Fundamental Analysis of Sona BLW

Sona Comstar has quickly established itself as a prominent player in the automotive component industry. Despite being a new entrant, Sona Comstar has made impressive progress and is gaining attention. In this blog, we will delve into the basics of Sona Comstar, understand its growth trajectory, examine its strategic moves, and identify what sets it apart in the automotive parts industry. So, let's take a closer look at Sona Comstar's journey and discover what makes it a unique player in the world of cars and components.

Sona BLW Overview

Sona BLW is a leading Indian company in the automotive systems and components industry, operating globally with nine manufacturing facilities in India, China, Mexico, and the USA. They specialize in designing, producing, and supplying advanced automotive products, including differential assemblies, starter motors, BSG systems, EV traction motors, and motor control units.

What sets them apart is their dominant market presence, commanding 60-90% of the Indian differential gears market. Their components are used in various vehicles, from passenger and commercial vehicles to electric cars and two-wheelers. They prioritize innovation, investing in mechanical, electrical, and software solutions to meet evolving customer needs.

With nine manufacturing plants and three R&D centers, Sona BLW employs over 4,064 dedicated professionals. They are a vital player in the global automotive industry, providing essential components to OEMs across the US, Europe, India, and China.

Sona BLW Journey: Milestones

1995 - Sona Okegawa Precision Forgings Ltd. was incorporated in partnership with Mitsubishi Metal Corporation Limited.

1998 - The journey began with the production of differential bevel gears at the Gurugram plant in Haryana, India.

1999 - A new manufacturing facility was established in Chennai, Tamil Nadu, India.

2005 - The company expanded its operations with a new plant in Pune, Maharashtra, India. Sona Autocomp Holding Private Limited became the majority shareholder.

2008 - A significant milestone was achieved with the acquisition of Thyssen Krupp’s precision forging business, including BLW, the pioneer of Warm Forging Technology.

2013 - The company underwent a transformation, adopting the name "Sona BLW Precision Forgings Limited" and earning the prestigious "North American OEM of PV’s and CV’s World Excellence Award (Silver)."

2016 - Further recognition came with a Gold World Excellence Award, solidifying its position as a leading North American OEM of PV’s and CV’s. The company also expanded to China and secured an investment from JM Financial Trustee. The association with Mitsubishi and Metal One concluded.

2017 - Operations were ramped up with the launch of two new plants in Gurugram, India, and the inauguration of the final assembly and finishing plant in Mexico, North America.

2018 - Strategic expansion continued with the acquisition of additional land for a second plant in Chakan, Pune. Notably, the company secured a contract for Differential Assembly supply from a renowned Global Electric Vehicle Manufacturer.

2019 - Embracing a new brand identity, "Sona Comstar," the differential assembly plant in Manesar, Haryana, India, commenced operations.

2020 - A remarkable production milestone was reached with 250 million Gears, accompanied by contracts for BLDC (Brush Less Direct Current) motor supply from two prominent Indian Electric 2-wheeler manufacturers.

2021 - A significant achievement unfolded as the company made its debut on the Indian Stock Exchanges.

Sona BLW Business Segments

Sona BLW's product line is categorized into two key segments:

1. Driveline Parts Segment:

• This segment focuses on manufacturing essential components like differential assemblies and precision-forged bevel gears.
• These components cater to a wide range of vehicles, including both electric and non-electric ones. This includes passenger cars, commercial vehicles, off-highway vehicles, and three-wheelers.

2. Motors Segment:

• Sona BLW is actively engaged in the production of starter motors for various types of vehicles. This includes conventional, micro-hybrid, and electric vehicles (EVs).
• In addition to starter motors, the company also specializes in crafting motor control units and EV traction motors.
• These motors find their applications in hybrid and electric vehicles, including two and three-wheelers.

Sona BLW is a prominent player in the automotive industry, catering to various segments including Passenger Vehicles (PVs), Commercial Vehicles (CVs), Tractors, and Off-Highways (OHVs). Notably, the company holds the distinction of being the largest manufacturer of differential gears for PVs, CVs, and tractors in India. Furthermore, it ranks among the top 10 global suppliers for both differential bevel gears and starter motors in the PV segment.

As of CY22, Sona BLW commands a substantial market share, with 7.2% in global differential gears and 4.1% in starter motors worldwide. In the domestic market, the company's stronghold is evident, boasting an impressive 80-90% market share in CVs, 75-85% in tractors, and 55-60% in PVs.

With a diverse clientele that includes renowned automotive manufacturers such as Maruti Suzuki, Renault, Nissan, and Volvo, the company's top 5 customers contributed 55% of its revenue in FY 2022-23. The top 10 customers accounted for an even more substantial 77% of the total revenue.

To foster innovation and stay at the cutting edge, Sona BLW maintains a strong emphasis on Research and Development (R&D). In FY 2022-23, the company allocated INR 73.1 Cr for R&D, employing 273 on-roll professionals across three centers in Gurugram and Chennai.

In response to the growing trend towards electric vehicles (EVs), Sona BLW has strategically shifted its focus, with the EV segment now contributing 26% of its revenue. The company is actively involved in 46 EV programs with 27 different customers, with Battery Electric Vehicles (BEVs) taking a significant share in FY 2022-23.

Looking ahead, Sona BLW's strategic vision entails a concentrated effort toward light passenger vehicles, commercial vehicles, and electric buses over the next three years. This includes plans to expand its footprint in Europe for differential assemblies and gears, as well as in China for micro-hybrid starter motors and 48V Belt Starter Generator (BSG) systems.

In a recent development in FY 2023, the company made a significant move into the sensors and software market by acquiring a 54% stake in Novelic, a testament to its commitment to innovation and diversification.

