Sona Comstar Ltd – Key Supplier to EV OEMs


Company Name – Sona BLW Precision Forgings Ltd (Sona Comstar)

Current Share Price – INR 559 (June 29, 2022)


Market Cap – INR 32,683cr


 

[Updated for Q4FY22/FY22 results]

1. What is interesting about the stock?

Electric vehicles (EVs) are the latest buzzword on the internet with various news articles explaining how a bunch of lesser-known brands is disrupting the automobile industry with their innovations. Companies like Ather Energy, Okinawa Scooters, Revolt Motors, Ola Electric, Tata Motors, etc. are trying to bring about a key change in the mindset of Indian consumers – moving them away from polluting & fuel-guzzling traditional IC engine-based vehicles to a cleaner & operationally cheaper means of transport. This tectonic shift in attitude has happened during the Covid-19 pandemic chiefly due to spiraling fuel prices & environmental concerns.


Nevertheless, how could these tech entrepreneurs move into the market with their market-ready products so fast? The answer lies in the technology partners, which provide the key components like Traction motors, Battery packs, etc. One such company is Sona BLW Precision Forgings Limited, which came up with an IPO in June 2021.


Sona Comstar supplies both electrified & non-electrified powertrain components to Original Equipment Manufacturers (OEMs). Sona Comstar boasts a strong global presence, supplying six of the top 10 global passenger vehicle makers including Tesla, Ford, and Renault.


Sona Comstar’s revenue mix by product comprises Differential gears (25% of FY22 revenues), Differential Assembly (27%), Micro/Plug-in Hybrid Starter Motors (26%), and Conventional Starter Motors (17%). In terms of powertrain, the Battery EV (BEV) segment contributed 25% of FY22 revenue (vs 14% in FY21), micro-hybrid/Hybrids contributed 26%, and Power source neutral contributed 31% and ICE contributed 18% for FY22. Further, in terms of vehicle segments of Sona Comstar, Passenger Vehicles (PV) contributed 68% of FY22 sales, Off-highway vehicles contributed 15% and Commercial Vehicle (CV) contributed 16% for FY22. However, it is interesting to note that Sona Comstar derives ~75% of its revenue from exports. It supplies e-axles, geartrain components, and traction motors for use in around 30 EV programs globally. This figure is poised to grow in coming years as more consumers flock toward owning an EV & is the chief reason behind the rally seen since its listing.


Global demand for electric two-wheelers is expected to grow at a CAGR of 72% - 74% between FY 2021-26 (CRISIL Report) and the electric three-wheeler segment is expected to grow at a CAGR of 46% between CY 2021-25 to reach 400,000 units in sales (Ricardo Report). 2030 targets (Ricardo Report) for India indicate that 70% of all commercial PV, 30% of private PV, 40% of buses, 80% of two-wheeler, and 80% of three-wheeler sales would be electric.


Management Background


Sunjay Kapur is the Chairman and Non-Executive Director of the Company. He graduated with a bachelor’s degree in Business Administration from the University of Buckingham and completed his post-graduation in Owner President Management Program at Harvard Business School. The Company is professionally managed on a day-to-day basis.


Vivek Vikram Singh is the Managing Director and Group Chief Executive Officer of the Company. He holds a BTech from HBTI, Kanpur, and a postgraduate diploma in management from the Indian Institute of Management, Ahmedabad. He has over 15 years of experience, including six years of experience in the automotive industry.


Rohit Nanda is the Group Chief Financial Officer of our Company. He is a qualified chartered accountant and has significant experience in diverse industries including steel, engineering, pharma, chemical, and industrial goods, among others.


Key Strengths

  • Strong growth metrics: 3 Yr CAGR Sales - 45%, 3 yr CAGR Profit – 27%.

  • A strong focus on R&D and an early bet on EVs has allowed the first mover’s advantage.

  • Strong and experienced management team.

  • Government of India pushes for faster adoption of EVs through the FAME-II policy by providing subsidies to buyers.

Key Weaknesses

  • Sona Comstar’s business is dependent on the performance of the automotive sector esp non-BEV segments globally, including key markets such as the US, Europe, India, and China. This segment faced challenges in Q4FY22

  • Overdependence on a handful of clients leads to order book concentration risk.

2. Key Historical Financials

  • Revenue growth of the Company is quite healthy - 36% in FY22 and 51% in FY21

  • Growth was muted in Q4FY22 vs Q4FY22 due to pressure from the non-BEV segment which was balanced by ~100% growth in the BEV segment

  • EBITDA margin fell in FY22 to 26% vs 28% in FY21 due to an increase in raw material cost and forex conversion

  • Cash Flow convertibility (CFO/EBITDA) was quite poor in FY21 at 34% due to a jump in working capital level; it has improved to 79% in FY22

  • ROCE/ROE is quite robust at 22%/21% in FY22

3. What is my view on company valuation?


Company share price has given blockbuster returns since listing at INR 361 with peaking at INR 820 in mid-December 2021. However, it has seen a ~30% correction from then.


Sona Comstar trades at a P/E (TTM) of 93x vs Minda Industries at 76x and Motherson Sumi at 62x. The long-term average P/E (TTM) multiple of Minda Industries and Motherson Sumi is around 30x.


Inside India, it faces stiff competition from rivals such as Tata Autocomp (unlisted), Motherson Sumi, Minda Industries, and other emerging startups. and Motherson Sumi & Minda Industries were valued at EV/EBITDA (TTM) 12x & 29x respectively vs Sona Comstar’s EV/EBITDA of 56x.


Sona Comstar is overvalued on every parameter & hence investors should use extreme caution investing at current levels even though it is an excellent long-term story. The current order book & future profits seem to be already priced into the stock.


4. What are the risks to the investment analysis?


Key risks to investment analysis are:

  • Competitors becoming more aggressive in expansion & JVs can lead to loss of key customer accounts in the US/Europe.

  • Continuation of ongoing Semiconductor shortage globally can lead to lower sales for OEMs in PV & CV segments affecting their offtake from the Company.

  • India’s overdependence on China for battery packs & assemblies. Currently, there is no clear winner in India in Li-Ion battery pack manufacturing, hence China can easily disrupt India’s EV supply chain.

 

About the Author


I have over 7 years of work experience in the Automobile Industry & Technology Sector in India.

Currently, I am working as a Research & Development Engineer at a Global Automobile major helping them scale their Electric Vehicles ambitions.


I hold Master’s & Bachelor’s degrees in Engineering from the Indian Institute of Technology, Madras (IITM).


I am an insignificant public investor & have an avid interest in Trekking, Photography, and Cybersecurity.


Disclosure


I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.


I am not a SEBI registered advisor. This article is purely for educational purposes and not to be construed as investment advice. Please consult your financial advisor before acting on it.


I have used publicly available information while writing this article.

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