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Salient features of the IPO:

* Blackstone-backed Sona BLW Precision Forgings Ltd.. (Sona BLW), is planning to raise up to Rs. 5,500cr through an IPO, which opens on 14th Jun. and closes on 16th Jun. 2021. The price band is Rs. 285 - 291 per share.

* The issue is a combination of fresh issue and OFS. The company will not receive any proceeds from the OFS portion. Of the net proceeds from the fresh issue, Rs. 241cr will be utilized to repay or prepayment of debt availed by the company. Residual funds will be used for general corporate purposes.

Key competitive strengths:

* One of the leading manufacturers and suppliers to global EV markets

* One of the leading global companies and gaining market share, diversified across key automotive geographies, products, vehicle segments and customers

* Strong research and development and technological capabilities in both hardware and software development

* Strong business development with customer centric approach

* Consistent financial performance with industry leading metrics

* Highly experienced board of directors and management team

Risk and concerns:

* Global slowdown in automotive sector

* Inability to adapt to the evolving EV technology

* Revenue concentration risk

* Delay in new product development plans

* Unfavorable forex movement

* Unfavorable movement in raw material prices

* Rise in interest rate

* Competition

Peer comparison and valuation:

At higher price band of Rs. 291, Sona BLW is demanding a TTM P/E multiple of 78.9x, which is at premium to the peer average of 60.3x. However, if we compare with EV focused global peer, it is at discount.

Below are a few key observations of the issue:

* Global light vehicle production has remained flat between 2015-19. In 2020, production declined by around 18% due to Covid-19 pandemic. Given the USA and most parts of Europe severely impacted by the pandemic, a V-shaped recovery is not anticipated, but a more gradual one. In 2021, growth will be primarily driven by the Chinese market. According to Ricardo Research, overall global volumes are likely to reach around 92mn by 2025 with China, Europe and North America accounting for approximately 70% of the global production volumes.

* As fuel economy norms become more stringent over time and countries introduce legislation to ban fossil fuel vehicles, production of internal combustion engine (ICE) vehicles will be dis-incentivized and the importance of battery electric vehicle (BEV) will gain prominence. According to Ricardo Research, BEV has been the fastest growing vehicle segment growing at 46% CAGR between 2015-20 and is expected to expand by 36% CAGR between 2020-25. Further by 2025, BEVs are likely to account for approximately 12% of the global production as against 3.3% in 2020.

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