Diversified Revenue Mix – By Geography

The company derived 29% of its total revenue from India, while the rest of its income originated from its international operations, with 43% coming from North America, 20% from Europe, and 8% from Asia and other regions.

Diversified Revenue Mix - By Product

The company's profits are driven by a diverse range of drivetrain components. Differential Gears lead with 32%, closely followed by Differential Assemblies at 23%. Micro/Plug-in Hybrid Starter Motors and Conventional Starter Motors contribute 21% and 15% respectively.
 

Return Percentage Over Various Periods

Sona Comstar has demonstrated impressive returns, with a remarkable 39% increase over six months, followed by a substantial 15% gain within a year, and 10% growth over two years.

Key Financial Metrics

Cash Flow of Sona Comstar (INR Cr)

Between March 2019 and March 2023, Sona Comstar's financial activities have shown fluctuations. Operating activities saw steady growth, rising from 154 Cr to 533 Cr Investing activities displayed a more erratic pattern, with a low of -954 Cr in March 2020 and a high of -156 in March 2021. Financing activities peaked at 766 Cr in March 2020.

Yearly Financial Snapshot

Sales Growth:

Over the past four years, the company has experienced impressive sales growth, starting at 1,038 Crores in March 2020 and reaching 2,676 Crores in March 2023. The highest surge occurred between March 2021 and March 2022, with sales jumping by 50.9%. Although the growth rate slightly moderated to 25.6% from March 2022 to March 2023, the overall trajectory remains positive and promising.

Operating Profit:

The company's operating profit demonstrated impressive growth over the past five years, starting at 200 crores in March 2019 and reaching 696 crores in March 2023. The most substantial leap occurred from March 2020 to March 2021, with an extraordinary 81.5% increase. This trend reflects a consistently robust financial performance.

Net Profit: 

The net profit data for the five years from March 2019 to March 2023 shows significant fluctuations. Notably, there was an impressive 108.1% growth from March 2019 to March 2020, followed by a sharp decline of -40.3% in the subsequent year. However, the net profit rebounded with a 68.4% increase in March 2022 and continued to grow by 9.1% in March 2023, demonstrating a mixed performance over the period.

Key Financial Ratios

ROE Ratio:

Return on Equity (ROE) is a measure of how well a company uses the money invested by its shareholders. It's like a report card for the company's performance. A higher ROE indicates that the company is effectively turning shareholders' investments into profits, which is a positive sign of its financial health.

Sona Comstar's ROE has shown an intriguing trend over five years. Starting strong at 62%, it gradually declined to 19% over three years. In the latest year, it settled at 18%, reflecting stable performance with a slight decrease.

ROCE Ratio:

ROCE, or Return on Capital Employed, is a financial measure that assesses how well a company generates profits using its invested capital (both debt and equity). A higher ROCE implies efficient use of capital, indicating a well-performing company. Conversely, a lower ROCE suggests potential inefficiency in capital utilization. This metric is crucial for evaluating a company's financial well-being and performance.

Sona Comstar's Return on Capital Employed (ROCE) has shown a positive trend over five years. It began at 36% and saw a minor decrease to 22% three years ago. However, in the latest year, it rebounded to 23%. 

Sona Comstar’s Shareholding Pattern

Sona Comstar boasts a well-diversified ownership structure. The Promoters, who play a pivotal role in the company's foundation and operations, hold a substantial stake of 29.8%. The Public, which includes individual and small-scale investors, owns 10.4% of the company. Additionally, both Domestic Institutional Investors (DIIs) and Foreign Institutional Investors (FIIs) have a significant presence, with DIIs accounting for 28.2% and FIIs holding an impressive 31.7%. This reflects a balanced mix of local and global investment interest in Sona Comstar.

Price Analysis

Sona BLW Precision Forgings, also known as Sona Comstar, made a successful debut on the stock market in June 2021. The company's shares opened at ₹302.40 on the BSE, marking 3.92% premium over its issue price.
The Initial Public Offering (IPO) comprised a fresh issue of shares worth ₹300 crore and an offer for sale of up to ₹5,250 crore by the selling shareholder.  Within the first hour of trading on the listing day, Sona Comstar shares surged by as much as 24% over the IPO price. In total, the company raised ₹5,550 crore, with over 94% of the funds coming from the offer for sale by existing shareholders, including Singapore VII Topco, a subsidiary of Blackstone.

Following the listing at ₹302, the share price of Sona Comstar reached ₹839.90 in December 2021, marking a remarkable 173% increase from the listing price. After reaching this all-time high, the stock entered a correction phase, touching a low of ₹400 in March 2023. Currently, the stock is in a recovery phase, having surged 53% from the recent low of ₹400 and is currently trading at ₹583. In the medium term, ₹750 is anticipated to act as a resistance level. The company boasts strong fundamentals, and once the share price sustains above ₹750, the previous high of ₹839 will serve as a significant resistance point.

Key Risks & Conclusion

In conclusion, while Sona BLW enjoys a strong position in the automotive industry and a diversified revenue base, it faces two significant risks:

• Raw Material Price Volatility: Fluctuations in critical raw material prices can directly impact manufacturing costs. Despite risk management efforts, the unpredictability of commodity prices may challenge the company's ability to fully offset these fluctuations through price adjustments.
• Customer Dependency: The company relies heavily on its top clients, with the top 10 contributing a substantial 77% of total revenue. This concentration poses a risk, as a significant reduction or cancellation of orders by these key clients could have a notable impact on the company's financial stability.

In summary, while Sona BLW has a strong market presence and a diversified business approach, it must actively address the risks associated with commodity price fluctuations and customer concentration. Strategic measures for risk diversification and resilience will be crucial for sustaining success in an evolving automotive industry landscape.