CMP: Rs 10 Target Price: NA
We recently met the management of Sona Koyo Steering Systems Ltd (SKSSL). We came back postive on (1) focus on the domestic market (90% of revenues) as compared to export market till recent past, (2) improvement in operating margins (by 510 bps to 7.3%) due to combination of benefits of decline in metal price and cost reduction initiatives during past six months. (3) improvement in DE ratio (current DE is 1.4x due to lower capex/investment requirements. However, we are still concerned about (1) the probable loss in subsidairy/JV Jtek Sona Automotive India Ltd (JSAIL) and Sona Fuji Kiko Automotive Ltd (SFKAL) in the initial phase of operations from 4QFY10 (2) the forex fluctuations as company raw material imports accounts for 30% of sales and (3) high interst and depreciation expense that will consume most of the operating profits.
A strong volume growth by Maruti, Hyundai and M&M (the top three customers of SKSSL accounting for 80% of revenues) and subsidizing cost pressures, does indicate adequate scope for positive surprises by SKSSL in FY10. However, a strong 1QFY10 operating performance is a pre-requisite to bring back the investor confidence as SKSSL has not delivered the desired performance in the recent past. At Rs 10, the stock trades at PER, Cash PER and EV/EBIDTA of 39.5x, 6.5x and 4.7x our FY10 estimates.
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