IGI Logo

Compelling play on EVs with strong growth visibility; Re-iterate BUY

Sona BLW Precision Forgings (Sona Comstar) remains of the key beneficiaries of rising global electrification phenomena. Receding supply constraints (from 2HFY23) coupled with strong net order book of INR186bn (as on Mar’22) will start reflecting true growth potential for the company. Though margins in the near-term will likely be affected by RM cost pressures, we expect margins to improve in 2HFY23 post gradual correction in commodity prices. Further, PLI incentives can provide a fillip to its margins given Sona’s key EV products - DA and traction motors are eligible for PLI. We expect revenue to post a 39% CAGR over FY22-24e (30%+ share from EVs) driven by high revenue visibility backed by strong net order book. EBITDA margin is expected to remain robust around 26.8%/30.4% led by higher operating leverage and PLI incentives. The company is currently trading at 45x FY24e EPS and given the strong growth potential, we believe that it will continue to trade at a premium valuation. We reiterate our BUY rating and TP of Rs750/share (based on DCF), implying a 25% upside. Key risks are dependence on the cyclical and fast-changing global automotive sector, delayed adoption of EVs and inability to win order for new products.

* Rising EV contribution; well positioned to benefit from global electrification: Sona’s EV revenue share has risen from 14% in FY21 to 25% in FY22 (29% in 4QFY22). As on March’22, Sona has won 30 new EV programs from 19 customers across product portfolios from Indian and global OEMs and 70% of these are yet to start. Strong EV order book of INR115bn provides high growth visibility. Further, the company is enhancing its capabilities to be an EV solution provider by developing multiple new products (range of motors) and has partnered with: 1) Enedym Inc (magnet-less motors), 2) C-Motive Technologies (electrostatic drive motors for EV applications) and 3) IRP Systems. Overall, we expect Sona’s EV revenue to grow at c.72% CAGR over FY22-24e led by strong order execution and believe it will be one of the key beneficiaries of rising global electrification given its technology and cost advantage vis-à-vis its peer.

* Receding supply constraints from 2HFY23 to reflect true growth picture: Global automotive market declined by c.3% in FY22 and despite supply constraints, Sona’s revenue increased by c.36% in FY22 on the back of new order execution. Sona won 43 new orders and added 10 new customers over last 3 quarter with net order book at INR 186bn (62% for BEV/PHEV) as on Mar’22. Commentaries from global OEMs and components suppliers indicate improvement in semiconductor chip supplies post 2QFY22 (and almost normalisation of supplies in 2023) which augurs well for Sona and will reflect it’s true growth picture in FY24. Overall, we expect c.39% revenue CAGR over FY22-24e.

* PLI incentives may provide a fillip to margins: EBITDA margins in 1HFY23 to remain affected due to RM cost related headwinds. However, we expect margins to improve in 2HFY23 post recent correction in steel and aluminium prices (no pass-through in electrical segment). Further, sona’s key EV products - differential assemblies and tractor motors, are eligible for PLI incentives and we believe that Sona’s will be eligible for highest share of incentive (16%), which can aid its margin by 300-400bps over FY24-28 (likely years of incentive receipt), in our view.

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at https://www.jmfl.com/disclaimer

CIN Number : L67120MH1986PLC038784

Above views are of the author and not of the website kindly read disclaimer