• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

B. Krishnakumar

GROWTH drives such as the sustained increase in automobile production, focus on the export market and the increasing popularity of electronic power steering systems make Sona Koyo Steering an attractive investment opportunity. Investors with a one/two-year perspective can consider exposures.

Sona Koyo makes steering systems and driveline components for passenger cars and utility vehicles. It is dominant player in car steering systems. Given the nature of the product, the company derives bulk of the revenues from the original equipment market.

Over the years, the company has taken efforts to move up the value chain and also broaden its customer base. As a result, the company now has a clientele that includes auto majors such as Maturti, Hyundai, Tata Motors and Mahindra and Mahindra. Maruti continues to be the single largest customer accounting for 57 per cent of revenues.

Aided by sustained increase in automobile production, Sona Koyo's performance has improved over the recent quarters. For the year-ended March 2004, the turnover rose 31.3 per cent to Rs 234 crore and post-tax earnings 87 per cent to Rs 12.1 crore.

The performance would have been better but for the sharp increase in the price of steel, the principal raw material for Sona Koyo. As the company caters to the original equipment market, it would not be in a position to revise price to completely accommodate change in raw material cost. As a result, the average product realisation tends to be under pressure.

The impact of the pressure on profitability is evident in the performance for the quarter ended June 2004. Revenues rose 19 per cent to Rs 60.9 crore, while post-tax earnings dropped marginally by 7 per cent to Rs 2.4 crore.

Growth in volumes would be the key driver of earnings, as there would be limited scope for improvement in profitability.

The sustained increase in automobile production and the growing popularity of vehicles with power steering are likely to drive volume growth.

The company has bagged orders to supply electronic power steering system to Maruti and Hyundai. The shift in product mix in favour of power steering systems would lead in higher margins. Besides, the potential for growth in exports is another significant factor to keep an eye on. Though export earnings accounted for only 2 per cent of revenues in the previous fiscal, robust growth appears likely.

To boost the export earnings, the company plans to leverage its association with the technical collaborator, Koyo Seiko of Japan.

It has already bagged export orders through its collaborator for the supply of manual steering gears. The order, which is worth $35 million, is to be executed over a five-year period.

The company has also been identified as the sole supplier of manual steering wheel for Toyota's new vehicle to be launched globally.

The company has also expanded its capacity at its Chennai plant. This would place it in a better position to service Hyundai and other South-based customers.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Investment quiz

Copyright © 2004, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line