ICRA maintains fundamental grade 3+ for Sona Koyo Steering

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ICRA maintains fundamental grade 3+ for Sona Koyo Steering

ICRA Equity Research Service has come out with its report on Sona Koyo Steering Systems Limited (SKSSL). The research firm has maintained the fundamental grade 3+ and the valuation grade A for the company in its November 04, 2011 report.

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ICRA Equity Research Service has come out with its report on Sona Koyo Steering Systems Limited (SKSSL). The research firm has maintained the fundamental grade 3+ and the valuation grade A for the company in its November 04, 2011 report.

Sona Koyo Steering Systems Limited (SKSSL) reported revenues of Rs. 273.5 Crore (in Q2, 2011-12) on a standalone basis, a growth of 8.6% (YoY); and Rs. 338.3 Crore on a consolidated basis, a growth of 19.7% (YoY) - which was in line with our estimates. Although Maruti Suzuki India Limited (MSIL), which accounts for around 45% of SKSSL's revenues, faced production disruption due to labour issues at its manufacturing facilities at Gurgaon and Manesar during the last quarter (resulting in 20% YoY decline in MSIL's total volumes in Q2, 2011-12), its impact on SKSSL was relatively less severe in view of (a) SKSSL's lack of presence in Swift (pre-change version) and Swift DZire models produced at MSIL's Manesar plant where production was impacted the most during this period; and (b) SKSSL's presence primarily in models manufactured at MSIL's Gurgaon plant where production was not much impacted in Q2, 2011-12. However, SKSSL's (standalone and consolidated) revenues in Q1, 2011-12 were flat on QoQ basis as the decline in its supplies to MSIL was neutralized through sales growth with other customers, particularly Mahindra & Mahindra Limited (M&M), and price increases given by select other customers. Overall, SKSSL's revenues in H1, 2011-12 were in line with our estimates; however, we have revised our projections for SKSSL downwards for 2011-12 considering that the production disruption at MSIL continued into October 2011 which severely impacted production volumes at both the Gurgaon as well as Manesar plants of MSIL; and in turn hindered the supplies of SKSSL to MSIL.

Forex loss due to stronger yen impacts net profits: In Q2, 2011-12, SKSSL reported EBITDA of Rs. 27.3 Crore on a standalone basis, a growth of 1.4% (YoY); and Rs. 33.8 Crore on a consolidated basis, a decline of 5.7% (YoY) - which was broadly in line with our estimates. Although SKSSL's (standalone) PBT at Rs. 9.9 Crore in Q2, 2011-12 was broadly in line with our estimates, the company's consolidated PBT at Rs. 3.4 Crore was significantly lower than our expectations. This was on account of the large forex loss of around Rs. 9 Crore reported by JTEKT Sona Automotive India Limited (JSAI, SKSSL's 49% subsidiary) in Q2, 2011-12 on restatement of its Yen (JPY) denominated loan following the sharp appreciation of JPY against the INR during the last quarter. The above loan of JPY 841 million was availed by JSAI in June 2009 with a tenure of six years. Since repayments of this loan start from March 2013 onwards, the JPY appreciation so far has not caused any increase in principal repayment burden for JSAI on cash basis. The loan continues to remain un-hedged; however, the management has indicated that it may re-evaluate the same based on cost-benefit analysis between increase in debt servicing costs on un-hedged loan due to JPY appreciation and cost of hedging.

Grading: ICRA Online maintains the Fundamental Grade 3+ and the Valuation Grade A for SKSSL. The fundamental grade 3+ indicates that the company has "good fundamentals". The valuation grade A implies that the company is "significantly under-valued on a relative basis" as on the date of the grading assigned.

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

To read the full report click on the attachment