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Operating performance beat est, led by reduced RM cost and favorable product mix

EBITDA margin guidance revised to ~28% from earlier guidance of 25- 27%

SONACOMS’ 3QFY24 resultssurpassed our estimates, led by better product mix and lower RM costs, resulting in an EBITDA margin of 29.3% (vs. est. 27.8%). Although the operational performance was healthy, we expect the margins to moderate in the future as RM costs and product mix normalize. The company’s focus on expanding in EVs continue with BEV contributing ~30% to the revenue (vs. 26%/27% in FY23/2QFY24). 

We largely maintain our FY24E/25E EPS. We believe the current valuations of ~64.6x/49x FY24/25E EPS factor in its strong EV order book as well as superior earnings and return profile. We reiterate our Neutral stance on the stock with a TP of INR610 (based on ~45x Dec’25E consol EPS).

Higher employee costs dent EBITDA margin expansion

SONACOMS’ 3QFY24 revenue/EBITDA/adj. PAT grew ~13%/22%/25% YoY to INR7.8b/ INR2.3b/INR1.33b. BEV revenue rose 28% YoY to INR2.2b (30% of total revenue), whereas ICE revenue jumped 8% YoY. 9MFY24 revenues/EBITDA/adj. PAT grew 19%/32%/37% YoY.

Gross margin expanded 330bp YoY to 59.1% (est. 55.7%) due to better mix and lower input cost.

However, this was offset by higher-than-est. employee expenses (up 240bp YoY; as a % of sales) on account of a newly approved ESOP scheme, causing an impact of INR58m and resulting in an EBITDA margin of 29.3% (up 210bp YoY vs. est.27.8%). Excluding the impact of the ESOP scheme, margins would have been 30%. EBITDA grew 22% YoY to INR2.3b (est. INR2.2b).

Additional advantages from the expansion of EBITDA margin were transferred to PAT, which stood at INR1.34b (vs. est. INR1.3b).

The board has declared an interim dividend of INR1.53/share for FY24.

Highlights from the management commentary

Outlook: The NA and EU light vehicle markets appear promising going ahead, with major OEMs focusing their attention on electrification. Further, favorable tax rebates for NA customers would propel EV adoption. In contrast, the India market remains a mixed bag with CVs anticipated to experience a decline due to election year and weakness in the off-highway segment. However, PVs are expected to remain stable. The current impact of the Red sea crisis remains negligible; however, it may lead to higher inventories and longer delivery time to NA and EU customers.

BEV contributed 30% of the revenue (vs. 27% in 2QFY24) at INR2.2b in 3QFY24, resulting in 28% YoY growth.

Added 5 new EV programs (including 2 new EV customers)

Added a new product- Integrated motor controller which would be supplied to e-2W OEMs. The product has a compact design and better thermal management system, which would improve electric powertrains.

Valuation and view

After a challenging FY23, SONACOMS is firmly back on a growth trajectory, led by the recovery in underlying markets and a strong order book. SONACOMS continues to serve as a reliable proxy for the global electrification trend, with a ~30% revenue mix from EVs and a ~79% representation in the order book. Moreover, its focus on broadening the product portfolio, expanding global scale, and cultivating a diverse customer base should translate into strong earnings growth and healthy capital efficiency. 

However, valuations at ~65x/49x FY24E/FY25E consol. EPS largely factor in these positives. We reiterate our Neutral stance on the stock with a TP of INR610 (based on ~45x Dec’25 consol. EPS).

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