Concerns On Business Model
Sona Koyo Steering Systems (SONA) Q3FY11 results were above expectation with revenue growth outpacing our expectations. The company reported margins of 10.1% and were inline with estimates. Adjusting for an exceptional gain of Rs39mn on sale of investment, adjusted profit increased by 26.3% YoY to Rs87mn as against our estimate of Rs68mn.

Topline higher than estimate: The domestic passenger vehicle (PV) industry had another impressive quarter with production volumes higher by 22.9% YoY to 0.74mn vehicles. Production volumes for Maruti, which is SONA’s largest customer, were up 24.9%. As a result, domestic sales for SONA were higher by 23.1% YoY to Rs2.6bn. Exports too got a leg up growing by 30.5% to Rs93mn.

Margins in line: Increase in raw material costs was offset partially by lower overheads. As a result margin contraction was arrested to 20bps QoQ. SONA reported margins of 10.1% which was inline with our estimates.

Income from sale of investment: During the quarter the company hived of its stake in AAM Sona Axle in favor of JV partner American Axles, USA. The stake was acquired in Oct’08 at a cost of Rs28mn. The company reported an exceptional gain of Rs39mn from this stake sale. Consequently reported profit was higher by 82.3% YoY at Rs126mn.

Outlook: We have maintained our revenue as well as margin estimates for FY11 and FY12. Our earnings estimate for FY11 and FY12 are at Rs1.5 and Rs1.7 respectively. We maintain our view of degradation of SONA’s business model with part of existing business being transferred to subsidiaries and listed entity getting demoted to tier III status.

VALUATIONS AND RECOMMENDATION
The stock is currently trading at 9.9x its FY12E earnings. Considering the long term concerns and degrading of the business model we have reduced the target multiple from 13x to 12x. We maintain our ‘HOLD’ rating with a revised target price of Rs20 (earlier Rs22) discounting FY12E earnings 12x.