Sona BLW Precision Forgings Ltd - Stock Valuation and Financial Performance

EBITDA Margin in the quarter was higher on some one-offs, long term guidance maintained at 25-27%.

About the Company:

Sona BLW Precision Forgings Ltd. (SONACOMS) is an auto ancillary with two well-established businesses in the form of Bevel Gears and Motors, which are essential components of electric and hybrid vehicles. As the global trend shifts towards battery electric vehicles (BEVs) and substantial increases in content per vehicle, SONACOMS' existing product portfolio for EVs compared to internal combustion (IC) vehicles, along with its new launches in the electrical motor segment, positions it to be the biggest beneficiary of this transition.

In 2019, Blackstone acquired a controlling stake in SONACOMS, also acquiring the Comstar entities, and the company adopted the brand name 'Sona Comstar.' With nine manufacturing and assembly facilities across India, China, Mexico, and the USA, three R&D centers, and eight warehouses, the company supplies its 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. SONACOMS is among the top ten players globally for the supply of bevel gears to PVs, CVs, and tractors and is also among the top 10 players in starter motor supplies to PVs. The company has a market share of 6.3%/4.6% for differential bevel gears/starter motors, respectively.

SONACOMS has developed a product portfolio tailored for EVs, including motors and gears, which are two of the five essential components of EVs. The company has already achieved significant leadership in the respective segments (gears and starter motors globally) with extensive focus on R&D spending. This puts SONACOMS in a better position to carry out more R&D on its EV-related existing products and offer more improved products to its customers.

About the Industry:

The Ricardo Report predicts a five-fold increase in global BEV production volume from 2.3mn units in CY20 to 11.2mn units in CY25, which accounts for 3.3% of total global vehicle sales. The company has significantly increased its portfolio of EVs, which now make up 62% of the net order book, while its reliance on pure ICE has decreased to 18% from 25% in the previous year. To stay ahead in the future-forward technology race, the company has introduced three new products in FY 2022. The global BEV DA industry is expected to grow at a CAGR of approximately 37%/33% in volume/value terms, respectively, over the period 2020-2025E. Although the company currently only supplies differential gear assemblies to global EV players, it is expected to expand its offerings to include electrical motor components with the launch of new products in this category.

About the Products:

(Source: Company Reports)

Revenue Mix:

Product Wise Breakup:

Geography wise breakup:

Breakup by Vehicle Segment:

(As per data for 9M FY23)

Business Performance:

Over the past 5 years, the company has achieved sales and profit growth rates of 31%/40% and 50%/50%, respectively. The company's ROE has ranged from 18-19% during this period, and has now increased to 21% in FY22. In Q3, the company achieved its best quarter in terms of revenue, EBITDA, and PAT. BEV revenue increased by 29%, while non-BEV revenue grew by an impressive 42%. The net order book has also increased by 35% YoY, totaling 23,800 Cr at the end of Q3, with 73% of orders for EV programs. While the company's global market share for starter motors has declined, its market share in differential gears continues to grow rapidly. The company recently secured a new order for electronically locking differential assemblies on EDLs, which represents the largest single new order win in the company's history.

About the Management:

Mr. Vivek Vikram Singh: Managing Director & Group CEO

Mr. Sunjay Kapur: Chairman

Mr. Vikram Verma Vadapalli: CEO, Driveline Business

Mr. Sat Mohan Gupta: CEO, Motor Business

Risks:

Slowdown in global car electrification pace along with slowdown in Auto sales amidst the on-going inflationary crisis around major geographies.

Inability to get PLI benefits to the desired extent.

Outlook:

Moving forward, the company is expected to generate increased revenue from BEV and hybrid vehicles instead of traditional vehicles. According to BP's Energy Outlook 2016 edition, a fleet of 71 million plug-in vehicles is estimated to be on the road by 2035. However, BloombergNEF's analysis of recent trends and sales data suggests that this target can be achieved by 2025, a decade earlier than initially projected. This acceleration in sales can be attributed to favorable government policies and increasing consumer awareness of climate change, which are expected to drive EV sales in the foreseeable future.

The electrification of commercial vehicles also presents a promising opportunity for the company as EV commercial vehicles require nearly twice the number of gears and have higher complexity than older vehicles. The International Energy Agency (IEA) predicts that global electric vehicle sales will reach around 15 million, accounting for approximately 15% of global light-vehicle sales by volume by 2025. By 2030, the IEA expects global electric vehicle sales to exceed 27 million, accounting for approximately 22% of light-vehicle sales.