Buy Sona BLW Precision Forgings Ltd For Target Rs. 2,040 By JM Financial Services
Healthy quarter; available at reasonable valuation
In 2QFY26, Sona BLW reported an EBITDA margin of 25.3% (-230bps YoY, +150bps QoQ), 150bps above JMFe, driven by positive operating leverage. EV business growth (down 17% YoY) was impacted due to demand slowdown at a key customer and rare-earth magnet supply constraints. In terms of demand outlook, three direct competitors (Driveline - differential assembly or differential gear makers) from the EU have filed for insolvency proceedings, leading to an increase in enquiries from the region. The company is hopeful of securing new orders going forward. Further, the company has won its first programme worth INR 2.6bn for Driveline from the Mexico plant to supply differential assembly for a North American recreational vehicle OEM. Additionally, from ClearMotion, Sona BLW received nominations worth INR 8.2bn for the suspension motor that opens up new growth opportunities. The future growth in the railway division is expected from upcoming product launches like automatic plug door, HVAC systems, etc. Factoring in the lower margin profile of the railway division, the management has guided for an EBITDA margin range of 24-26%. We maintain BUY rating with Mar’27 TP of INR 570 (35x FY27E EPS).
* 2QFY26 – beat led by operating leverage: Sona BLW reported consolidated revenue of INR 11.4bn (+23.6% YoY, +34.4% QoQ), 6.7% above JMFe. The growth in revenue was due to consolidation of revenue from the railway division, the first full quarter after acquisition. However, the slowdown in EVs slowdown continues. EBITDA margin stood at 25.3% (-230bps YoY, +150bps QoQ), 150bps above JMFe driven by operating leverage. Reported EBITDA came in at INR 2.9bn (+13.4% YoY, +42.7% QoQ), 13.3% above JMFe. Adj. PAT stood at INR 1.7bn (+12.6% YoY, +30.3% QoQ), 4.9% above JMFe.
* EV business update for 2Q: EV revenue during 2Q declined 17% YoY to INR 2.6bn. The decline in the EV business is attributed to demand slowdown at a key customer and rare-earth magnet constraints. Share of BEV revenue stood at 32% during 2Q (28% in 1QFY26). During 2QFY26, from ClearMotion, Sona BLW received nominations worth INR 6.4bn (SOP: 2QFY27) from an existing New Age Asian customer for electric PV and INR 1.8bn (SOP: 2QFY27) from a new European OEM of luxury performance PVs. These orders are for suspension motors. With these additions, the company now has 62 EV programmes with 32 different customers. Of these, 14 programmes are in the ramp-up phase, and production is yet to commence for 29 others. Regarding rare-earth magnet (REM) supply constraints, the management indicated that it has designed and developed a rare-earth-free Ferrite Assisted Synchronous Reluctance Motor (FeSynRM Motor) that has applications in 2Ws, 3Ws, and LCVs. Though the weight of these motors is higher, the cost is lower compared to motors that use REM.
* Growth in the railway division will be driven by new products: Railway division contributed ~11% to the total revenue for 1HFY26. As of 2QFY26, the Railway division has an order book of INR 13bn, to be executed largely within 12 months. The company is already a leader in railway brake systems and has a strong position in suspension and coupler as well. The management indicated that the next leg of growth from the division is expected to come from new products that are expected to be launched, such as the railway automatic plug door system, railway HVAC system, etc.
* Demand outlook: Although demand uncertainties persist, several factors could help Sona BLW navigate the near-term challenges. Three direct competitors (Driveline – differential assembly or differential gear makers) from the EU have filed for insolvency proceedings, leading to an increase in enquiries from the region. The company is hopeful of securing new orders going forward. Further, the company has won its first programme worth INR 2.6bn for Driveline from the Mexico plant to supply differential assembly for a North American recreational vehicle OEM. Additionally, from ClearMotion, Sona BLW received nominations worth INR 8.2bn for the suspension motor that opens up new growth opportunities.
* Margin outlook: In 2QFY26, the company’s EBITDA margin declined by 230bps YoY to 25.3%, primarily due to negative operating leverage and an unfavourable product mix. The inclusion of the railway equipment business, which operates at a lower EBITDA margin of ~18%, from Jun’25 is expected to moderate overall margins, going forward. The management guided for EBITDA margin in the range of 24-26%.
* Other Highlights: 1) The impact of Nexperia is limited, as Sona Comstar has lower exposure to EU-PV. 2) The Novelis fire has had an impact, though not very significant, on one of the company’s larger customers, Ford. Sona BLW supplies components for the 250, 350, and F-650 diesel models. 3) The management indicated that the China JV with JNT is in abeyance due to geopolitical reasons, and will remain so until conditions change. The company is pursuing this with a high degree of caution. Meanwhile, with the existing plant in China, it will continue its current operations. 4) On partnership with NEURA Robotics, the management mentioned Humanoids (face – has more moving parts and joints) and robots, including Cobots (cognitive robots) and industrial robots, will take longer than 3-4 years to start contributing to the business. By 2040, the industry might be larger than the entire automotive industry.
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SEBI Registration Number is INM000010361
