Sona Koyo Steering: Hold

Shareholders can continue to hold Sona Koyo Steering Systems with a two-three year perspective. The company, a supplier to the passenger cars market, is among the few component makers that have weathered the current slowdown in the industry relatively well. However, given the company's focus on OEM supplies, order flow tends to be lumpy; revenue growth is expected to be of the order of 10 per cent in 2007-08. The company's market leadership position and superior product mix, coupled with its plans to localise the column type EPS (C-EPS) components, imply that earnings can gain traction over three-five years; near-term prospects are muted though. Shareholders can hold on to the stock which now trades at a PE of 14 times the trailing twelve months earnings.

Product, Revenue Mix

 

Sona Koyo's product portfolio includes steering systems and driveline products. The former accounts for 85 per cent of the revenues and the latter the rest. Maruti Suzuki is the major client, contributing to 60 per cent of the total revenues; Hyundai and Mahindra (including Mahindra-Renault) chip in with 15 per cent each. Toyota Kirloskar and Tata Motors make up the rest. In 2006-07, the company saw a whopping 72 per cent rise in sales due to the introduction of Electronic Power Steering (EPS) systems. This is an exceptional increase, triggered by supplies to a set of small car OEMs (Original Equipment Manufacturers) led by Maruti.

 

A tilt in the product mix towards power steering impacted margins in 2006-07 (10.3 per cent against 11.1 per cent in 2005-06) as the product features a high import content. However, the same factor worked in favour of the company in the first quarter of 2007-08, as operating margins improved on the back of an appreciating rupee.

Prospects

 

The sustained growth in domestic passenger car sales augurs well for the company. The company is favourably placed to tap this growing market.

 

One, Sona Koyo already has a strong presence in the compact car segment supplying to models such as Alto, Wagon R, Estilo and Santro. Given the plans to make India a global hub for compact cars, the company's client base will expand.

 

Second, the emergence of a low-cost, entry-level car, developed for the mass market, could open up a new market segment for Sona Koyo.

 

To benefit from such volume-driven requirements, the company is setting up a manufacturing facility in West Bengal to cater to Tata Motors' Rs 1-lakh car project.

 

Third, the company being the pioneer in EPS in India, will have the first mover advantage when the demand for such components increases over the next few years. In 2006-07, Sona Koyo added capacity for manufacturing 3,00,000 units of C-EPS at Gurgaon. The company has also set up a plant at Dharuhera, Pune for the same.

Exports

 

Exports contribute around 7 per cent of the revenues. 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.

 

To achieve the export target, Sona Koyo is strengthening its design and development capabilities through in-house/acquired technology/R&D.

 

The company is currently developing EPS for off-highway vehicles in the US markets where the demand is expected to be strong.

 

It is also looking at leveraging its association with the joint-venture partner, Fuji Kiko, through which Sona Koyo has gained a toehold in the European and Latin American markets.

 

However, for Sona Koyo, the domestic market may offer a more lucrative source of growth, given the growth potential for compact cars in this market.