Bosch Limited (500530) Earnings Call Transcript & Summary

Welcome to Bosch 3Q FY 2021 Post-Results Conference Call. From the Bosch management, we have with us today Mr. Soumitra Bhattacharya, Managing Director; Mr. S. C. Srinivasan Chief Financial Officer and Executive Director; and Mr. Rajesh Parte, Company's Secretary and Compliance Officer. I will now hand over the call to Mr. Soumitra Bhattacharya for his opening remarks to be followed by the question-and-answer session. Over to you, sir.

Thank you, Mr. Annamalai Jayaraj, and a very good afternoon to all the investors. I would like to first thank you for being a part of this call, and I would like to start briefly about with the macroeconomic highlights for the quarter affecting our business. India and the automotive market have witnessed a very solid V-shaped recovery. While the bulk of it can be attributed to the pent-up demand, it can now fairly be said that the economy has opened up faster than anticipated. However, the global economy is experiencing a pretty high volatility due to the second wave of the COVID-19, and luckily, this has not yet affected India. This is leading to a disruption in global supply chains and impacting the pace of recovery. As per the recent data released by the Indian Economic Survey for 2020-'21, India's economy is likely to rebound by a plus 11% in FY '22, after a severe 7.7% contraction in the current fiscal against the earlier estimates where we thought that the GDP would degrow by 10% for fiscal '21. These are conservative estimates as the normalization of the economy will be aided by the COVID-19 vaccinations and a whole host of policies and reforms taken by the government of India. Due to the festive season, the overall demand in the automotive segment, except for 3-wheeler, remains strong in the quarter ending December 2020. During the quarter, overall automotive market production increased by 17% over the same quarter in the previous fiscal, including 2-wheeler segment. Heavy commercial vehicles segment increased by 16%, of course, on a very low base. Volumes showed a recovery, majorly driven by higher demand from construction and mining sectors. The pass cars segment increased by 25% on continuing retail momentum. Tractor segment continued to show double-digit growth trend. Volume showed an increase of 62% due to a robust rural demand. Colleagues, I must remind you in Tractor for the fiscal year '21, we are likely to be back to the peaks of '18/'19 of nearly 9 lakh units. LCV segment increased by 12% due to strong demand from e-commerce and last mile delivery segment. 2-wheeler increased by 18%, benefiting from a favorable base on some inventory buildup. Amongst the other market segments, 3-wheeler segment declined by 34%. This decline is majorly due to the lower demand for shared mobility and on the concerns of social distancing. Amidst this auto market performance, we will now look at the performance of our company for the last quarter. Total revenue from operations at INR 30,296 million or INR 3,030 crores, an increase of 19.4% as compared to the corresponding period of previous year. Mobility business sector increased by 34.7%. By the way, this compares on a like-to-like for the market of 17%, Bosch grew by 35% approximately. Business Mobility Solutions declined by 7.7%. The domestic sales for this quarter increased by 25%. For the 9 months period ended December 2020, revenue from operations declined by 14.5%. The Mobility business sector with 2-wheeler declined by 13.3% compared to the 24.1% decline in the overall automotive market for the same period. Business beyond mobility declined by 24.4%. The material cost as a percentage of revenue from operations has increased to 57.9% in October-December 2020 as compared to 52.1% in October-December 2019. The increase is mainly due to higher freight cost, product mix change with higher credit goods and manufacture -- as well as manufacture of new generation products, ForEx impact and lower service income during this quarter, which has partially been set off with the cost reduction measures with our suppliers. A similar trend is seen in the 9 months period ending December 2020, which increased the material cost from 54% to 58.4%. Our employee cost has declined to INR 2,455 million, which is INR 245 crores for October-December 2020 from INR 3,049 million or INR 305 crores in October-December 2019. Personal restructuring measures initiated by the company mainly contributed to that reduction. Similarly, for the 9 months period, December 2020, the employee cost stood at INR 7,965 million as compared to INR 9,922 million for the same period in 2019, which shows a decline of 19.7%. Depreciation has decreased by 11.8% in October-December 2020 as against October-December 2019 due to lower additions during the year. A similar trend is seen for the 9 months period ending December 2020, which witnessed decline by 6.8% compared to April-December 2019. Our other expenses for the quarter, October-December 2020 is INR 6,712 million as compared to INR 5,893 million for October-December 2019. This is an increase of 13.9%, which is in line with increase in total revenue. I must also remind you that some element of our -- this quarter's expenses are onetime expenses. For the 9 months period ended December 2020, other expenses stood at INR 13,622 million, which is in line with the previous period. Our operating profit stood at INR 2,612 million for October-December 2020, as compared to INR 2,104 million for October-December 2019, mainly resulting from higher turnover and benefits out of our restructuring measures. For the 9 months period ended December 2020, operating profit has declined to INR 2,940 million from INR 8,745 million in corresponding previous period. The other income declined to INR 1,113 million in the quarter October-December 2020 from INR 1,399 million in October-December mainly due to decline in interest income, partly offset by higher MTM gain on marketable securities. For the 9 months increased period ended December 2020, other income has also declined to INR 3,869 million from INR 4,062 million in April-December 2019. For the quarter October-December 2020, the company posted a profit before tax of INR 3,657 million before exceptional items as compared to INR 3,475 million in October-December 2019. This is an increase of 5.2%. Profit before tax, after exceptional items, stood at INR 2,190 million, which is 7.2% of revenue from operations. For the 9 months period ended December 2020, profit before tax, before exceptional items, has decreased to 10.3% from 16.8% in April-December 2019. Loss before tax after exceptional items stood at INR 729 million. For the 9 months period ended December 2020 profit after tax stood at INR 4.9 million. Bosch beyond mobility business showed a prudent recovery with high adoption of digital business models and incorporating digital platforms in the user experience journey. On the other hand, the Indian automotive market continued to show signs of recovery, but has been massively hit due to volatility in the global supply chains. Due to various factors, the global procurement market is currently experiencing a general shortage of certain semiconductor components, for example, microcontrollers. The reasons for this are manifold. Bosch buys certain semiconductor components for its manufacturing. The bottleneck did not originate at Bosch, but rather in the supply chain. As an outcome, imports of Bosch Limited have been impacted with severe supply shortages leading to reduced ability to deliver to the automotive market demand in India. Independent research agency feels that the shortfall in the supply chain should continue in the first half of 2021. In this respect, we are in close daily contact with our suppliers and our customers. We hope you will understand that as a matter of principle we cannot give you further information. Colleagues on the call, I would like to further add that Bosch was one of the few companies who first went and informed that about this global shortage on semiconductors. I would also request you to understand that this is not a India challenge. This is a worldwide challenge, which has now broken out across the world for all or many of the OEMs. And later during the conversation, we can go into further details of what this means and how this originated. I would also like to tell you -- share information with you with pride that Bosch has been certified as a Great Place to Work in 2021. And this gives us -- Bosch Limited this is and this gives a big recognition to the people who have been working for Bosch. And with this, I would like to now open up the discussion so that you have enough time. We can discuss about all -- not only the results, but also about the various aspects of the government's economy, the V-shaped recovery, the proposed scrappage policy and also our expanded offerings that we are doing for the year. I'd like to thank all of you for your patient listening and for -- looking forward to the questions that you have.

