RESEARCH RESEARCHRESEARCH RESEARCH RESEARCH
STOCK DATA
SHAREHOLDING PATTERN (%)
STOCK PERFORMANCE (%)
STOCK PRICE PERFORMANCE
Market Cap Rs4.2 bn.
Book Value per share Rs15.5 Eq Shares O/S (F.V. Rs. 2) 96.9 mn.
Median Volumes (12 mths) 93,050 (BSE+NSE) 52 Week High/Low Rs74 / 40
Bloomberg Code SONA@IN
Reuters Code SONA.BO
Qtr. Ended Jun-07 Sep-07 Dec-07
Promoters 51.7 51.6 51.5
MFs/UTI/FIs 3.3 2.5 2.5
FIIs/NRIs/OCBs 3.0 4.0 2.0
PCB 10.1 10.9 11.1
Indian Public 31.8 30.1 33.0
1M 3M 12M
Absolute (24.6) (8.9) (15.2)
Relative (4.3) 2.4 (32.2)
SONA KOYO STEERING SYSTEMS LTD.
Q3 FY 2008 update BUY
Sector Auto Ancillary I CMP Rs 48 I Target Rs 64
KEY HIGHLIGHTS
Sona Koyo Steering Systems (SKSS) reported a 15% YoY increase in revenues to Rs1.72bn in Q3FY08. This was mainly on the back of growth in Electronic Power Steering (EPS) volumes to 110k units. Volume growth of Manual Steering (MS)
& Hydraulic Power Steering (HPS) mirrored the growth in domestic passenger vehicle industry.
z z z z
z OPM expands by 150 bps to 10.6%, Net profit rises by 10%
The raw material cost & other expenditure declined by 150 bps & 90 bps resp., primarily due to increase in localisation content of EPS. Staff cost rose by 90 bps on account of wage revision. Due to capital charges being higher by 40% on account of capex to expand capacities, net profits rose by 10% YoY to Rs73mn in Q3FY08.
z zz
zz Commenced supplies to Hyundai’s i10
SKSS commenced supplies to Hyundai’s i10, which clocked volumes of 14k units in Q3FY08. It has also received approval to supply 50% of the steering gear & column business & 100% of differential sub assembly business to Tata’s Nano.
z zz
zz Capex of Rs4bn over FY07-10
The company is undertaking a capex of Rs4bn over FY07-10 wherein it will almost double its current capacity of 1.2 mn units over the next 2-3 years. This is in line with capacity additions being undertaken by OEMs wherein automotive capacities are set to double by FY2011.
VALUATION AND RECOMMENDATION
At the CMP of Rs48, SKSS is trading at a P/E of 9.3x & EV/EBIDTA of 5.8x its FY09E numbers. With a market share in excess of 50% in domestic passenger vehicles steering systems, SKSS is well poised to capture the robust growth in the domestic passenger car industry. Also, with enhanced opportunities from export markets and margin expansion from increasing localisation of components for EPS, we expect a CAGR of 35% in earnings over FY08-10E.
We believe there is improved visibility from new orders with potential upside to the stock post correction in price. Hence we maintain our
‘BUY’ recommendation with a revised price target of Rs64 (vs Rs60).
0 30 60 90 120
Feb-07 May -07 Aug-07 Oct-07 Jan-08 SKSS BSE (Rebased)
KEY FINANCIALS (STANDALONE)
Jun-07 Sep-07 Dec-07 2006 2007 2008E 2009E 2010E
Rs mn Quarter Ended Yr Ended (March)
Net Sales 1,526 1,646 1,720 3,397 5,807 6,820 8,217 9,830
YoY Gr.(%) 32.0 18.8 14.6 14.2 71.0 17.4 20.5 19.6
Op. Profits 165 177 183 395 595 779 1,061 1,333
Op. Marg.(%) 10.8 10.7 10.6 11.6 10.2 11.4 12.9 13.6
Net Profits 80 88 73 162 277 361 510 663
KEY RATIOS
2006 2007 2008E 2009E 2010E Yr Ended (March)
Dil. EPS (Rs) 1.8 3.0 3.5 5.0 6.5
ROCE (%) 17.3 21.8 20.5 21.7 22.9
RONW (%) 20.7 24.4 19.2 20.4 22.5
P/E (x) 26.0 16.0 13.6 9.6 7.4
EV/Sales (x) 0.7 0.7 0.6 0.6 0.5
Growth in EPS volumes steers Q3FY08 revenues...
