In this post I value the equity of Bosch Ltd. Bosch plays mainly in the field of automobile ancillaries. Hence its fortunes are linked to the growth of the automobile industry in addition to its own market share gains. As I said in my post on auto ancillaries and spare parts, while Bosch has been steadily increasing its sales, this increase is not keeping pace with the burgeoning market size and hence the market share is reducing. Bosch is expected to face market share challenges going ahead because global OEMs are increasingly sourcing from India, meaning that other global OEMs start encroaching into Bosch's turf in India.
Historical and Forecasts
Let us consider the trends in the total revenue, total expenses and the net profit margin. The first two are in crores of rupees, whereas the third is in percentage. 2017 onward, the numbers are forecasts. My data is taken from moneycontrol.com, since for this company, the website was not very helpful in getting the annual reports.
Let us analyze the growth trends in some important income statement and balance sheet items on a CAGR basis between 2012 and 2016. On the revenue side, total income from operations grew at 4.8%, in line with net sales, which was its biggest contributor, the other operating income making a much smaller contribution. The largest expense item, consumption of raw materials, decreased by a little over a percentage. Purchase of traded goods increased by around 13% and increase in stocks by around 28%. Employees cost and depreciation increased by 10% each. A huge increase in interest expense at 76% was more than made up for by other income which increased by over 45%, but growing from a larger base than the interest expense, more than covered for the growth of the latter. Consequently, profit before tax grew by 6.4%. The growth of tax at a lower rate of 5.9% led the profit after tax to grow by 6.6%.
On the liabilities side, although the net worth increased by around 15% due to the increase of reserves by as much, the decline in total debt by over 47%, led the total liabilities to grow at a lower rate of 13.7%. On the asset side, the growth of gross block by 11.8% and that of the depreciation at a lower rate of 10.4% led the net block to grow at over 17.7%. Total current assets grew by 9.4%, aided by the growth of sundry debtors at 10.1% and cash and bank balance at 17,8%. The growth of investments by 23% was a significant addition to the non-current assets. Another major contributor was loans and advances which grew at 8.2%.
Forecasts for the income statement and balance sheet items were based on a linear or growth trend as deemed fit for the individual items, keeping in mind their past growth rate.
On the liabilities side, although the net worth increased by around 15% due to the increase of reserves by as much, the decline in total debt by over 47%, led the total liabilities to grow at a lower rate of 13.7%. On the asset side, the growth of gross block by 11.8% and that of the depreciation at a lower rate of 10.4% led the net block to grow at over 17.7%. Total current assets grew by 9.4%, aided by the growth of sundry debtors at 10.1% and cash and bank balance at 17,8%. The growth of investments by 23% was a significant addition to the non-current assets. Another major contributor was loans and advances which grew at 8.2%.
Forecasts for the income statement and balance sheet items were based on a linear or growth trend as deemed fit for the individual items, keeping in mind their past growth rate.
The Valuation
The FCFE increased to ₹2,374 crore in 2026 from ₹1689 crore in 2016. To find the value due to the FCFEs in the forecast period from 2016 to 2026, these are discounted based on the cost of equity calculated based on the CAPM model. A risk free rate of 6.5% based on the yield of the 10 year Government of India bond is taken. For the country risk premium, two values for India have been calculated by professor Aswath Damodaran of the New York University Stern School of Business. One of these (7.39%) is based on the Sovereign CDS and the other (8.82%) is based on the local currency sovereign rating provided by a rating agency. I find the former more palatable since the ratings agencies have taken flak for giving excellent ratings to the securitization products that brought the U.S. economy down in 2008. The beta of the stock has been taken from an online source and is 1.33. Together, these yield a cost of equity of 16.33%. The terminal growth rate for the FCFEs is assumed to be 5% since the economy is expected to change its growth rate from around 6% in 2016 to around 3% by 2060, but until 2035, grows at over 5%. The automobile sector's contribution to the economy is thus assumed not to change much since it keeps pace with the economic growth.
The Price
Together, this set of assumptions yields a valuation of ₹3,828 for the Bosch Ltd.'s share. Hence at over ₹21,905, the scrip seems hugely overpriced.
A sensitivity analysis based on slightly different values of the terminal growth rate (TG) and the equity risk premium (RP) can be found below.
No comments:
Post a Comment