[Operator Instructions] The first question is from the line of Pramod Amthe from InCred Capital.

First question is with regards to the semiconductor. Have you discussed -- am I audible, sorry?

Yes, please. Go ahead, please.

Sir, with regard to semiconductors shortage, you have been prudent to come forward and alarm the industry and the investors. Can you quantify what is the extent of a sales shortfall or the higher cost you might have incurred to meet the customer requirements? And can you give more color about what is the reasons behind its genesis as you discussed in the call?

So Pramod, I will give you an answer to the second part of the question, and then I'll come later to the first part. The second part of the question is that we have to first understand that this matter is a global challenge. We must understand that the automotive market worldwide is catered by the semiconductor industry to the extent of approximately 10%. So that's the weightage that they have towards the automotive market worldwide. This is not about India. The second part, we must understand that there has been during COVID times a very high consumption and requirement of semiconductors based on the demand on electronics, which is a predominant industry, which takes these semiconductors, based during COVID period, the need for phones, laptops, pads, tablets and electronic items. The third due to a very strong COVID impact and then a V-shaped recovery resulted in worldwide automotive market having a huge demand. Keeping all this in mind and keeping the fact that India imports its entire semiconductors and OEMs are dependent on Tier 1s to supply who themselves like us and the other Tier 1s are dependent on the semiconductor industry or the Tier 2 to supply, there is a global supply chain shortage across the world. In India, we had mentioned that this sort of crisis is coming up. Today, Pramod, I think you and all the analysts on the call know that this is not a Bosch issue. It is an issue of a far larger nature and affected the world. India also has got affected due to supply chain, and we have been transparent to indicate. Now on the first part, Pramod, keeping in mind what I explained, I can't share any specific numbers because, a, this is a generic issue; b, the matter currently on the supply chain is extremely volatile. It changes on weekly, monthly and sometimes daily basis. So this matter is not going to go away in a few days' time or a few weeks. It is there to stay for some months. We are not able to estimate how long right now, but it's not going away right now. We are in touch with both our suppliers and we are in touch with our OEMs in a very transparent way based on the information that we get from the suppliers who supply to Bosch globally.