Company scales down its export target to Rs600-650mn in FY08...
PERFORMANCE OVERVIEW
The performance of the company was below expectations on revenues, margins &
profitability front. The key revenue driver was growth in EPS volumes to 110k units (vs ~60k units in Q3FY07) along with incremental volumes from Maruti’s SX4, Renault’s Logan & Hyundai’s i10. Volume growth in MS mirrored the growth in domestic passenger vehicles industry, which grew by 13% in Q2FY08.
SKSS commenced EPS supply in Q4FY06 to Alto, WagonR & Versa and further added Zen Estillo in Q3FY07. The company clocked EPS volumes of ~254k units in FY07 of which
~100k units were in H2FY07. It has already registered volumes of ~270k units in 9MFY08.
Sales to MSL continued to be strong due to 17% growth in MSL’s volumes on back of additional volumes from SX4 (9k units in Q3FY08) & Estilo (16k units in Q3FY08). This resulted in MSL’s share in revenues rising to 62%. Sales to M&M surged due to a strong growth in M&M’s volumes to 32k units (up 42%) contributed mainly by incremental volumes from Logan. Realisations continued to improve by 2-3% due to a shift in mix in favour of EPS, which have better realisations.
Post introduction of EPS, the raw material cost base had moved upwards by
~520 bps, as ~85% of EPS requirements were imported. In Q3FY08, RM cost declined by 150 bps to 72% as the localisation has gone up to ~20%.
While staff cost rose by 90 bps to 7.8% on account of wage revisions, other expenditure declined by 90 bps to 9.6% due to better appropriation of fixed costs.
This helped margins improve by 150 bps to 10.6%.
While interest costs escalated by 40% YoY to Rs29mn, depreciation was also higher by 41% at Rs45mn due to investments in increasing capacities. Consequently, net profits rose by only 10% YoY to Rs73mn.
Exports
The performance of the company was below expectations on exports front. Originally the company had targeted a turnover of Rs1bn for FY08, which it has revised downwards to Rs600-650mn for FY08 (vs Rs550mn for FY07) as it has managed to achieve exports of Rs450mn in 9MFY08 (vs Rs380mn in 9MFY07). The primary reason for the sluggish exports cited by the company has been the strengthening of the rupee which has made exports less profitable, therein forcing the company to cut down on Dollar exports &
focus on increasing exports to European markets.
Capex Plans
SKSS is undertaking a capex of Rs4bn wherein it will double its capacities from the current 1.2 mn units over FY07-10. This is on back of significant capacity additions announced by various automotive OEMs which will double the OEM capacity by FY11. It is expanding its capacity at Chennai plant from 240k units to 400k units. This expansion was completed in Q3FY08 & has started commercial production in Q4FY08.
RM Cost vs OPM (%)
Source: Pinc Research 60
65 70 75 80
Q1FY06 Q3FY06 Q1FY07 Q3FY07 Q1FY08 Q3FY08
3 6 9 12 15 RM Cost (% LHS) OPM (% RHS)
JV with Jtekt (Japan) for manufacturing power steering systems...
Commences Pinion valve localisation project at Dharuhera in Sep’07...
The company has also setup a greenfield plant at Dharuhera to manufacture and localise EPS with a capacity of 175k units (end FY07) which it has doubled to 350k units in Q3FY08. Almost 80% of the components for EPS are currently imported which it plans to bring down to 30% by FY10.
