Updated: Apr 14, 2022
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Electric Vehicles or EVs is the latest buzzword. And companies like Ather Energy, Ola Electric, Tata Motors are all trying their best to turn the Indian market away from the traditional Internal Combustion engine based vehicles to cleaner & operationally cheaper means of transport. The rising fuel prices during COVID, as well as environmental concerns, have fueled this further.
The big question is how these EV companies plan on moving into the market at a fast pace? That’s where auto comp partners come in. Partners provide essential components like traction motors and battery packs for these EV companies to go-to-market quickly. One such technology partner is Sona BLW Precision Forgings or Sona Comstar, that came up with an IPO in June 2021.
The Company supplies both electrified & non-electrified powertrain components to manufacturers. They also boast a strong global presence, supplying to passenger vehicle makers including Tesla, Ford, and Renault. Sona Comstar derives 75% of its revenue from exports. It supplies e-axles and motor control units for use in the electric 2W and 3W segment that currently constitutes around 1% of last year’s revenue. This figure is set to blow up in the coming years as more and more consumers choose EVs. Global demand for electric two-wheelers is expected to grow at a CAGR of 72% - 74% over the next 5 years, and 46% for three-wheelers over the next 4 years.
With their experienced management team, strong focus on R&D, and their first mover advantage, the Company had a 3-year profit CAGR of around 40%. Moreover, with the government pushing for faster adoption of EVs by providing subsidies, things are looking really positive. Their overdependence on a handful of clients however is worrisome.
So, what are our views on the valuation?
The company share price has given excellent returns of approximately 100% since listing . However, it has seen a 15% correction in the past 2 weeks. Other auto comp players like Bharat Forge & Minda Industries were valued at EV/EBITDA of 35 times & 20 times respectively in comparison to Sona Comstar’s EV/EBITDA of 130x.
Thus we can say the Company is significantly overvalued, and we urge investors to be very cautious. Future profits seem to have been priced into the stock price already.
Moving on, there are a few risks to this analysis. Competitors can be aggressive in their expansion, which could lead to loss of key customer accounts in western markets. Moreover, India relies heavily on China for battery packs & assemblies. This gives China the ability to disrupt the EV supply chain in India.
So, would you invest in Sona Comstar?
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