I had 1 more question with regard to PLI scheme. Considering that Bosch is global component maker. And in India also, you have a sizable presence. How do you see the PLI scheme expected to roll out in terms of opening up more export opportunities for the India plant? And second, does this incentive advance your localization plans for the imported components?

So Pramod, again, a very intelligent question. Thank you. I would give the answer based on your question for the industry and rather not Bosch because the PLI scheme is meant for the industry. So if I break it up into simple key issues. Number one, the PLI scheme is a very welcome scheme from the government based on Atmanirbhar Bharat or Self-reliant India. Second, the first area of the PLI scheme, which has been announced with great granularity, is on the electronics, including mobile phones and that segment. There is a very clear indication of how much percentage will be given in relation to the incremental sales for the time period, which results in allowing companies to invest and even, therefore, not only for the domestic, but more importantly, be competitive to export. Now if this PLI scheme where the automotive market has the highest share of the pie of the 26 billion is given in a transparent, user-friendly manner, which we see in the matter of mobility and electronics, which we believe also will be rolled out in that manner, and a time frame, which is equitable, both to the government as well as to the industry to be able to absorb the scheme, then I believe it's a win-win and a true example of Atmanirbhar Bharat, which will aid the industry overall to improve competitiveness, for not only the domestic market, but also be important to live the export market, and therefore, Atmanirbhar Bharat. So summary, we, from Bosch, but also when I listen to industries like CII and others, industry is very positive. We are very positive. The development of India and the Prime Minister has rolled out these schemes, and we are only hoping that big tickets like this will systematically rolled out pushing the industry to higher the bar and yet also reap the benefits thereby making India more Atmanirbhar Bharat.

The next question is from the line of Shyam Sundar Sriram from Sundaram Mutual Fund.

This is Shyam from Sundaram Mutual Fund. Sir my first question is on the powertrain growth. You have mentioned about 46% growth in powertrains. Does this include the 2-wheeler business as well? And if you can provide some perspective on how the diesel powertrain vis-à-vis gasoline powertrain growth during the quarter and some perspective on the 9 months? And the second part of my same question is, you have -- in the last time we met, and you have spoken about our initiative in the aftermarket -- automotive aftermarket welfare. How did the auto aftermarket perform in terms of growth in the 9-month period? If you can comment on these 2 points.

Sorry to interrupt, Mr. Sriram. Sir, there is a disturbance coming from your line. I would request you to mute your line while the management answers your question.

Thank you very much. Shyam, thank you for the question. So I had indicated, Shyam, just to bring you to speed that the market grew in this quarter by 17.3% on mobility, and mobility includes 2-wheelers and 3-wheelers and we from Bosch grew at 34.7%, let's say, 17% against 35%. Now that was the point I said. Also, I had mentioned that while the YTD market in -- for these 3 quarters, the market de-growth was 24%, we had a de-growth of 13%. Now this has, of course, been driven both by our powertrain division, which has done very well linked to the mix, linked to the product, linked to the demand. And also -- this has also had a good flip from the 2-wheeler, 3-wheeler market division that is inside our company, for that portion. In relation to aftermarket, I would say our aftermarket division has been doing well in terms of both its journey on the -- digital journey, on the reach journey, on the very important part of secondary sales rather than sales to the direct customers, which is the dealers and is also cracking the movement across India because we have many touch points on where these sales are happening and also securing -- has done a very good job on securing our receivables. So there's been a lot of cleaning up done by the aftermarket. And I can tell you that I see a very positive future because aftermarket is also a substantial part of our business anywhere between 22% to 25% of our business. So it's done well. Beyond this, I will not give any numbers.

Sure, sir. That's helpful, sir. I had also asked on the diesel vis-à-vis gasoline. So on that point, if you can -- how does the diesel vis-à-vis gasoline powertrain grow maybe either this quarter or 9 months, basically the way if you can share some numbers that would be helpful.

