The initial public offering (IPO) of Blackstone-backed Sona BLW Precision Forgings (Sona Comstar), an automotive technology company, has received a ‘subscribe’ rating from many analysts given the company’s strong product portfolio, expected growth potential in electric vehicle (EV) segment, sound research & development (R&D) base, healthy financial strength, competitive edge and sound global clientele.
The Rs 5,550-crore public issue, comprising fresh issue of Rs 300 crore and an offer for sale of Rs 5,250 crore by Singapore VII Topco III, opens for subscription on June 14. The price band for the offer has been fixed at Rs 285-291 per share.
The net proceeds from the fresh issue will be utilised for repaying debt of Rs 241.12 crore and general corporate purposes.
“Despite its rich valuations, considering its visibility of topline growth, competitive edge, superior profitability as compared to peers, prudent cost management, return ratios, wide clientele spread across the globe, sound R&D base and technological progress, we recommend investors to subscribe to this IPO of Sona Comstar for long term,” said LKP Securities.
ICICI Direct, Choice Broking and Canara Bank Securities also advised subscribing to the issue for long term.
“Sona Comstar provides an exciting play on electrification and possesses healthy financial strength (around 28 percent margins, around 20 percent RoCE-return on capital employed) but valuations proposed are rich (around 74x P/E on FY21 basis). Nevertheless, we believe the company offers a good investment case on the back of strong growth prospects,” ICICI Direct reasoned.
Also read – Sona Comstar IPO | 10 things to know before subscribing the issue
At higher price band of Rs 291, Choice Broking also feels the issue is at a premium to the peer average. “However if we compare it with EV-focused global peer, it is at discount. Thus, considering the growth potential in the EV segment and the company’s product portfolio spanning over all types of electrified power trains, we assign ‘subscribe for long term’ rating for the issue,” said the brokerage.
Sona Comstar designs, manufactures and supply highly engineered, mission critical automotive systems and components with global presence. The company has an expertise in precision forging technology that provides better yield, higher durability, better performance and scalability.
The company is well-diversified in terms of its revenue generation both across categories and geographies. The company generates 41 percent of its revenue from EV plus Micro hybrid / Hybrid segment, and 14 percent revenue from pure play Battery EV. It further plans to increase its EV share of revenue, going forward.
“The company is catering to fastest growing segments within auto space and we believe that the increased adoption of the EVs acts as a tailwind for the players like Sona Comstar,” said Canara Bank Securities.
It commanded 8.7 percent global market share in BEV (battery electric vehicle) differential assemblies as of FY21 and currently has eight EV programmes under serial production, with a pipeline of seven more for the future. The company is a prominent player in the domestic electric-2-wheeler space supplying traction motors to domestic original equipment manufacturers (OEMs).
The company has long-standing relationships of 15 years and more with 13 of its top-20 customers. According to the management, the company has not lost any customer till date.
Its global OEM portfolio includes Ashok Leyland, CNH, Daimler, Escorts, Escorts Kubota, Geely, Jaguar Land Rover, John Deere, Mahindra and Mahindra, Mahindra Electric, Maruti Suzuki, Renault Nissan, Revolt Intellicorp, TAFE, Volvo Cars and Volvo Eicher. They also serve selected leading Tier 1 automotive system suppliers such as Carraro, Dana, Jing-Jin Electric, Linamar and Maschio.
“Looking at the growth potential in the company we anticipate listing gains and give a ‘subscribe’ rating to Sona Comstar IPO,” said KR Choksey.
Despite global automotive slowdown in 2020, Sona BLW has reported a robust financial performance over FY18-20. EBITDA margin expanded by 76bps over the period. Reported PAT increased by 40.6 percent CAGR to Rs 215.2 crore in FY20 with 131bps expansion in the margin. The company reported a positive operating cash flow over FY18-20, with an average flow of Rs 175 crore.
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As of FY21 (nine months period ended on December 2020), consolidated sales were at Rs 1,566 crore with EBITDA at Rs 441 crore (margins of around 28 percent) and PAT at Rs 215 crore. Chief product lines include differential gears (contributed 27.8 percent to sales), differential assemblies (17.6 percent to sales), micro hybrid starter motors (26.7 percent to sales) and conventional starter motors (23.8 percent to sales).
Consolidated debt declined by 11.7 percent CAGR, leading to a net-debt to EBITDA ratio of 1x in FY20 as compared to 3.9x in FY18.
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