Neutral SONA BLW Precision Forging Ltd for the Target Rs.468 by Motilal Oswal Financial Services Ltd
Multiple global headwinds to restrain growth
BEV revenue down 25% YoY in 1Q
* SONACOMS’ margin (excl. railways division) was in line with our estimate; however, PAT was ahead of estimates due to higher other income.
* While its long-term outlook remains positive on the back of its healthy order backlog, SONACOMS is currently witnessing the impact of a slowdown in the EV transition and weak auto demand globally. The ongoing global tariff war, weak global macro, and likely supply chain disruption, especially in EVs, remain key headwinds in the near term. Adjusted for Railways division, core business is trading at ~46.5x FY26E/39x FY27E consol, and appears fairly valued. Reiterate Neutral with a TP of INR468, premised on ~40x Jun’27E consol. EPS and assigning INR49 per share for the recently acquired railway business.
Weak operational performance due to multiple global headwinds
* Sona has merged its Railways division into 1Q financials for five weeks. Reported 1Q revenue was down 5% YoY at INR8.5b, with margins declining 430bp YoY to 23.8%. PAT was down 12% YoY at INR1.2b.
* Given that we had not factored in the Railways division numbers in our 1Q estimates, we attempt to give a like-to-like comparison YoY on its financial performance for Sona (excl. Railways division) for 1Q as below.
* Revenue was down by an estimated 10% YoY to INR8b, in line with our estimate. BEV revenue fell 25% YoY to INR2.1b. As a result, BEV share for 2Q declined to 28% from 33% YoY.
* Given the adverse mix and weak revenue, margin contracted 390bp YoY to 24.2%, in line with our estimate.
* Impact in 1Q was a function of multiple adverse factors: 1) a change in supply terms by an EV OEM in Europe from ex works to be delivered to OEM, which in turn added 60 days of shipment time for revenue recognition, which was shifted to 2Q from 1Q; 2) a sharp decline in one global EV OEM due to slowdown in EV demand; 3) shortage of rare earth materials that impacted offtake of traction motors; 4) given uncertainty about US tariffs, OEMs are now maintaining low stock levels. Management did highlight that most of these issues are transient in nature and are likely to normalize in the coming quarters.
* Other income was significantly high at INR427m (est of INR90m).
* As a result, adjusted for exceptional provision, PAT declined 14% YoY to INR1.2b, ahead of our estimate of INR988m.
Highlights from the management commentary
* Update on new order wins: The net order book now stands at INR262b, of which 75% is EV mix. Production from Novelic is expected to start from FY27 onward for an EV customer in cabin sensing. This product is powertrain-agnostic.
* Update on China JV: The company has recently signed a term sheet to form a JV with JNT to enter the China market. While Sona will take a majority 60% stake in the USD20m JV, JNT will take over operational responsibilities. Combining the strength of both partners and confirmed orders from OEMs, Sona aims to be one of the key suppliers of driveline systems in China. This JV is set to commence operations from 2HFY26.
* Update on Railways division: The company has consolidated this business for about three weeks in 1Q. It is the market leader in brake system in Indian Railways. Sona has identified opportunities to add new segments and hence would focus on strong growth over the next 4-5 years.
* Update on supply constraints due to rare earth magnets: Traction motors business saw some impact due to the shortage of rare earth magnets. Sona has now identified light earth substitutes for these heavy earth magnets, which can be used for motors up to 15kw. Sona is now back to normal production levels for traction motors in July with alternate supply arrangements. In traction motors, most of its business comes from 2Ws, which have up to 2kw motor.
* Guidance: Its earlier margin guidance stood at 25-27%. With the merger of the Railway business, which is estimated to have 18% margin, Sona’s margins are likely to fall to the 23-25% range.
Valuation and view
* SONACOMS is poised for faster-than-industry growth, driven by 1) content enhancement in the existing portfolio; 2) market share gains in key geographies; and 3) new products such as traction motors, controllers, BSG, and sensors.
* However, SONACOMS is currently witnessing the impact of a slowdown in the EV transition and weak auto demand globally. The ongoing global tariff war, weak global macro, and likely supply chain disruption, especially in EVs, remain key headwinds in the near term. Adjusted for Railways division, core business is trading at ~46.5x FY26E/39x FY27E consol, and appears fairly valued. Reiterate Neutral with a TP of INR468, premised on ~40x Jun’27E consol. EPS and assigning INR49 per share for the recently acquired railway business.
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