Bosch: saving for a rainy day

Updated: Aug 28 2008, 06:25am hrs
Bosch, a major player in the automotive industry has delivered sales and earnings growth of 14.57% and 33.77%, respectively, in the 2008 June quarter. Experts reckon that its continuous introduction of quality and innovative automotive products sets it apart from other automotive companies. It will be interesting to see the reason behind the higher growth of profit than sales. The company has accumulated huge reserves due to its consistent profitability being one of the oldest players in the industry. It generates income (dividends and interest) by investing in fixed deposits, mutual funds, bonds and other unquoted investments. The companys total investment is at Rs 1,063.78 crore and fixed deposits at Rs 635 crore as on December 31, 2007. Other income for the same period was Rs 296.9 crore. For the June quarter, other income has gone up by 230% to Rs 114.59 crore giving significant impetus to its net profit. Here one can note that other income and interest comes to 48.53% of the total profit before tax (PBT) of Rs 280 crore.

Obviously, when the going gets tough, other income acts as a cushion in times of slacked period or when the costs are hitting hard on margins.

As the automotive business is cyclical in nature and growth is dependent on various macro factors, it can actually be a wise decision to set aside the profits earned into safe avenues. Also, this will not erode the shareholder returns and confidence in the gloomy period. After deducting other income from PBT, the net PBT margin comes to 11.80% (denominator is net sales) and otherwise it is 21% (denominator is total income).

This shows that the companys core business earns lower margins, which is the ideal scenario. Nonetheless, ROCE (return on capital employed) and RONW (return on net worth) are healthy at 34% and 26.46% respectively.

Contributed by Rahul Jain