Sona BLW Precision Forging

IPO Detailed Review- 5 Point Analysis

Introduction:

The Rs.5,550 Cr. IPO by Blackstone-backed Sona BLW Precision Forgings (Sona Comstar) opened for subscription from today. Sona BLW is a play on the EV (electric vehicle) theme. Here is a 5 point analysis of the Sona BLW IPO review.

1. IPO Details:

• The IPO Subscription window for Sona BLW is opened between 14^th June 2021 to 16^th June 2021.
• The Price Band of the IPO ranges between Rs 285 to Rs. 291 per equity share. The Face Value of Equity Share is Rs. 10 per equity share.
• With this Initial Public Offering, the company plans to raise a total of Rs. 5,550 Cr. Out of the total issue size, the fresh issue is just Rs. 300 Cr., while the rest Rs. 5,250 Cr. consist of an Offer for Sale.
• Through the IPO, the Private Equity Investor is exiting its whole stake, while the promoter is not diluting any kind of stake, which is a positive sign.
• In 2018, Investment by Singapore Topco, an affiliate of the Blackstone Group was done which provided them with a 66.28% stake in the company. And now, via this IPO, Singapore Topco is offloading its 50% of the total stake i.e., 33.14% worth Rs. 5,250 Cr.
• The Promoter is and will be holding a 33.72% stake in the company
• The objective of the Fresh Issue will be utilized for paying debt worth Rs. 241 Cr. and the rest will be used for General Corporate Purposes.
• The Reservation Quota of the Investors are as follows: Qualified Institutional Buyers (QIBs)-75%, Non-Institutional Investors (NIIs)- 15%, and Retail Investors- 10%
• Lot Size of the IPO includes 51 shares in a single lot and multiples thereof up to 13 lots.
• The Stock will be listed on BSE as well as NSE.

2. Company Overview:

• The company was Incorporated in 1995, as a Joint Venture with Mitsubishi Metal Corporation Ltd
• In 2016, there was a Termination of Technical know-how agreement with Mitsubishi Metal Corporation.
• Sona Comstar is One of India’s leading automotive technology companies with the brand name of Sona Comstar.
• The Company is engaged in designing, manufacturing, and supplying both electrical and non-electrical powertrain for the automobile sector
• Sona BLW is among the Top 10 Global Differential Bevel Gear Suppliers, Among the Top 10 Global Starter Motor Suppliers for PVs, and the Largest manufacturer of differential gears for PVs, CVs & Tractors in India. This shows the strong Global and Domestic Positioning of the company.
• The company has increased focus on Electric Vehicles (EVs constitute 14% of Revenue).
• Key Original Equipment Manufacturers (OEMs) Customers of the company are North Americal PVs and CVs maker, Ashok Leyland, Daimler, Escorts, Mahindra and Mahindra, Mahinda Electric, Maruti Suzuki, Renault Nissan, and Volvo & Volvo Eicher.
• The company is having a total of 9 Manufacturing & Assembly facilities – 6 in India and the rest 3 in China, Mexico, and the USA.
• As per Ricardo’s Report dated 15/02/2021, Sona Comstar is having an 8.7% market share in the global market in Battery Electric Vehicle (BEV) Differential Assembles, 5% Globally in Differential Bevel Gear, and lastly 3% market share in the global market in the Starter Motor.

3. Financial Performance:

i) Revenue Growth & Revenue Mix:

• The revenue growth of the company for the last 3 years has been at 8.6% on a CAGR basis i.e., from Rs. 1,224 Cr. in FY18 to Rs. 1,428 Cr, in FY19, and Rs. 1,220 Cr. in FY20. The revenue of the company stood at Rs. 1,566 Cr. in the FY21.
• But in the last 1 year, Revenue has grown by around by 25%, which is a good sign.
• As of FY21, the North America business contributes the highest 36.1% of the total revenue, then comes the Europe business which contributes 26.5% of the revenue, India business contributes 25% to the company’s revenue, 7.6% of the revenue generated from China business, and rest 4.8% received from other countries.
• Accordingly, this shows that the company is having a well-diversified business where 75% of the revenue of the company comes from the export and the rest 25% is generated from domestic business.

