Bosch Chassis Systems (BCSL)'s stock offers an interesting bet for investors who have a long-term horizon of two-three years. A subsidiary of Robert Bosch, BCSL is one of the few companies in India with the capability to make the full range of disc and oil-immersed brakes.

Business:

One of the world's top automobile components manufacturer, Robert Bosch owns 80% stake in BCSL, ensuring a strong technological support for the latter. The Bosch parentage is also reflected in its balance sheet — BCSL has a low debt-to-equity ratio, high interest cover, strong cash flows, high asset utilisation and does not face the danger of an equity dilution to fund capital expenditure. This is a perfect recipe for sustained long-term growth.

Growth drivers:

While in the past, the BCSL benefited from adoption of disc brakes by passenger car and motorcycle makers, going forward, we expect the company to gain from adoption of anti-lock braking system (ABS) and electronic stability programme (ESP) by domestic carmakers.

Its two-wheeler braking division is expected to grow faster once the transfer to the joint venture company with Brembo is completed by the year-end. Tatas' Rs 1-lakh car will be another growth driver as BCSL is the principal supplier of brake systems for the low-cost car.

Modern braking systems are high technology products. Brake manufacturers have to continually invest in new product development and get their products tested and validated by other equipment manufacturers (OEMs). For instance, global OEMs may take up to three years to approve a new brake system developed by vendors. This creates entry barriers for new players and provides pricing power to existing players.

The market for brakes in India is dominated by four players. But all the four players have their own niches and there is only limited competition between them. BSCL is dominant in the disc brakes' market for passenger cars, sports utility vehicles (SUVs) and motorcycles and oil-immersed brakes for tractors.

BCSL is working on launching India's first domestically manufactured ABS by the last quarter of '08. This will give the company a headstart over competitors. Initially, it will be fitted on cars and SUVs meant for export and later, for the domestic market.

At Rs 5,000/unit, it is a Rs 100-crore opportunity for the company. It will be followed by the launch of ESP, a common feature in high-end cars in developed markets. The average sales realisation on ESP systems can be up to Rs 25,000 per unit.

Around 95% of 200,000 cars exported from India last year were fitted with ABS. However, vehicle makers import them, as ABS is not manufactured in India currently. The company is also setting up a technical and R&D centre. This will significantly speed up the approval process for launching new products, besides helping it strengthen product development capabilities.

Financials:

During the quarter ended March '07, the company's net profit declined by 13% year-on-year to Rs 11.2 crore, while net sales inched up by 7% to Rs 133 crore. This excludes a one-time gain of Rs 14.7 crore (net of taxes) during the March '06 quarter from the transfer of two-wheeler braking division to the JV company with Brembo.

Slower growth was attributed to decline in exports due to the expiry of contract with one of its US customers. The company expects to resume shipment to the customer later this year. Slow topline growth and faster growth in raw material costs led to a 150- basis point decline in operating profit margin to 13.8% of net sales. In the 12 months ended December '06, the company's net profit (excluding one-time gain) was flat at Rs 39.1crore, while net sales grew 17% to Rs 478 crore.

Valuations:

At the current market price of Rs 1,165 a share, the stock is trading at 24 times its CY07 estimated earnings per share of Rs 47. This is quite attractive for a company with strong financials and a pipeline of new products. It provides a significant upside potential for investors with a horizon of 24-30 months. Investors may also gain from the 1:1 bonus issue approved at the company's AGM recently.