain, manufacturing, there are, of course, much many more players in the market in gasoline compared to diesel.

I think your other question was how do you see that in case of hydrogen. In hydrogen, we see a high degree of overlap with additional kind of a complex system, which needs competence buildup in system engineering and also the competence components with hydraulics. So that matches very close to the competence which we have established for Diesel. So that kind of gives you a perspective of what happens when we move from diesel to gasoline back to hydrogen.

[Annamalai Jayaraj, analyst]

Okay. So then one question on 2-wheeler see, other than fuel injection that Bosch supply [ other ] components for the 2-wheeler sector.

[Sandeep Nelamangala, executive]

Well, we have ABS. Single channel and dual channel ABS. We have infotainment systems, display indicators and also in-hub [ motors ] with motor control units. So that's the, let's say, end-to-end portfolio spread of Bosch outside the electronic fuel injection.

[Annamalai Jayaraj, analyst]

Tractor segment, broadly how much percentage of Bosch revenues from Tractor segment? And what is the outlook for FY '24 and '25. And also associated with that emission norm change in Tractor segment, TREM4 has been implemented when is TREM5 expected?

[Guruprasad Mudlapur, executive]

Yes. I'll sort of give you a response on the second part. We do not share details of segment level revenue and so on. On the TREM5, currently, we are all prepared for -- in terms of technology. Of course, we are a technology company, we provide technology to the OEMs, and we are prepared on offering TREM5 technology to them. The chance of a postponement or chance of introduction of TREM5, I do not want to speculate, but it looks more and more certain that there will be further postponement of TREM5 legislation. But yes, we leave that to speculation.

[Annamalai Jayaraj, analyst]

Next question is from [ Sindel Manikandan ]. You can ask your questions.

[Unknown Analyst]

First question is with respect to the 2-wheeler segment. From the electric powertrain side. So what's the scope going forward over the next 2 to 3 years, what kind of components that Bosch plans to add to this segment?

[Sandeep Nelamangala, executive]

Like I mentioned earlier, I think in the electrified scooter space, we would primarily focus on in-hub motors in the range of 2 to 3 kilowatts power range, along with the motor control unit. That would be the focus of portfolio from a Bosch side on the electrified 2-wheelers.

[Unknown Analyst]

Just related to that can quantify our market share or some business acquisition are you working with [ retailers ] in the market?

[Annamalai Jayaraj, analyst]

Can you talk a bit louder. Your voice is not clear.

[Unknown Analyst]

Just related to the 2-wheeler electric part, if you can quantify in terms of business acquisitions and our market share in these products and -- how do you see as a percentage of overall consolidated sales 2-wheelers performing? Any color on this.

[Sandeep Nelamangala, executive]

Well, I'd like to not get into a forecast or a trajectory of market shares now because we are in an extremely early stages of a formative business. And you noticed how the volumes are going back and forth being so sensitive to [indiscernible]. So at the moment, we are focusing on requirements engineering. We're focusing on the first engagement on system concepts with customers. So I would rather keep it this way, then make a statement on a projection of market share or market development because there are too many open parameters and variables at this point in time.

[Guruprasad Mudlapur, executive]

I'd just add that we are, of course, working with all OEMs on these projects.

[Unknown Analyst]

Okay, sir. Second question is, how do you see the 2-wheeler market itself evolving like -- because entry-level Energy segment hasn't been performing well of late. So just you can share your perspective on that.

[Unknown Executive]

I think the entry-level growth is still sluggish. And there is a movement of the market more towards the 125 , while the premium segments are doing relatively better. I think this is also linked with a certain amount of, I would have call it distressed, but a slowdown in the rural spend towards the entry-level bike side. We don't really foresee that there will be a big change, but good news for us in terms of business is that the premium segment is continuing to do well.

[Guruprasad Mudlapur, executive]

Entry-level 2-wheelers get exported and the export market is also sluggish currently.

[Annamalai Jayaraj, analyst]

There's a follow-up question on your answer on 2-wheelers. So [indiscernible] is a part of the listed entity?

[Sandeep Nelamangala, executive]

No, it doesn't. It's not a part of the listed entity.

[Annamalai Jayaraj, analyst]

Okay. The next question is, can you highlight within automotive products, which items have higher traded goods element. And what is contributing of those product items in percentage in terms to our current revenue?

[Karin Gilges, executive]

Traded goods. So traded goods are, of course, mainly in the powertrain solutions where we see it. And I mentioned already the exhaust gas treatment, which are currently traded goods, where we're now going in the next upcoming years going ahead with the localization. And this ended partially, of course, in our power tools, we have partially localized and partially retraded.

[Annamalai Jayaraj, analyst]

Okay. And then the next questions is, can you please tell us how much CapEx is planned for the current year and the next year? In addition, is there any change in the CapEx under PMA?

[Karin Gilges, executive]

CapEx we have planned for the current year of roughly [ INR 4.9 billion ]. And this is a little bit lesser than last year because last year, we have finished our [indiscernible] Campus here, as you know. And this is mainly in the plant and this is mainly in machinery and equipment.

[Annamalai Jayaraj, analyst]

Okay. And next question is, what is your view and you say the artificial intelligence is the starting business of Bosch. Does it improve the efficiency significantly and consequently reduce our dependence on increased manpower in the service business?

[Guruprasad Mudlapur, executive]

Yes. I mean it's a very generic question, but I'll give you the answer and 2 perspectives. One is the utilization of AI in products and services that we make and offer. So here Bosch has been investing quite a lot in AI, which is useful at our products. And this will continue. We will see a products this will [indiscernible] we will see quite a lot of growth in this -- as the automotive technology is also most ahead.

Of course, there is another aspect to AI, which is now the more popular one under discussion, which is the generative AI like ChatGPT or so on. This certainly is also a topic of focus within Bosch. We look at it from the perspective of how can it enhance our productivities inside and what can we do more with tools like ChatGPT either for coding software development kind of aspects or for other purposes, in terms of helping documentation or generation of reports or even multiple -- we are working on productivity pressure. So both aspects have impact and certainly, we see AI as a productivity enhancer in the second aspect. Of course, AI and product will add significant value.

[Annamalai Jayaraj, analyst]

Okay. Next question on the chat box is. Can you clarify why interest cost is higher INR 30 crores in 1Q FY '24?

[Karin Gilges, executive]

Interest is on the account of the interest provision created through the lever of the interest on GST payables. Under the reverse charge in respect of the salary cost of the expert deputed in the legal -- Indian legal entities. So this is the reason why we had to put in the provision.

[Annamalai Jayaraj, analyst]

Okay. The next question is on the employee cost. It could be great if you could throw some light on the employee cost, how is the trend going forward?

[Karin Gilges, executive]

Going forward, the trend and that we have an extra thing this is because we had a reversal in the provision. And therefore, we see normal is at 8%. Of course, you have in each quarter, sometimes you have a reversal of the provision on the other side, you have an increase in the provisions but we see for this financial year at 8%, which is reasonable and compared to the last year's or to the former years, where before the EDR, we are really now on a very good basis.

[Annamalai Jayaraj, analyst]

Okay. I think these were all the questions in the chat box. Yes, as there are no more questions, on behalf of B&K Securities, we thank all the participants for joining the call. And special thanks to his Bosch Management for taking time out for the call and giving us the opportunity to host the call. Have a good day.

[Karin Gilges, executive]

Thank you very much. Bye.