OREANDA-NEWS. Fitch Ratings has affirmed Robert Bosch GmbH's (Bosch) Short-term Issuer Default Rating (IDR) at 'F1'. The agency has also affirmed the short-term debt issued by Bosch and Robert Bosch Finance Corp at 'F1'.

The affirmation reflects the continuous recovery of the group's profitability and cash generation, as well as resilient financial metrics despite recent large acquisitions. The group maintains strong business characteristics and a conservative financial policy.

KEY RATING DRIVERS

Strong Business Profile
The rating reflects Bosch's solid and diversified business profile, including leading global positions in automotive supply (e.g. powertrain, chassis and aftermarkets), consumer goods (power tools and household appliances) and industrial technology (e.g. hydraulics). Bosch also benefits from high geographical diversification, solid research and development (R&D) capacity and technology leadership in several segments.

Business Diversification
The group derives about two-thirds of its revenue from the cyclical and volatile automotive supply business. However, diversification is provided by Bosch's presence in the industrial, consumer goods and energy sectors. This has been reinforced by the recent acquisition of Siemens' 50% share in their JV Bosch und Siemens Hausgerate GmbH (BSH, a leading supplier of household appliances). The group is also looking to focus further on the more stable and higher-margin automotive aftermarkets segment.

Acquisitions
In September 2014, Bosch announced the purchase of its partners' respective 50% stakes in two separate JVs, BSH and ZF Lenksysteme GmbH (ZFLS). These acquisitions will increase revenue by about EUR15bn in 2015 with a slightly dilutive effect on EBIT margins. We expect the financial impact from these acquisitions to be moderate and rapidly digested and to also be offset by the positive effect on the business profile.

Recovering Profitability
As a result of a further increase in sales, we expect group profitability to improve moderately in 2015. Fitch expects the EBIT margin to increase to 6.4% in 2015 and towards 7.5% by 2017, from 5.8% in 2014 as gains from operating leverage will more than offset increased investments, notably in R&D.

Stronger FCF Expected
As a result of stronger funds from operations (FFO), Fitch expects the free cash flow (FCF) margin to recover to a level more commensurate with the ratings of more than 3% in 2016-2017, from 1.3% in 2014 and just more than an estimated 1% in 2015.

Conservative Financial Policy
Earnings retention is an important source of financing, in line with the group's conservative financial policy, underpinned by substantial liquidity. Dividend pay-outs have been negligible. Bosch is 92%-owned by a foundation, which safeguards its independence. The remaining shares are held by the Bosch family and as treasury stock.

KEY ASSUMPTIONS

- Revenues to grow by mid-single digits in 2015-2017, excluding the effect from the ZFLS and BSH acquisitions (more than EUR16bn in 2015);
- EBIT margin to increase to nearly 6.5% in 2015 and gradually increase further to more than 7.5% in 2017;
- FCF margin to remain modest at 1% in 2015 but to increase to 3%-3.5% in 2016-2017;
- Capex of about EUR4.5bn p.a in 2015-2016, increasing gradually afterwards.

RATING SENSITIVITIES

Negative: Future developments that could, individually or collectively, lead to a downgrade include:
- EBIT margin remaining sustainably below 6% (2014: 5.8%, 2015E: 6.4%, 2016E: 7.5%)
- A material weakening in the group's liquidity profile, including sustained negative FCF (2014: 1.3%, 2015E: 1%, 2016E: 3.1%)
- FFO adjusted net leverage increasing above 1x (2014: (0.8)x, 2015E: (0.0)x, 2016E: (0.3)x)

An upgrade to 'F1+' is unlikely as the ratings have already reached a natural ceiling for the industry.

LIQUIDITY

Liquidity remains healthy, including EUR10.5bn of readily available cash, after Fitch's adjustments for minimum operational cash of EUR1.5bn and less liquid marketable securities of EUR3.6bn. Bosch's maturities are well spread with no more than EUR1bn due in any given year and some bonds extending as far out as 2039.

Bosch has low FFO adjusted gross and net leverage. We expect gross leverage to remain around 1x-1.2x in the foreseeable future while we expect net leverage to increase to about breakeven at end-2015 from negative 0.8x at end-2014, but to improve again in 2016.