Sona Koyo is the largest manufacturer of steering systems in India, catering to passenger cars, utility vehicles and light commercial vehicles. The company has technical and financial collaboration with JTEKT Corporation, Japan, which is the largest producer of passenger-vehicle steering systems in the world.
Sona Koyo registered a turnaround in 1QFY2010 with its Bottom-line back in the green. Its domestic business has started improving owing to which we expect the company to continue to show a decent Top-line growth going ahead.
However, aggressive capex incurred in the last few years and high Debt on its books (of around Rs240 crore) would continue to pressurize its bottom-line for the next couple of years. Additionally, major investments done in joint ventures (JVs) will start contributing to net profit only post FY2011.
Sona Koyo’s strategic investments in Subsidiaries and JVs will start commercial production during FY2010-11. Both its key subsidiaries, JTEKT Sona Automotive (JTEKT) and Sona Fuji Kiko Automotive (SFKA), will start commercial production in November 2009.
Arjan Stamping is in the process of ramping up and consolidating its current production, and should reach optimum capacity levels by March 2010. Nonetheless, the high Debt in its books and Depreciation are expected to exert pressure on bottom-line.
Overall, the auto Industry is exhibiting a positive turnaround over the last few quarters. Hence, on increasing volumes and on improving operating leverage, we expect Sona Koyo to clock an EPS of Rs0.7 in FY2010E and Rs1.5 in FY2011E. At Rs16, the stock is trading at fair valuation of 10.8x FY2011E Earnings.
Hence, we maintain a NEUTRAL view on the stock.