Buy Sona Koyo Steering; target Rs 22: PINC Research

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Buy Sona Koyo Steering; target Rs 22: PINC Research

PINC Research is bullish on Sona Koyo Steering System (SONA) and has recommended buy rating on the stock with a target price of Rs 22 in its February 1, 2012 research report.

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PINC Research is bullish on Sona Koyo Steering System (SONA) and has recommended buy rating on the stock with a target price of Rs 22 in its February 1, 2012 research report.

"Sona Koyo Steering System's (SONA) standalone results for Q3FY12 were tad below our expectations as net profit declined 19.1% YoY to Rs 70mn, 9.3% below our estimate. Revenues continued to remain under pressure due to the labour unrest at its primary client i.e. Maruti Suzuki (MSIL) and led to a sales decline of 7.7% YoY and QoQ to Rs 2.5bn (PINCe Rs 2.9bn). Lower input cost and other overheads aided in an EBITDA margin expansion of 11bps sequentially to 9.7% (PINCe 9.3%). Consolidated results remained erratic and surprised us positively as subsidiaries contributed half of the consolidated net profit of Rs 137mn."

"Net revenues for Q3FY12 continued to remain under pressure as the overall passenger car demand remained lackluster during the quarter. Additionally labour unrest at MSIL's Manesar facility led to a further loss of production. Management indicated that although demand for utility vehicles remained stable, passenger car volumes continued to drag the overall volume growth. Passenger vehicle industry production during the quarter declined 3.8% YoY while production volumes at MSIL slumped 25%. Net revenues for the company declined 7.7% YoY to Rs 2.5bn. Despite the lower revenues, the company reported a 11bps sequential margin expansion to 9.7% (PINCe 9.3%). Raw material cost as a percentage of sales contracted 45bps QoQ largely contributing to the margin outperformance. Adjusted for an exceptional gain of Rs 39mn in Q3FY11, net profits declined 19.1% YoY to Rs 70mn. After reporting a loss in the previous quarter, the company reported a net profit of Rs 137mn on a consolidated basis. On a YoY basis, margins contracted 312bps to 10.9% largely on the depreciation of the Indian Rupee vis-a-vis the Japanese Yen."

"With production at Maruti Suzuki stabilising post resolution of labour issues at its Manesar plant and signs of improvement in the passenger vehicle industry, we expect revenue growth to turn positive. We maintain our earnings estimate of Rs 1.8 and Rs 2.2 for FY12 and FY13 respectively and introduce FY14 earnings estimate of Rs 2.5. The stock is currently trading at 6.4x its FY13E standalone earnings. We maintain 'BUY' recommendation on the stock with a target price of Rs 22 discounting FY13E earnings 10x," says PINC Research report.

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To read the full report click on the attachment