SKSS has also entered into a 49:51 JV with Jtekt (Japan) for manufacture of power steering systems. The JV will cater to the small car requirements of Toyota, Renault &
Nissan to be launched in India in the next 2-3 years. Also, BRIC country requirements of Hydraulic Power Steering (HPS) will be catered to through this JV. The plant will entail an investment of Rs1.6bn with a Debt:Equity of 2:1. It will commence commercial production in FY10 and the company expects revenues of Rs3-3.5bn in FY11.
INVESTMENT INCENTIVES
SKSS derives 91% of its revenues from the domestic market while the rest is from exports. On the back of a higher interest rate scenario, volumes in the domestic auto segment have witnessed a slowdown in the past 2 quarters. However, SKSS was able to maintain a volume growth of 15-16% in FY08YTD due to strong EPS volumes which it supplies to Alto, WagonR, Versa & Zen Estillo.
SKSS has got an approval for 100% requirements of Hyundai’s PA (i10) & PB models.
i10 has been launched in India in Oct’07 and has clocked volumes of 15k units in Q3FY08. The initial response to the launch has been encouraging and Hyundai is targeting sales of 200k units of this model in the next 2 years.
SKSS has also received approval for supply of 50% of the steering systems requirements of Tata’s Nano. The supply to the model is expected to commence in Q1/Q2FY09. Tata is targeting sales of 250k units p.a. in Phase I which it plans to double over the next 2-3 years. The company will also supply EPS to Maruti’s A-Star.
The company has also received approval for orders to the tune of Rs2.3bn p.a. in Q2FY08 from Toyota, Hyundai, Fiat for new small cars launches to be made in FY09- 10. Going forward, we expect growth for SKSS to be driven by sales to Hyundai &
Tata Motors due to incremental volumes from i10, Nano & Ace alongwith incremental revenues from Toyota & Fiat coupled with a modest growth in exports.
While the export numbers will continue to be sluggish in the near term, we believe there exists a huge potential on this front, especially in light of any slowdown in international automotive volumes which will encourage more OEM’s & Tier-I suppliers to look at low cost destinations like China, India & Thailand for its sourcing. Also, Fuji Autotech (France
& Brazil) has started sourcing components from SKSS. This can be scaled up further as the Fuji Autotech Group as a whole commences sourcing from SKSS. We expect SKSS’
exports to be Rs600-650mn in FY08 with the potential to scale it up to Rs1bn by FY10.
Increase in localisation of EPS components from current 20% to 40% in FY09 & to further 70% by FY10 would help in cost reduction and margin expansion considerably going forward. Also, localisation in HPS is expected to reach 90% by FY09. Further, improvement in capacity utilisation levels would help appropriate fixed costs over a
SKSS Revenue Mix (Q3FY08)
Source: Company, Pinc Research
France 9%
Others 4%
Europe 27%
Brazil 11%
North America 49%
Maruti 62%
Hyundai 9%
Mahindra 12%
Toyota 4%
Tata Motors 3%
Exports & Others 10%
SKSS’ Exports Mix - FY08E
Rupee appreciation could curtail SKSS’ export potential...
We maintain our ‘BUY’
recommendation with a revised price taget of Rs64...
Company description
Sona Koyo is the largest manufacturer of steering systems in India with a market share of more than 50% of the domestic passenger vehicles market. The company has technical collbaborations with Koyo Seiko (Japan) & Mando (Korea). It has 2 plants located in Tamil Nadu & Haryana. Maruti is its key customer accounting for 60% of the revenues with its relationships with almost all OEMs in India.
INVESTMENT RISKS
Any slowdown in the domestic passenger vehicles demand can impede revenue growth of the company as SKSS currently derives more than 90% of its revenues from the domestic market. Also, the company derives 60% of its revenues from Maruti. Significant slowdown due to intensifying competition could impact SKSS volumes considerably.
On an average, the time lag between vendor approval & actual execution of orders can be as high as 12-15 months in exports. Also, strengthening of the rupee have made dollar exports less profitable forcing the company to cut down on dollar exports & focus on raising exports to European markets. However, dollar exports still comprise 80% of the total exports. This has slammed the brakes on exports which could otherwise have witnessed a growth of 35-40% CAGR over the next 2-3 years. Any further strengthening of the rupee could prove to be a big dampener.
