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Upward revision in EBITDA margin guidance

Valuation and View

Sona BLW (SONACOMS) 3QFY24 results were better as EBITDA/PAT exceeded our estimates by 11-13%, led by better than expected EBITDA margins at 29.7% (est 27.4%, +180bp QoQ, 13 quarter high). This was led by operational efficiencies and benign RM costs. We believe the operating performance were healthy given UAW strike led to Rs250mn revenue impact in Oct-23, which is now resolved and will partially reverse in 4QFY24. On the positive side, the key highlight of the quarter was, 1) the new order wins for Integrated Motor Controller (IMC) for EV 2W segment and 2) upward revision in EBITDA margins guidance to 28%+ in the near term (vs earlier guidance of 25-27%). Adjusted New order addition came in healthy at ~Rs20b (v/s Rs13b/Rs5b/Rs42b/Rs4b/Rs28b/Rs6b orders added in previous 6 quarters). Co’s overall orderbook stands at Rs240b (v/s Rs221b QoQ and Rs215b/Rs186b in FY23/FY22). Sona’s EV revenue mix during 3QFY24 were at 30% (v/s 27%/26% in 2QFY24/1QFY24).

The management guided majority of new programs would go into production in 1-2 quarters. On the other hand, with RM headwinds receding, coupled with benefits of operating leverage should help margins expansion over FY23-25E. Hence, we expect revenue/EBITDA/Adj. PAT to grow 27-42% CAGR over FY24-26E. We haven’t change our FY24E/25E EPS and have maintained an ADD on the stock with TP at Rs684 (unchanged) given limited upside led by recent valuations expansion.

Result Highlights - Favorable product mix drive EBITDA margins

? Consol revenues grew 15.8% YoY (-0.7% QoQ) at Rs7.8b (est Rs7.6b, cons Rs8.3b) outperforming underlying light vehicle industry growth of ~13%.

? Gross margins expanded 430bp YoY/ 450bp QoQ at 59.4% (est 55.2%) partially offset by higher than expected employee cost at Rs732m (est Rs600m) due to ESOP cost under the newly approved scheme.

? Consequently, EBITDA came in better at Rs2.3b (+31.8% YoY/ +5.7% QoQ, est Rs2.1b, cons Rs2.29b) led to margins expansion of +360bp YoY/ +180bp QoQ at 29.7% (est 27.4%, cons 27.6%).

? Led by steady operating performance, Adj.PAT came in at Rs1.33b (+24.7% YoY/ +4% QoQ, est Rs1.18b, cons Rs1.32b).

? 9MFY24 performance – Revenue/EBITDA/Adj.PAT grew 20.3%/37.9%/36.6% to Rs23b/Rs6.6b/Rs3.7b.

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