About two years ago, the management of India’s largest steering systems manufacturer Sona Koyo Steering Systems Ltd (SKSSL) had set the target of achieving a top-line of $115 million (Rs. 500 crore) by financial year 2006-07 (FY’07). The latest quarterly results of the company suggest that it is set to exceed the target by a big margin. In fact, it has achieved the annual sales target in the first nine months of FY’07 itself.

Sona Koyo, a technical and financial joint venture company of Japan’s Koyo Seiko Company, the global technology provider of steering systems, is an ideal representative of the growth and future potential of India’s auto ancillaries industry.

The Government of India has chalked out a roadmap to attract $40 billion investment in the auto sector over a period of 10 years. The Auto Mission plan (AMP-2006-2016) announced by Indian Prime Minister Dr. Manmohan Singh on Monday, January 29, 2007 aims at making India an auto design, manufacturing and exports hub, and envisages a turnover of $145 billion by 2016 in the sector. The current size of the Indian automobile industry is about $35 billion. A great thrust has been given to exports with the target of taking the automobile exports from India to $35 billion in the next 10 years from the current export turnover of $4.1 billion.

It might sound ambitious, but the growth of the Indian automobile and auto ancillary companies makes us believe that it’s actually a mission possible. Look at the results of Sona Koyo itself. It’s sales in the third quarter (October-December 2006, Q3FY07) of the current fiscal grew 84.5% year-on-year (YoY) to reach at $41.16 million (Rs.181.12 crore) compared with $22.31 million (Rs.98.18 crore) in the same quarter previous fiscal. The net profit of the company was up 88% at $1.5 million (Rs.6.6 crore) from $800,000 (Rs.3.5 crore) YoY. The profit after tax excluding extraordinary items was at $1.22 million (Rs.5.35 crore) compared with $940,000 (Rs.4.15 crore), up 29% YoY. There was an extraordinary gain of $290,000 million (Rs.1.28 crore) on account of foreign currency loan translation during the third quarter this fiscal.

Despite good growth in sales, however, Sona Koyo faced a slide in its EBIDTA margin this quarter, which fell to 8% in Q3FY07 from 10.35% in Q3FY06. In fact, the EBIDTA margin had gone up to 11.77% in Q4FY06, but slipped in the range of 8%-8.5% in the subsequent quarters. Company has recently changed its product mix with the commencement of electronic power steering (EPS) column supplies, which pushed its sales growth but resulted in lower margins. The objective of making this change in the product mix was to transform the company from a steering-gear-column supplier to a complete steering systems provider. The shift is not offering it a better margin right now because some of the critical parts such as electric motor and control systems are sourced from abroad based on client determined criteria. The company expects to benefit from this transformation in future when indigenisation would reduce its costs.

SKSSL has ambitious expansion plans and its new plant at Dharuhera in the north Indian state of Haryana is expected to commence commercial production by March’07. It is also expanding capacity at its plant in Chennai, the capital city of the south Indian state of Tamil Nadu where the additional capacity is scheduled to be added in the second quarter of fiscal year 2007-08. Analysts believe that the expansion plan will work out in favour of company’s long term prospects in the backdrop of the fast growing domestic automobile industry. In fact, the new production facilities will start adding to the sales as soon as they commence operations. The company has already secured new orders worth nearly $18 million (Rs.80 crore) on annualized basis during the third quarter this fiscal. 

Sona Koyo had announced investment plans of $91 million (Rs.400 crore) in February 2006, resulting in a total capacity of 3 million pieces of manual steering gears, half a million hydraulic power steering gears, 0.25 million of EPS and double the present capacity for Steering columns to 2 million parts from 1 million over a period of 4 years. With this expansion, the company has set a sales target of $230 million (Rs.1000 crores) by 2010, about double from the sales of current fiscal year.

With more than 45% domestic market share, Sona Koyo is the largest manufacturer of steering gears in India and is the leading supplier of Hydraulic Power Steering Systems, Manual Rack & Pinion Steering Systems and Collapsible, Tilt and Rigid Steering Columns for Passenger Vans and MUVs. Growth drivers of the company include Hydraulic and electronic power steering system, Maruti Udyog Ltd, India’s largest car manufacturer sourcing EPS for its B-segment cars and 100% supplier of column type EPS to Maruti's Alto, Wagon R and Versa since Q4FY06.  At present, it has plants at Gurgaon (near Delhi) and Chennai. The Gurgaon plant is 38 kilometers away from Delhi and 10 kilometers away from the plant of its largest customer Maruti Udyog.

To partly fund the expansion plans, the company has raised Rs. 98 crore ($22 million) via preferential issue of equity and warrants to promoters. Company has allotted 4,396,700 nos. of Equity Shares of 4.5 cents (Rs.2 each) and 7,040,216 nos. of convertible warrants (to be converted into Equity Shares within a period of 18 months) at the issue price of $1.52 (Rs.67.10) per Share Warrant in the third week of January 2007, on preferential basis, to the promoters and the collaborators.

With the excellent growth outlook for the domestic automobile industry, and the new opportunities arising out of the export markets, Sona Koyo is well poised to leverage its leadership position in the Indian auto ancillaries market. The only worrying factor for an analyst would be its dependence on its largest client Maruti Udyog Ltd., the largest car maker of India. Although Sona Koyo has made efforts to reduce its dependency on a single client, Maruti still accounts for about 60% of its total revenue.