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Margins improve QoQ despite railway division integration

Steady performance amid challenging macro

* SONACOMS’ consol. revenue/EBITDA/adj. PAT rose ~24%/13%/11% YoY to INR11.4b/INR2.9b/INR1.7b. 2Q results are not comparable to our estimates as it was the first quarter after the railway division integration, while our estimates factored in the core business. EBITDA margins fell 230bp YoY to 25.3% due to an adverse mix, lower operating leverage and the integration of the railway business

* We earlier valued the railway division separately. However, given that the company would not be disclosing segmental financials, we have now integrated the railway division’s financials into our estimates. As a result, we have upgraded the earnings estimates by 27%/20% for FY26/FY27. However, this would also warrant a de-rating for the consolidated entity, in our view. Hence, we lower our target multiple for the consolidated entity to 34x from 36x earlier for the core. As a result, our TP now stands at INR448 per share (valued at 34x Sep’27E EPS). Maintain Neutral.

Full integration of railway division seen in 2Q

* The company’s 2Q financials are not directly comparable with our estimates, as we had estimated financials for the core business, excluding the railway division. However, the company has now fully integrated the railway business acquired from Escorts Kubota and has not divulged details separately. Hence, a like-for-like comparison with our estimates and with last year’s financials is not possible.

* Consol. revenue/EBITDA/adj. PAT rose ~24%/13%/11% YoY to INR11.4b/INR2.9b/INR1.7b. Revenue growth was largely driven by the integration of the railway division.

* BEV revenue was down 17% YoY, with BEV contribution falling to 30% in 1HFY26 from 36% YoY.

* EBITDA margins fell 230bp YoY to 25.3% due to an adverse mix, lower operating leverage and the integration of the railway business.

* Overall, 2Q PAT grew 13% YoY to INR1.7b.

* For 1HFY26, revenue/adj. PAT grew 9.7%/2.1% YoY, while EBITDA fell ~3%. We expect revenue/EBITDA/PAT to grow ~35%/30%/23% YoY in 2HFY26.

* The company generated a cash flow from operations (CFO) of INR3.4b in 1H and incurred a capex of INR2b. FCF stood at INR1.4b. Cash balance stood at INR10b as of Sep’25.

Highlights from the management commentary

* The company won new orders worth INR10b in 2Q, and the net order book stood at INR236b (6.6x FY25 revenue). EV mix in this order book was 70%.

* New order wins in 2Q included: 1) first order for its driveline plant in Mexico to supply differential assemblies to an existing customer, a North American OEM of recreational off-highway vehicles worth INR2.6b, with SOP from 2QFY28, and 2) two more programs to supply its integrated motor controller modules for the active suspension systems, one from existing Asian EV maker (INR6.4b) and other from European luxury PV OEM (INR1.8b).

* The company has signed an MoU with Neura Robotics (Germany) to jointly develop advanced technologies, components, and subassemblies for robots and humanoids targeted at India and other agreed markets. The addressable market for these products could be bigger than the automotive industry size in the next 15 years.

* Three direct driveline competitors in the EU have filed for insolvency in the past six months. Sona BLW is emerging as a key beneficiary of the same, as it is seeing a meaningful rise in customer RFQs for new business.

Valuation and view

* We earlier valued the railway division separately. However, given that the company would not be disclosing segmental financials, we have now integrated the railway division’s financials into our estimates. As a result, we have upgraded the earnings estimates by 27%/20% for FY26/FY27. However, this would also warrant a de-rating for the consolidated entity, in our view. Hence, we lower our target multiple for the consolidated entity to 34x from 36x earlier for the core. As a result, our TP now stands at INR448 per share (valued at 34x Sep’27E EPS). Maintain Neutral.

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