Sona Koyo Steering Systems - PINC Result Review

Subsidiaries Share The Pie

Sona Koyo Steering Systems (SONA) Q1FY11 results were marginally below our estimates with muted topline growth. Transfer of business to subsidiaries, a primary concern with the company, resulted in a lower sales growth of 16%. Although margins were inline, lower revenues of Rs2.17bn resulted in a net profit of Rs56mn as against estimate of Rs63mn.

Transfer of business a major concern: SONA's subsidiary i.e. JTEKT Sona (JSAI) was operational from 1st Feb 2010. Supply of CEPS for the new WagonR has been transferred to JSAI, with SONA relegated to supply of manual steering gear to JSAI. Going forward we expect SONA standalone business to be demoted to a tier III status and this will hit the margins. The profitability on the consolidated basis will be shared with technology partners.

Outlook: We have maintained our revenue as well as margin estimates for FY11 and FY12. Our earnings estimate for FY11 and FY12 are at Rs1.5 and Rs1.7 respectively.

VALUATIONS AND RECOMMENDATION

The stock is currently trading at 12.3x its FY12E earnings. Considering the concerns on the business, we believe that at current price, stock is fairly valued and reiterate our 'HOLD' rating with a target price of Rs22 discounting FY12E earnings 13x.

Source : Equity Bulls

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