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Strong growth in ICE segment | EU recovers strongly, Asia declines

* SONACOMS’ 1QFY24 operating performance was in line. Its revenue/ EBITDA grew 24%/43% YoY. The company has won a new order worth INR13b in 1QFY24 (total order book was at INR220b) and salience of EV in order book has risen to 78%. Conventional start-motor is now just 11% of revenue.

* We raise our FY24E/25E EPS by ~4%/2.5% to factor in a healthy order book execution and higher margins. Maintain Neutral with a TP of INR600 (based on 45x Sep’25E consol. EPS) owing to its expensive valuation.

Operating performance in line; PAT surprised

* SONACOMS’ 1QFY24 revenue/EBITDA/adj. PAT grew ~24%/43%/51% YoY to INR7.3b/ INR2.0b/ INR1.1b. BEV revenue rose 13% YoY to INR1.8b (26% of total revenue), whereas ICE revenue jumped 28% YoY.

* Gross margin improved 240bp YoY/260bp QoQ to 56.9% (est. 54.6%), mainly driven by better mix.

* This coupled with operating leverage resulted in EBITDA margin expansion of 360bp YoY (+70bp QoQ) to 27.8% (vs. est. 27%). EBITDA grew 43% YoY to INR2.0b (est. INR1.97b).

* A better operating performance, along with lower depreciation, resulted in higher-than-expected adj. PAT at INR1.14b (+51% YoY, est. INR1.06b).

Highlights from the management commentary

* BEV revenue grew 13% YoY (-10% QoQ) to INR1.8b in 1QFY24 and revenue share was at 26% (vs. 28% in 4QFY23), hurt by reduction in FAME-2 subsidies for e-2W from Jun’23.

* Impact of FAME-2 incentive reduction on e-2Ws: As compared to its budget, the company estimated a loss of revenue of INR250m in 1QFY24 and INR1.0-1.2b in FY24. However, it expects traction motors business to be much bigger than ICE starter motor business in three years.

* Order book stable, despite orders going into execution: It won four new orders worth INR13b, taking the total order book to INR220b (vs. INR215b in 4QFY23). Of these orders, three were in EVs, which formed 78% of the order book.

* It is expanding capacity for traction motors from 400k to 600k, and putting up capacity of 500k for PCB at Chennai by investing ~INR1b. This capacity is for e-2W/3W traction motors as well as to cater to its partnership with Equipmake; the capacity will be ready by FY25.

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