Sona Koyo Steering: Hands on the wheel

The cyclical upturn in car sales bodes well for the Sona Koyo Steering stock. The company’s market leadership position in steering systems for passenger vehicles and diversified clientele give good visibility to earnings growth in the next few quarters.

Like many other auto and auto component stocks, Sona Koyo too has been re-rated in the rally since September 2013.

It now trades at about 30 times its trailing 12-month consolidated earnings, much higher than about seven times two years ago.

Yet, it is still cheaper compared to peer ZF Steering Gear (37 times trailing 12-month earnings), which supplies steering components for commercial vehicles. Investors with a two-year perspective can enter the stock. But take only limited exposures, considering that the Sona Koyo stock has a market capitalisation of just about ₹ 1,200 crore.

Cars and heavy commercial vehicles are among the segments showing strong volume growth in recent times.

As against 5 per cent shrinkage in volumes in 2013-14, car sales witnessed a revival in demand in the 2014-15 fiscal, recording a 5 per cent growth.

This trend has caught on further this year, with new car sales growing by 9.5 per cent in the first six months of this fiscal. Lower borrowing costs from interest rate cuts, easing of inflation and improving prospects of economic growth should keep car sales going strong in the months to come.

Sona Koyo has about 50 per cent market share in steerings used in cars and utility vehicles. Offerings of the company, along with its subsidiaries — JTEKT Sona Automotive and Sona Fuji Kiko Automotive — include various steering-related products and components, such as rack and pinion steering (manual and hydraulic power), electric power steering, steering columns and shafts. A small portion of its revenue comes from other products, such as axle shafts and assemblies.

From being a supplier predominantly to Maruti Suzuki, the company has expanded its client base. Maruti Suzuki today accounts for 30-40 per cent of the company’s revenue, while Honda, Toyota, Mahindra and Mahindra, Nissan and Hyundai are among the other auto-makers added to the client roster.

It supplies to successful launches, such as the Mobilo, Etios, XUV500, Duster and Ciaz.

Sona Koyo has recently developed the Electronic Power Assist Module (EPAM) for off-highway vehicles with in-house technology. It currently exports this to John Deere in the US. Going forward, it expects to gain more traction in the overseas markets.

Exports account for less than 10 per cent of revenue now. Besides, the company is also offering this technology to tractor-makers in India.

Though tractor sales are going through a rough patch right now, this expansion lends diversification as tractors and automobiles go through different sales cycles. That tractor-makers, such as TAFE, Swaraj (M&M) and Sonalika, are already its customers for other products lends confidence on EPAM’s domestic prospects, once tractor sales revive.

For the quarter ended June 2015, consolidated net sales grew 5 per cent over the June 2014 quarter to ₹372 crore. Consolidated net profit growth was healthier at 16 per cent (₹4.1 crore). Like many other component-makers, the company did see the benefit of lower input prices.

Raw material as percentage of sales stood at 66 per cent for the three months ended June 2015, compared to 69.3 per cent a year ago. But higher employee costs and other expenses pulled down margins to 11.7 per cent now vis-à-vis 12.5 per cent a year ago.

With input prices expected to remain benign in the next few quarters, greater traction in sales as demand improves will help expand margins and sustain double-digit growth in the company's profits.

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