About the company:
The Auto Component manufacturer Sona BLW Precision Forgings aka Sona Comstar is set to hit the Dalal Street from 14th of June and will remain open till 16th of June 2021. The Forging player is looking to raise Rs.5,550 cr via a combination of offer for sale of close to Rs.5,250 cr and Fresh Issue of Rs.300 cr which will give it a market cap of close to Rs.17,000 cr (higher upper band). The price band is fixed at Rs.285 – Rs.291 per share for a lot size of 51 shares per lot bid.
Objects of the Offer:
Blackstone’s Fund Singapore VII Topco III Pte. Ltd is one of the largest shareholder in the company (66.28%) and is now looking to sell half of its stake via OFS route despite that it will still own 33% stake in the company. The objects are 1) Repayment and pre-payment of identified borrowings in full availed by the company and 2) General corporate purposes. Further, the company expects that the listing of the equity shares will enhance its visibility and brand image among their existing and potential customers. The selling shareholder (Singapore VII Topco III Pte. Ltd.) will be entitled to the proceeds from the offer for sale (Rs.5,250 will go to Blackstone). The company will not receive any proceeds from the offer for sale.
Company Overview:
Sona BLW Precision Forgings Ltd is one of India’s leading automotive technology companies, designing, manufacturing and supplying highly engineered, mission critical automotive systems and components such as differential assemblies, differential gears, conventional and micro-hybrid starter motors, BSG (Belt-driven starter generator) systems, EV (electric vehicle) traction motors (BLDC - Brushless direct current and PMSM - Permanent magnet synchronous motor ) and motor control units to automotive OEMs (Original equipment manufacturer) across US, Europe, India and China, for both electrified and non-electrified powertrain segments. Sona Comstar has been supplying differential gears in the global EV market since April 2016 and differential assemblies since 2018. The company supplies differential assembly as well as the e-axle in electric cars and 3Ws and sees huge opportunity for medium to long term due to faster adoption of EVs worldwide. Electric vehicle (EV) drivetrains are more complicated than conventional powertrains, This in turn results in higher price realization for differential gear assembly in EVs than conventional powertrains. The company’s global market share of BEV differential assemblies in CY20 was 8.7%. Sona BLW Precision Forgings Ltd is also amongst the top ten global starter motor suppliers based on their exposure to the PV segment and market share in calendar year 2020, according to the Ricardo report.
The company has been gaining global market share across products to reach a share of approximately 5.0% for differential bevel gears, 3.0% for starter motors and 8.7% for BEV (Battery Electric Vehicle) differential assemblies, in calendar year 2020, according to the Ricardo Report. Sona BLW Precision Forgings Ltd has nine manufacturing and assembly facilities across India, China, Mexico and USA, of which six are located in India, from where they supply their products to six out of the top ten global PV OEMs, three out of the top ten global CV OEMs and seven out of the top eight global tractor OEMs by volume, according to the Ricardo Report. The company is a global supplier and it derived 75.0% of its income from sale of goods with end-use in the overseas markets, including 36.1% in North America, 26.5% in Europe and 7.6% in China and 25.0% of its income was derived from sale of goods with end-use in India, for Fiscal 2021. The company has a well-diversified revenue stream with 59% revenue from ICE, 14% pure electric vehicle and 27% more coming from hybrid and micro hybrid.
Financials:
Sona Comstar has delivered a strong revenue CAGR growth of 50 percent during FY19 to FY21 and its net profit from continuing operations clocked a 47 percent CAGR from FY19-21 which stood at Rs. 215 crore in FY21 aided by a sustained CAGR growth of 49 percent in its operating profits despite unusual year of FY21 which was impacted due to COVID-19. It maintained highest operating margins between 25-28 percent in FY19-FY20 as compared to its global peers average of 18 percent.The company has a strong margin profile due to its critical and diversified components offerings, in India as well as globally. In addition, the company makes superior return ratios. In FY21, the company’s ROE & ROCE stood at 17 percent and 20 percent respectively as compared to established players like Bosch, Bharat Forge and Motherson sumi which stood in the range of 7-12 percent only.
Risks:
• The company’s business is dependent on the performance of the automotive sector globally, including key markets such as US, Europe, India and China. Any adverse changes in conditions affecting these markets can adversely impact business, results of operations and financial conditions.
• High Customer Concentration (80 percent of revenues comes from Top 10 customers and for Top 2 its 32 percent). Sona Comstar’s business largely depends upon top ten customers and the loss of such customers or a significant reduction in purchases by such customers will have a significantly adverse impact on the business.
• High Trade Receivables during FY21 (27 percent of FY21 Revenues)
Valuations & View:
Despite being in the highly cyclical auto ancillary industry, the company has been able to maintain its margins in the 26 – 28 percent range. Sona Comstar has also spent a significant percent of sales on R&D and plans to increase its focus on the precision EV space. It currently has 14 percent of its revenue from Battery EV’s and 27 percent of its revenues from Hybrid EV’s and plans to increase this number going ahead. Considering the company’s diversified product and revenue mix and significant spends on R&D (5.8 percent of FY21 Revenues) it is well-positioned to capture the market opportunity in the growing auto components and especially EV Battery space. At the upper price band of Rs.291 the issue is valued at 79x as compared to its Indian peers which are valued in the range of 72x to 93x however, the issue looks highly priced at a P/BV of 13x and P/Sales of 11x which may impact deter some investors however, With its diversified product mix the company looks well-positioned to capture the growing Battery EV market in developed as well as developing countries.
Therefore, We at Samco Research recommend investors to subscribe this IPO for listing gains only.
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