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Sona Koyo Steering Systems – Hold

October 19, 2007

Sona Koyo Steering Systems (Sona Koyo) declared another set of good numbers with an 18.8% growth in revenues at INR 1.65 bn in Q2FY08. EBITDA stood at INR 177 mn, up 33% Y-o-Y, with EBITDA margins improving 110bps Y-o-Y and 20bps Q-o-Q. The company’s net profit for the quarter stood at INR 87.9 mn, up 38.2% Y-o-Y.

Capex for its greenfield plants at Singur and Uttaranchal is on track; the company expects them to come on stream by H2FY09E. It is also setting up a third plant at Bawal, Haryana, as part of its recent 49:51 JV with JTEKT, called JTEKT Sona Automotive India.

The company has shifted its focus towards the more profitable European markets, and deferred some export orders to the US. Valuations for Sona Koyo are still attractive given its healthy topline growth with improving margins. At CMP of INR 44, the stock is trading at a P/E of 11.5 and 8.8 on our EPS estimate of INR 3.8 and INR 4.9 for FY08 and FY09, respectively.

Existing investors can hold and add on market corrections.

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