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Sona BLW Precision Forgings (Sona) is a multi-product, multi geography auto ancillary company which is into manufacturing products like differential gears (32% of revenue), differential assemblies (23%), starter motors for hybrids and ICE (21% and 15%, respectively), traction motors for two-wheeler electric vehicles (4%) and others (5%). Exports account for 71%, with the U.S. and Europe being the largest markets (43% and 20% of total exports, respectively). Strong margin profile, high and increasing return ratios, warm/cold forgings technical benefit and entry barriers to it and EV opportunity provides the moat for the company considering 77% of the current order book of ?215 bn belongs to EV.

We believe that the rapidly growing penetration of EVs and Sona being well entrenched into it, is riding the EV wave seen globally. The company is performing well in its traditional business of Differentials and is also gaining traction in other products like EDL and ADAS (through recent Novelic acquisition). Though the starter motors business is waning due to ICE dependence, EV business is more than offsetting this fall. Sona is set to benefit from the electrification of light vehicles aided by its presence in both driveline and motors.

Capex plan is ?11bn over the next three years. Currently, no customer accounts for more than 20% of revenues, which the company hopes to bring to 15% over time. Sona has several EV products on its roadmap, which give strong growth visibility without assuming any market growth. Production Linked Incentive (PLI) benefit may flow through from FY25 onwards after products are approved in FY24. The addition of yet another EV product this quarter reinforces our view that the addressable market for Sona will keep expanding, and hence it should trade at premium valuations. We anticipate a revenue/PAT CAGR of ~35%/43% respectively each through FY22-FY25E, with strong returns ratios – RoE of ~25% in FY25E. Currently trading at ~37xFY25E EPS, we assign a BUY rating with a TP of ?624. Blackstone’s recent exit eliminates the overhang of a large supply of shares, while we are aware that the management is professionally run.

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