Business as usual post PE exit; Well placed to ride electrification wave
We recently interacted with management of Sona BLW Precision Forgings (Sona Comstar) to gauge the business environment and concerns on management continuity post Blackstone’s exit. Key managerial personnel have been with the company for many years and have played instrumental role in building the company. Growth prospects remain robust and given the depth of the management team, we do not foresee risk in company’s ability to expand its product portfolio and grow profitably. Gradual easing in supply constraints coupled with strong net order book (INR 238bn as on Dec’22) is expected to support the growth going ahead. Softening commodity prices are expected to support margins going ahead (LT guidance (ex-PLI) remains in the range of 25-27%). We have reduced our revenue estimates by 3-5% over FY23E-25E owing to delayed start to new programs. We expect the company to post ~28% / 33% revenue / EPS CAGR over FY22-25E. We re-iterate our BUY rating and TP of INR665/share (DCF based). Key risks are delayed adoption of EVs and inability to win order for new products.
* Blackstone’s exit does not impact the growth prospects: Key managerial personnel have been with the company for several years and have played instrumental role in building the company to its current position. Management believes post Blackstone’s exit, as a shareholder, their responsibility, to deliver growth and healthy returns, has increased towards existing and incoming shareholders. Basis customers EV program, growth prospects remains strong and we do not foresee risk in company’s ability to expand its product portfolio and grow profitably
* Rising EV contribution; well positioned to benefit from global electrification: Sona’s EV revenue share has risen from 14% in FY21 to 25% for 9MFY23. As on December’22, Sona has won 41 new EV programs from 25 customers across product portfolios from Indian and global OEMs and c.75% of these are yet to start. Strong EV order book of INR238bn provides high growth visibility. We believe it will be one of the key beneficiaries of rising global electrification given its technology and cost advantage vis-à-vis its peer.
* Novelic acquisition to expand addressable opportunity: With the recent acquisition of majority stake in Novelic, Sona Comstar has forayed into ADAS sensor market. Globally, ADAS sensor market is expected to grow to USD43bn (from USD 13bn currently). Upcoming safety regulations (for Child presence detection) in developed markets is expected to drive the growth. Acquisition is expected to be EPS accretive from year 1.
* Receding supply constraints to support growth: Commentaries from global OEMs and components suppliers indicate gradual improvement in semiconductor chip supplies going ahead which augurs well for Sona and will support the growth going ahead.
* Softening RM prices to support margin; PLI incentives may provide a fillip: Recent softening in key raw material prices, is expected to support margins. Further, Sona’s key EV products – differential assemblies and tractor motors, are eligible for PLI incentives which can aid its margin by 300-400bps over FY24-28 (likely years of receipt), in our view
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