OUTLOOK
We expect a volume growth of 15-16% CAGR and a 2-3% CAGR improvement in realisations which would help a revenue growth of 19-20% CAGR over FY08-10. We expect operating margins to improve to 13.5% led by increasing localisation of EPS. As the company is undergoing a capex of Rs4bn over FY07-10, we expect capital charges to be higher by 25-27% CAGR. Consequently, we expect earnings growth of 30-35% CAGR to Rs657mn.
VALUATION
At the CMP of Rs48, SKSS is trading at a P/E of 6.7x & EV/EBIDTA of 3.9x its FY10E. With a market share in excess of 50% in the domestic passenger vehicles steering systems, SKSS is well poised to capitalise on the robust growth in the domestic passenger car industry. Also, with enhanced opportunities from European export markets and margin expansion from increasing localisation of components for EPS, we expect a CAGR of 35%
in earnings over FY08-10E.
We believe there is an improved visibility for FY09 & FY10 from new orders with potential upside to the stock post correction in its price. Hence we maintain our ‘BUY’ recommendation with a revised price target of Rs64 (vs Rs60 earlier) for a 12-month investment horizon.
SKSS Raw Material consumption
Source: Pinc Research 0%
25%
50%
75%
100%
FY03 FY04 FY05 FY06 FY07 FY08E FY09E FY10E
Imported Indegenious
Quarter Ended Nine Months Ended Particulars (Rs Mn)
31/12/07 31/12/06 Gr % 31/12/07 31/12/06 Gr % 31/03/07
Net Sales 1,720 1,501 14.6 4,892 4,042 21.0 5,807
Total Expenditure 1,538 1,365 12.7 4,369 3,658 19.4 5,213
(Inc.) / Dec. in stock (10) (9) (22) (32) (7)
Materials 1,248 1,112 12.3 3,552 2,989 18.9 4,254
Staff Cost 134 103 29.7 360 276 30.5 389
Other expenditure 166 158 4.8 478 425 12.4 576
Operating profit 183 137 33.6 524 385 36.2 595
Other Income 7 9 (19.8) 20 21 (4.7) 27
PBDIT 190 145 30.4 544 406 34.1 622
Interest 29 21 40.0 78 65 20.1 87
Depreciation 45 32 40.8 120 93 29.6 124
PBT 115 92 24.6 346 248 39.5 411
Provision for tax 7 30 99 80 132
Provision for FBT 2 2 2 5 5
Provision for deferred tax 33 7 33 2 2
PAT before Extra-ordinary 73 54 36.8 213 161 32.1 272
Extra-ordinary items - 13 28 6 6
Net Profit 73 66 10.4 241 167 44.4 277
Equity Capital (FV Rs 2) 194 185 194 88 185
Reserves (excl. reval. res.) - - - - 1,243
EPS for the period (Rs) 0.8 0.7 2.5 3.8 3.0
Book Value (Rs) - - - - 15.5
OPM (%) 10.6 9.1 1.5 10.7 9.5 1.2 10.2
NPM (%) 4.3 4.4 4.9 4.1 4.8
Expend. (% of sales)
Raw Material 72.0 73.5 72.2 73.2 73.1
Staff Costs 7.8 6.9 7.4 6.8 6.7
Other Exp 9.6 10.5 9.8 10.5 9.9
Financial results for the quarter & nine months ended 31 December 2007 (Standalone)
Year Ended
Median PE v/s Daily PE PE Band
25x 20x 15x 10x 5x 0
7 14 21
28 P/E ratio Median PE
0 25 50 75 100
Income Statement 2005 2006 2007 2008E 2009E 2010E
Balance Sheet 2005 2006 2007 2008E 2009E 2010E