You'll have to mute yourself, please, Shyam. So in diesel versus gasoline, it is not about Bosch. The overall market is degrowing, Shyam. And we know that the percentages from 6 years ago, 7 years ago when diesel was -- had peaked at 48%, that has massively reduced. So it's currently sub-20%. And it is likely to grow -- degrow more in the years to come. And this is a phenomena which has seen. Of course, this, I'm talking of in relation to pass car and utility vehicles. This has to be very clear. Yes. I'm not -- you cannot link it to other forms, including HCV, LCV or even tractors, yes, so only 1 segment. So in summary, if you look at the '18/'19, when pass car hit 4.07 million, and this year, and when I say pass car, it means utility vehicles. This year, we thought pass car and utility vehicles in May would be hitting 2.2 million, we were pleasantly surprised to see that pass car hit about 2.9 million up to December on an annualized basis. On this, the percentage of diesel has dropped. What is the future of diesel could be your next question? It is still positive segment-wise. Tractors, you can -- you know it very well. You know in heavy commercial vehicles very well. And you know in light commercial vehicles, even today, diesel is running strong. Final statement is Bosch, we have always believed as a technology-agnostic supplier. We still believe what we mentioned to you in the previous calls, including our last overall investor call that by 2030, India will still be a dominant ICE market. Not all countries will remain dominant. And dominant means around 75%, maybe up to 80%. And on a low single-digit today from electrification, there's likelihood that we will move to 20% or marginally above that, say, 25%. Thank you.

Understood, sir. The next question is on the -- from the cost perspective, our traded goods segment is now at close to 38% of sales. Now I do -- you have mentioned this in the prior calls as well that whenever any technology transition happens, we will have higher percentage of imports initially and then thereafter, it will -- we will localize. So given that we are fairly, let's say, 9, 10 months into the BS VI transition, can you give us some perspective on when do we expect to -- the localization to pick up on this front? And any time frame that you can share? And is it possible to localize these parts that we are now importing? That will also -- that will be helpful sir? And the other question here is, you spoke about the semiconductor shortages. Sir, given all these compared to December quarter to the March quarter in terms of the production, are we seeing any production cuts coming through across all segments, if you can talk about that as well.

Shyam, there are many questions you've asked. I'll keep it brief with the fairness to allow others to also ask. First, in relation to the material cost, I have always mentioned, Shyam, that we have a systemic way at the right time to go in for the localization. You are well aware that due to COVID, the offtake of BS VI and general offtake had dramatically reduced. You're also aware that you need to have a critical volume before you go into a localization. And we would always look at localization with critical volume or in the case of BS VI or the exhaust gas treatment on a Y-design formula to do outsourcing with partners, while taking responsibility for the system. So our policy has not changed. Bosch Limited has systematically done localization. You're aware of that from in line pumps to common rail to other areas. We will continue on our localization journey, both in diesel and in gasoline, but we will do it in a planned way, which makes meaning, including we will do outsourcing in a meaningful way with like-minded partners while taking responsibility with our customer to ensure for the whole system and the solution that we provide. Now the -- again, you went back to the semiconductor and manufacturing. This is what I will not go into it. It's too volatile. It's a situation worldwide, leave alone Bosch India, leave alone Bosch globally. Worldwide, people are tackling with this issue. It's a global matter, Shyam. And you have to understand that. And therefore, I would leave it at that and request your understanding.

The next question is from the line of Rajesh Ranganathan from Doric Capital.

A couple of things. When we spoke about your other expenses after your previous quarter, you had mentioned that it was high in the previous quarter, and there was some one-off elements, which would go away. But actually, in the December quarter, it's gone up even further. So could you help us understand what kind of one-off expenses are these? And did you actually expect them to come down in the December quarter? They did not -- can you give us some clarity on that?

So I'm requesting our CFO and Executive Director, who, by the way, from tomorrow takes over as GMD, to give the answer on that.

Yes. Thank you, Rajesh, for your question. Overall, if you look at other expenses, are well controlled, and they are also seeing the benefit of some of our cost measures that we have taken, and we have shared -- always shared with you the program around euro-based budgeting and others that we have implemented. As part of the localization program, we also have some onetime expenses, which are into development costs. So as our Managing Director just mentioned, the localization program is ongoing. And as we localize, there are certain technology and development costs that we incur. And this specific quarter also has the impact. But I think it's suffice to say that our cost reduction programs are well on course.