ii) Consistently Rising Share of EV in Revenue Mix

• In FY19, Battery Electric Vehicles (EVs) were contributing just 1.3% of the total revenue. But now, as of FY21, its contribution stands at 13.8% of the total revenue.
• The same phenomenon has been noticed in the Hybrid segment, where its contribution has increased from 17% in FY19 to 26.7% in FY21.
• The growth in revenue contribution by these segments is a big shoot-up for the company which also shows that there is a rising share of Electrified Powertrains.
• On the contrary, the revenue contribution of Conventional Powertrains like Power Source Neutral and ICE Dependent has gone down over the 2 years.
• In FY19, Power Source Neutral contributed 47% of the total revenue which now contributes 34.4% of the revenue, as of FY21.
• Likely, the revenue contribution of ICE Dependent has gone down from 34.7% in FY19 to 25.1% in FY21.

iii) EBITDA & EBITDA Margin:

• The EBITDA of the company has grown at a CAGR rate of 8.5% in the last 3 financial years.
• The EBITDA of the company was Rs. 345 Cr. in FY18, Rs. 415 Cr. in FY19, Rs. 325 Cr in FY20, and Rs. 441 Cr. in FY21.
• The EBITDA Margins stand strong at 28.2% in FY21.
• The EBITDA margins of Sona BLW have remained consistent and at a strong level over the last 3 years.

iv) Net Profit:

• The Net Profit growth of the company in CAGR terms is just 7.7% in the last 3 years.
• The Net Profit of the company was: FY18- Rs. 172 Cr., FY19- Rs. 213 Cr., FY20- Rs. 222 Cr., and FY21- Rs. 215 Cr.
• The company witnessed a downfall in its Net Profit Margins from 18.2% in FY20 to 13.7% in FY21.

v) ROCE & ROE:

• Currently, the Return on Equity (ROE) of the company stands at 36.4% which has been consistent over the years.
• The Return on Capital Employed (ROCE) of the company is 34.8%  as of FY21.
• The ROCE of the company was 40.3% in FY19 but now it has come down to 34.8% due to a steep rise in debt.
• An increase in the Total Borrowings of the company was as follows: FY19- Rs. 146 Cr., FY20- Rs. 307 Cr., and FY21- Rs. 366 Cr.

4. Peer Comparison:

• Among all its peers, Minda Industries has only reported strong double-digit growth of 17.3% in Revenue on 3 Years CAGR basis. Sona BLW obtains the second position in the list with revenue growth on 3 Years CAGR basis of 8.5%.
• Moving to the Net Profit Growth on 3 Years CAGR basis, Endurance Tech reserves the top position with 8.7%, and then comes the Sona BLW with 7.7% net profit growth. All other companies have reported negative Net Profit Growth.
• In FY21, Sona BLW has registered the highest Operating Margins among others of 28.2%.
• In terms of ROCE & ROE also, the company registers the first position among other competitors and registered the highest figures of 34.8% & 36.4% respectively. All other players are far away from these strong double-digit return ratios.
• Also, the company spends the second-highest % of turnover on Research & Development among all other players. In FY21, Bosch spent 4.4% of turnover on R&D, while Sona BLW spent 3.3% of the turnover.

5. Valuation:

• As per the EPS of FY21 of 3.76 and the upper range of the price band i.e., the PE ratio of Sona BLW stands at 77.6.
• Currently, the PE ratio of the company is a little stretched.

Conclusion:

Looking at the emerging opportunity in the Electric Vehicles’ Industry, the company has the potential to grow well in the future. There is great scope of growth and growth in earnings in this industry. The company is already having a significant market share in the global market and with the emerging EVs Industry, this company may get a first-mover advantage. As of now, there is a very little Grey Market Premium of 4%-5%. Hence, for Investors looking for listing gain, there is not much scope available in this counter, but those who are looking for this IPO for the longer term, should keep this stock on the radar and should do proper research before investing.