The Sona Koyo Steering Systems stock is a good bet to ride on the revival in domestic automobile sales. The company’s market leadership position in steering systems for passenger vehicles, diversified clientele and efforts to improve margins from localisation and backward integration give good visibility to earnings growth in the next few quarters.
Although most stocks in this sector have been re-rated based on high growth expectations, Sona Koyo still trades at a reasonable 25 times its trailing 12-month consolidated earnings.
Valuations of many other auto parts makers have zoomed to double that. It should suit investors with a one-two year perspective. We recommend limited exposure though, considering that its market capitalisation is only about ₹1,050 crore.
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.
The ongoing cyclical turnaround in automobile sales bodes well for the company. Compared to 4-5 per cent shrinkage in volumes in 2013-14 over the previous year, cars and utility vehicles have witnessed a revival in demand in the current fiscal, recording 3-5 per cent growth.
Expected interest cuts, lower inflation and improving prospects of economic growth should strengthen vehicle sales in the months to come.
Sona Koyo is well placed to benefit from this. From predominantly being a supplier to Maruti Suzuki, the company has expanded its client base recently.
Maruti today accounts for only 40 per cent of the company’s revenue, while Honda, Toyota, Mahindra and Mahindra, Renault and Hyundai are among the other auto makers added to the client roster.
It supplies to successful new launches, such as the Mobilo, Etios, XUV500 and Duster.
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 contribute to less than 10 per cent of revenue now. Besides, the company is also offering this technology to tractor makers in India with supplies to Escorts expected to begin soon.
That tractor makers such as TAFE, Swaraj (M&M) and Sonalika are already its customers for other products, lends confidence to EPAM’s domestic prospects.
Besides, as tractors and automobiles go through different sales cycles, more revenue from tractors will also serve as a diversifier in times of an auto slowdown and vice-versa.
In the April-September 2014 period, Sona Koyo’s consolidated net sales inched up 7.5 cent year-on-year to ₹755 crore while net profit grew 3.5 per cent to ₹12.2 crore.
Lower raw material and interest costs (due to repayment of debt) did favour the company. But a 72 per cent rise in depreciation, thanks to changed accounting norms, played spoilsport on profit growth.
As auto sales pick up, double-digit growth can be expected in the next few quarters.
Margin expansionOperating margins improved by about 200 basis points to 13.3 per cent in the first half of this fiscal and has scope for further expansion.
The company is working on substituting import content for raw materials/components used in electric power steerings and the newly developed EPAM.
It expects to bring down the import content from the current 20 per cent levels to 12-15 per cent.
Sona Koyo has also undertaken backward integration by making aluminium die casting for its various components. This provides for about 35 per cent of the company’s requirements.