The Hindu Business Line : Sona Koyo Steering: Buy

Investors with moderate return expectations and a perspective of three years or more can consider exposure to Sona Koyo Steering, which produces steering systems and other driveline products for the passenger cars industry.

Its major customer, Maruti, brings in more than 50 per cent of the revenues. Mahindra and Mahindra, Hyundai, Toyota and Tata Motors chip in with the rest.

The company’s market leadership position, healthy order flows, superior product-mix and localisation efforts indicate that earnings can gain traction over three-five years. Considering that the stock has been on a steady move upwards in the last few months, the sharp fall in market price in the recent correction presents a good opportunity to buy. At the current market price of Rs 54, the stock trades at a PE of around 15 times the trailing 12-month earnings.

Financials

For the quarter December 2007, sales stood at Rs 172 crore, growing by 14 per cent on a year-on-year basis. Net profits have increased by 10 per cent for the same period to reach Rs 7.3 crore.

A better product mix, aided by the sale of C-EPS (column-type electronic power steering) introduced in FY-07 has been the key driver of growth.

On the operating front, margins, which remained subdued in the last few quarters due to high import content in the manufacture of electronic steering systems and columns, showed an improvement in the latest quarter.

On a year-on-year basis, margins improved by 1.5 percentage points to reach 10.6 per cent. While this can be partly attributed to lower cost of imports due to the appreciation of the rupee, the rest could be on account of the ongoing localisation efforts.

Going forward, the company expects to achieve localisation of electronic power steering in phases, with a target of 70 per cent localisation by FY-11.

Economies of scale due to capacity expansion and complete localisation of hydraulic power steering expected by June ‘08 could help margins.

Net margins for the quarter have been impacted by higher interest and depreciation costs due to ramp up of capacity and lower gain on account of foreign currency loan translation.

However, higher volumes from recent order flows should aid profitability over the next few quarters.

Major boost to volumes

The sustained growth in domestic passenger car sales augurs well for the company. Because of its market leadership position, the company is favourably placed to tap this growing market.

Sona Koyo will benefit from Maruti’s robust growth and its planned launches such as the Splash, A-Star and the Swift sedan in the current year. Plans of global auto majors such as Toyota, Honda and Bajaj to launch a small car in India will also open up possible additional revenue streams.

Besides, its business with Tata Motors (which brings in only 5 per cent of the revenues) will receive a fillip, given the slew of new orders it has got in the last few quarters.

During the quarter, Sona Koyo has received additional orders from Tata Fiat worth Rs 30 crore per annum and from Tata Motors for steering gears and columns for the Ace.

The company has entered into an agreement to form a joint venture with the US-based AAM International Holdings (American Axles) for the manufacture and supply of rear beam axles of 0.75 and 1 tonne capacity to Tata Motors. It is also setting up a plant at Singur to supply 1,50,000 steering columns and 3,00,000 differentiated assemblies initially for the Nano. With the Nano expected to sell one million vehicles by 2011, this will serve as a huge volume and revenue booster for the company.

Also, the installation of the second-line of production of C-EPS at Dharuhera, (doubling capacity to 3,50,000 units) bodes well for higher volumes as well as improved realisations due to the high value, high margin nature of the product.

Focus on exports

Exports contribute 10 per cent of the revenues. The company is focussing more on Europe than the US. Its joint venture with Fuji Kiko Group, the market leader of steering columns in Europe, will enable Sona Koyo gain considerable foothold in European markets.

However, the company has revised downward its 2010 export target from 45 per cent of revenues to 35 per cent due to the greater potential that the domestic market offers.

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