Sona Comstar – A fast growing pure play EV bet?

Updated: Feb 15


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

Current Share Price – INR 705 (December 27, 2021)


Market Cap – INR 41,171cr


 

1. What is interesting about the stock?

Electric vehicles (EVs) is the latest buzzword on the internet with various news articles explaining how a bunch of lesser-known brands are 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 course of Covid-19 pandemic chiefly due to spiraling fuel prices & environmental concerns.


Nevertheless, how could these tech entrepreneurs move in to 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, that 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 of a strong global presence, supplying to six of the top 10 global passenger vehicle makers that includes Tesla, Ford, and Renault.


Sona Comstar’s revenue mix by product comprises of Differential gears (28% of FY21 revenues), Differential Assembly (17%), Micro Hybrid Starter Motors (27%) and Conventional Starter Motors (24%). In terms of powertrain, Battery EV segment contributed 14% of FY21 revenue, micro hybrid/Hybrids contributed 27%, Power source neutral contributed 34% and ICE contributed 25% for FY21. Further, in terms of vehicle segments of Sona Comstar, Passenger Vehicles (PV) contributed 69% of FY21 sales, Off-highway vehicles contributed 17% and Commercial Vehicle (CV) contributed 14% for FY21. However, it is interesting to note that Sona Comstar derives 75% of its revenue from exports. It supplies e-axles, BLDC (Brushless Direct Current) motors and motor control units for use in the electric two-wheeler and three-wheeler segment that currently constitutes around 1% of FY21 revenue. This figure is poised to explode in coming years as more consumers flock towards owning an EV & is the chief reason behind the rally seen since 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.


Key Strengths

  • Strong growth metrics: 3 Yr CAGR Sales - 36.79%, 3 yr CAGR Profit – 42.72%.

  • 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’s push for faster adoption of EVs through FAME-II policy by providing subsidies to buyers.

Key Weaknesses

  • Negative net cash flows (INR 34 cr for FY21) due to high Capex incurred.

  • Sona Comstar’s business is dependent on the performance of the automotive sector globally, including key markets such as US, Europe, India and China.

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

2. Key Historical Financials


3. What is my view on company valuation?


Company share price has given blockbuster returns (~100%) since listing at INR 361. However, it has seen a 15% correction from 52 week high in the past 2 weeks.


Sona Comstar trades at a P/E (TTM) of 206 vs Minda Industries at multiple of 95 vs Bharat Forge at a multiple of 47. Long-term average P/E (TTM) multiple of Minda Industries and Bharat Forge is around 30x.


Inside India, it faces stiff competition with rivals such as Bharat Forge, Motherson Sumi, Minda Industries and other emerging startups. Bharat Forge & Minda Industries were valued at EV/EBITDA (TTM) 35x & 20x respectively vs Sona Comstar’s EV/EBITDA of 130x.


Sona Comstar is overvalued on every parameter & hence investors should use extreme caution investing at current levels. 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 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 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 Indian Institute of Technology, Madras (IITM).


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


Disclosure


I have no stock, option or similar derivative position in any of the companies mentioned since 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 purpose and not to be construed as an 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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