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Good performance in a challenging quarter!

EV segment ramp up in fifth gear!

SONA’s 4QFY22 operating performance was slightly above estimates led by better-than-estimated topline. Ramp-up in the EV segment continued strongly, with its contribution to revenue/order book at 29%/ 62% in 4QFY22, respectively, supported by new order wins. Near-term challenges on chip shortage, risks from China lockdowns and commodity prices will keep margins under check despite expected strong revenue traction.

We upgrade our FY23E EPS by 5% to account for revenue growth while we retain our FY24E EPS. Reiterate Neutral with a TP of INR640

RM costs restrict margins, but tax refunds boost PAT

SONA’s 4QFY22 revenue/EBITDA/PAT grew 2%/-3%/29% YoY to ~INR5.5b/INR1.4b/INR0.9b, respectively. Its FY22 Revenue/EBITDA/PAT rose 36%/27%/39% YoY to INR21.3b/INR5.6b/INR3.4b, respectively.

While revenue from BEVs grew 104% YoY, non-BEV revenues declined 14% as it was impacted by chip shortages.

Gross margin contracted 240bp QoQ (-200bp YoY) to 55.1% (v/s est. 54.6%). While product mix contributed 200bp to margins, RM cost inflation led to 340bp YoY contraction (240bp due to base effect where RM cost was passed on and 80bp where RM cost was not passed on).

EBITDA margin declined 180bp QoQ (-140bp YoY) to 24.6% (v/s est. 24.4%) as lower employee costs were offset by higher other expenses. EBITDA declined 3.4% YoY (+3.7% QoQ) to INR1.4b (v/s INR1.28b).

Further, Adj PAT rose 48.4% YoY (21% QoQ) to ~INR0.91b (est. INR0.63b).

The Board declared a final dividend of INR0.77/equity share

Highlights from the management commentary

Outlook: The management guided for strong revenue growth in FY23E led by execution of EV programs in hand. This is without any tailwind from the underlying industry and despite macro issues.

It has made progress in expanding product portfolios in both gears (addition of spool gears and epicyclic sets) and in traction motors (recent tie-ups with Enedym and C-Motive, in addition to tie-up with IRP (Israel)), resulting in an expansion of end-use case under different EV applications.

RM cost inflation: Margins to remain under pressure over the next 2-3 quarters, as RM cost continues to increase.

Supply chain: Chip shortages are expected to continue for at least the next 3-4 quarters. China lockdown is a bigger challenge and global supply chain will take a big hit if China does not open by end-May’22.

Valuation and view

While BEV driveline would continue to drive growth complemented by addition of new products, traction motors have started to gain traction with new customer additions (ramp-up from FY23E).

However, valuations at 77.8x/48x FY23E/FY24E consolidated EPS largely factor in these positives. Maintain Neutral with a TP of INR640 (premised on ~50x FY24E consol. EPS).

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