But when you call it one-off, that gives us an impression that it's one-off. So what you're saying is it's sort of an ongoing cost because it's R&D expense?

So when you say one-off, these are more linked to setting up production and technology for localization. And hence, there is a transfer fee development cost, which is onetime. Of course, overall, there is a royalty and technology percentage that continues. That's ongoing, but these are specific one-off linked to the local manufacturing.

So Rajesh, if I may add to what our CFO said, that look, in Bosch, we have a very systematic and excellent way on cost management. You will get to see over time, just like in personnel, also, on other expenses, not just value, but also percentage, significant improvement. I think that's your question. And you cannot compare the quarter-to-quarter, but the management is very clear that we will systematically be doing cost management and yet invest for the future and which our CFO just now explained. Yes, thank you.

One more issue on the cost itself. So you had mentioned earlier that your -- because of outsourcing/importing, our raw material cost has gone up 500 basis points. And over a period of time, you hope to bring this down. Could you give us some understanding of what kind of time frames are we looking at?

So Rajesh, I have given this answer before, and I'd like to repeat it again. We do not give guidance, and we do not give time frames on these issues. That doesn't mean that we don't have a game plan or an action plan. We have a very clear action plan, which we have been following. We do not look at quarterly results. We look at what is meaningful. We start localization at a certain point, threshold point, and we also start doing outsourcing, which is of strategic nature, where we can rely because at the end, the whole orchestration of BS VI, which you are well aware from the conception right up to SoP Bosch Limited, along with the Bosch Group in India with Bosch Limited in the forefront has orchestrated. And example, my colleague, the previous Joint Managing Director, Jan Röhrl, who is with us today here, who is also the current CTO until his departure, has excellently managed. So this is a process we have. It is not a one-off, and you'll have to first appreciate and understand the process, which then leads to numbers and not go the other way around. I request your understanding.

Sure. And earlier, you had mentioned...

I think, Rajesh, you need to give time for others, please. Thank you.

The next question is from the line of Ajit Motwani from Pinpoint Asset Management.

[Technical Difficulty]

Can't hear you, Rajesh (sic) [ Ajit ].

Mr. Motwani, your voice is not audible.

Is it audible now?

Yes, sir. You may go ahead.

Yes. My question is, one, on the impact of the semiconductor issue on margins or the profitability, would it mean that our procurement cost for this component will go up, and hence, our ability to pass it on to OEMs is limited? One is that. And second, in the last quarter, you had said that our restructuring-related exceptionals, by and large, would be true by December. So your comment on that.

Yes. Motwani, I'll come to the second question first and then come back to semiconductor. So on the second question, I have already told you in my opening talk, this was the last tranche of the restructuring because we have a very keen balance sheet, and we've always provided ahead and then executed. And this free audit is not just restructuring. It is redeployment. It is reskilling. You just heard that I mentioned to you that we are doing a massive digital fluency program, which covers more than 4,500 Bosch colleagues across all our legal entities, including Bosch Limited. So we are spending money on that. We have put upfront, and the quarter that went by is the last tranche. And we have done it the Bosch way with a very optimal package, with care and concern for our employees on a voluntary basis. And then we have changed where we have ensured that the business is taken care of. Bosch Limited, which has 10,500 employees 5 years ago will look at more like 7,500 now. That's a massive change. And it's not just the headcount reduction. It is where we are doing with the Bosch philosophy, where we are giving packages, which is one of the best and optimal in the market. And it is volume-free. And finally, it is about reskilling for the new world even for blue collars. Having said that, you will, therefore, see this investment which our balance sheet allows, where our cash position still continues to be very strong, which allows us to be far more competitive for the future. On the matter semiconductor, the issue is not the cost of semiconductor, Motwani. The issue worldwide today is there's a shortage in a very big way of the semiconductors for these microcontrollers that we need, which then goes into the ECUs that Bosch makes which is a global challenge for the reasons which I indicated, primarily also that automotive industry offtake is only 10% globally of the total semiconductor output and massive requirements which happened during COVID and even today on the electronics sector. Thank you.

Got it. Got it. Sir, just one last thing. The restructuring charges we have shown to the P&L now, is it fair to assume that the cash outflow related to same will happen from the balance sheet in the ensuing quarters?

Your mic was echoing. Can you repeat that last sentence on restructuring and balance sheet? And then one for me to understand it.