Year Ended March (Figures in Rs mn)
Revenues 2,975 3,397 5,807 6,820 8,217 9,830
Growth (%) 27.1 14.2 71.0 17.4 20.5 19.6
Total Expenditure 2,618 3,002 5,213 6,041 7,157 8,497
Operating Profit 357 395 595 779 1,061 1,333
Other Income 32 32 27 32 48 56
EBDIT 389 427 622 811 1,109 1,389
(-) Depreciation 93 107 124 165 214 236
(-) Interest 27 51 87 114 150 196
PBT & Minority Interest 270 269 411 532 745 957
(-) Tax Provision 87 88 139 171 235 294
Net Profits 167 162 277 361 510 663
Fully Diluted Eq. Sh. O/S (mn nos.) 44 44 92 102 102 102
Book Value (Rs) 17 19 15 24 26 31
Basic E.P.S. (Rs) 3.8 3.7 3.0 3.7 5.0 6.5
Diluted E.P.S. (Rs) 1.9 1.8 3.0 3.5 5.0 6.5
Equity Share Capital 88 88 185 205 205 205
Reserves & Surplus 641 753 1,243 2,116 2,480 2,997
Net Worth 729 841 1,428 2,320 2,685 3,202
Total Borrowings 867 1,056 959 1,279 1,719 2,209
Deferred Rax Liability (Net) 181 194 210 225 242 259
Capital Employed 16,101 2,091 2,597 3,824 4,646 5,669
Fixed Assets 933 1,215 1,755 2,885 3,306 3,795
Capital WIP 88 78 50 75 150 90
Net Current Assets 399 420 414 434 404 582
Investments 297 298 300 350 696 1,103
Misc. Exp (not w/off) 67 79 78 80 90 100
Total Assets 16,101 2,091 2,597 3,824 4,646 5,669
Cash Flow Statement 2005 2006 2007 2008E 2009E 2010E
Key Ratios 2005 2006 2007 2008E 2009E 2010E
Year Ended March (Figures in Rs mn)
PBT & Extraord. items 253 251 411 532 745 957
Depreciation 93 107 124 165 214 236
Interest & Div. Income (28) (44) (27) (32) (48) (56)
Interest Paid 20 51 87 114 150 196
Tax Paid (73) (54) (118) (149) (209) (268)
Deferred Revenue Expd. 16 18 1 (2) (10) (10)
Other Adjustments (1) (2) - - - -
(Inc.)/Dec. in WC (166) (41) 93 120 (128) (162)
Cash from Operations 114 286 571 748 714 893
Net Capital exp. (209) (201) (635) (1,320) (710) (665)
Net Investment (293) (1) (2) (50) (346) (407)
Interest & Div Recd. 28 14 27 32 48 56
Cash from Investing Act. (473) (188) (611) (1,338) (1,008) (1,016)
Issue of Equity shares - - 383 670 - -
Change in Loans (incl. FCCBs) 421 12 (96) 320 440 490
Interest paid (22) (52) (87) (114) (150) (196)
Equity Div. paid (incl. tax) (40) (50) (74) (138) (146) (146)
Cash from Financing Act. 360 (90) 126 738 144 148
Inc/(Dec) in Cash 0 7 86 148 (150) 25
EBIDT (%) 12.0 11.6 10.2 11.4 12.9 13.6
ROACE (%) 22.4 17.3 21.8 20.5 21.7 22.9
ROANW (%) 24.9 20.7 24.4 19.2 20.4 22.5
Sales/Total Assets (x) 2.0 2.0 2.7 2.1 2.1 2.1
Debt:Equity (x) 1.2 1.3 0.7 0.6 0.6 0.7
Current Ratio (x) 1.9 1.8 1.5 1.4 1.3 1.4
Debtors (Days) 41.0 36.2 24.9 24.0 24.9 24.5
Inventory (Days) 28.9 29.0 20.5 19.5 20.3 20.6
Working Capital (Days) 39.7 37.1 21.2 19.0 14.8 17.8
EV/Sales (x) 0.7 0.7 0.7 0.6 0.6 0.5
EV/EBIDT (x) 6.9 6.7 8.0 6.6 5.3 4.2
P/E (x) 25.3 26.0 16.0 13.6 9.6 7.4
P/BV (x) 5.8 5.0 3.1 2.0 1.8 1.5
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