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Business diversification continues

View – Acquisition of EKL’s railway business to be long term positive

Acquisition of EKL’s railway division (RED) was in-line with co’s mission to expand beyond auto into broader mobility space. The transaction is valued at 1.6x EV/sales (FY24) for a total cash consideration of Rs16b is attractive for a business with revenue and EBIT CAGR of ~16%/~15% over FY19-24 with EBIT margins of ~19% in FY24. Despite, RED is market leader in railway braking, we believe synergies such as cross selling, new product pipeline to accrue only in the long term given long gestation. While we are yet to integrate RED financials, we expect it would incrementally contribute 14-15% to FY27 EPS. The business can potentially grow at 20% CAGR over FY24-27E, we believe.

Sona BLW (SONACOMS) 2QFY25 results were better as revenues and EBITDA were ~5% better to our estimates. EBITDA margins were in-line at 27.3% (-60bp YoY/ -70bp QoQ) is resilient, despite ESOP cost of Rs165m in 1HFY25 (vs Rs82m in 1QFY25 and Rs80m in 4QFY24). On the positive side, management comments around no major programs delay (apart from one each in Europe/India related to EV) while BEV revenue rampup continued despite moderating EV transition. Further, adjusted new order addition were at ~Rs12b (vs ~Rs11b/Rs12b/Rs20b/Rs13b/Rs5b/Rs42b/Rs4b/Rs28b/Rs6b orders added in previous 9 quarters). Co’s overall orderbook stands at Rs231b (vs Rs223b/Rs226b in 1QFY25/FY24). EV revenue mix during 2QFY25 were highest at 36% (Vs 33%/32% in 1QFY25/4QFY24).

SONACOMS revenue growth of ~17% YoY vs ~2% volume decline in light vehicle segment from top 3 markets is still healthy as it continues to serve as a proxy for the global electrification trend, focus on broadening the product portfolio, expanding global scale, and cultivating a diverse customer base. This should translate into strong earnings growth and capital efficiency. Hence, we expect revenue/EBITDA/Adj. PAT to grow 26-32% CAGR over FY24-27E. We have cut FY25/26 consol EPS by 1-2% to factor in for slow domestic growth (led by CV and OHV) and weak Europe/US OHT outlook. We remain neutral with TP at Rs682 (vs R690 earlier) given limited upside as valuations factors in positives.

Result Highlights – Steady quarter

* Consol revenues grew 17.1% YoY (+3.5% QoQ) at Rs9.2b (est ~Rs8.7b). Gross margins expanded 100bp YoY/-160bp QoQ at 55.9% (est 57%) led by favorable product mix and benign RM. EBITDA grew +14.6% YoY at Rs2.5b (est ~Rs2.4b, cons) with margins contracted by 60bp YoY/-70bp QoQ at 27.3% (est 27.5%).

* Led by higher other income at Rs239m (+15% YoY, +170% QoQ, est Rs90m), Adj.PAT grew by 18.1% YoY at Rs1.5b (est ~Rs1.3b).

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