Sona BLW capitalising on EV growth in long term

Sona BLW Precision Forgings Limited is tapping the capital markets with its fresh issue of Rs 300 crore and an offer for sale of Rs 5,250 crore in a price band of Rs 285-291. The issue has opened on Monday the June 14 and would close on Wednesday the June 16. The company had on Friday allotted 8.58 crore shares to anchor investors at Rs 291. The highest allocation of 16.1 per cent was made to Government of Singapore and its associate, Monetary Authority of Singapore. This was followed by a similar 7.1 per cent to SBI Mutual Fund, Axis Mutual Fund and Aditya Birla Sunlife Mutual Fund.

The company is promoted by Sona group and private equity investor Blackstone who own a third and 2/3rd of the company respectively. The offer for sale is from Blackstone, post which there would be no overhang of further sale by promoters to maintain listing requirements. The company is a leading automotive technology component manufacturer, supplying mission critical complex systems and components for both electrified and non-electrified powertrain segments. It supplies components for passenger vehicles, commercial vehicles and off-highway vehicles. Off its total revenues, 14 per cent comes from battery electric vehicles while 27 per cent comes from hybrid vehicles.

Currently one out of 12 battery electric vehicle in the world uses differential assembly manufactured by Sona Comstar. The company has 15 development programmes for supply of components to EV OEMs of which supplies are happening through eight of them. They have won 58 programs from 27 customers, many of which programs would be starting in FY 2021 onwards. The per vehicle requirement of components supplied by Sona Comstar increases progressively when supplied instead of IC Engine vehicle to a hybrid vehicle and is highest when supplied to a battery vehicle. With the demand for electric vehicles expected to grow sharply, globally from just about 8 per cent now to 33 per cent in 2025, the opportunity, potential and expected profits of Sona Comstar could be huge. Further, during this same period from 2020-2025, the global automobile production is expected to grow from 70 million to 92 million. The company has reported revenues of Rs 1,566 crore for the year ended March 2021 on a consolidated basis. The company has best in class margins when compared to all its peers in the auto component segment. It had EBITDA margins of 28 per cent for the year ended March 2021 and return on equity of 36 per cent. It reported a profit after tax of Rs 215 crore and the margin was 14 per cent. Margins as compared to peers are more than double than the industry average.

The PE multiple at which shares are being offered is Rs 76-77.60. At first glance this looks expensive but when compared to the peer group, the view changes. Companies like Bosch, Bharat Forge, Minda and Wabco are some of the companies whose present price is quoting at a higher multiple than Sona. Companies like Motherson Sumi and Mahindra CIE are slightly cheaper than Sona Comstar.

The one issue that I found as a cause of concern was the top line of the company. At a top line of just about Rs 1,566 crore, it looked like a small company compared to its valuations and peer group. On doing a deep dive into the company I found, that things have just started taking shape for the company. In the fourth quarter of FY21, the company had a revenue of Rs 540 crore which translates into a top line of 2,160 crore for the next four quarters.

Taking a conservative growth of other businesses, it would be fair that the company's top line in FY22 would be Rs 2,400 crore. Assuming a growth of 30 per cent, this would be Rs 3,100 crore in FY23 and Rs 4,000 crore in FY24 as a base case. The margin that is enjoyed at the PAT level being taken as constant would result in a profit after tax of Rs 560 crore or an EPS of Rs 9.76. This would correspond to a PE multiple of 29.8 times.

Considering the above numbers, one should invest in the company only if, one is convinced about the future of electric vehicles and that in the next 4- 5 years the way forward would be battery powered vehicles in a phased manner. If you are convinced about this, this is the company to invest in. The investment should be for the medium to long term only. In case short term gains accrue, they should be treated as a bonus.