IPO Analysis: Sona Comstar

IPO rating- Invest for listing gains 

About the issue 

The automotive technology company, Sona BLW Precision Forgings (Sona Comstar) is coming out with its initial public offering (IPO) of equity shares of the face value of Rs 10 each. The public issue comprises a fresh issue of equity shares worth Rs 300 crore and offer-for-sale (OFS) of up to Rs 5,250 crore. The price band of the issue has been fixed at Rs 285 to Rs 291 per equity share. The IPO open date is June 14, 2021, while it will close on June 16, 2021. The issue will be listed on June 24, 2021. The IPO market lot size is 51 shares. A retail-individual investor can apply for up to 13 lots (663 shares or Rs 1,92,933). The quota for retail investors in the initial public offer (IPO) has been fixed at 10 per cent of the net offer. The QIB quota is fixed at 75 per cent while the NII quota at 15 per cent. The objective of the offer is to make repayment of the company’s debt fully or partially and also, to meet general corporate purposes.

About the company 

Sona BLW Precision Forgings Limited was incorporated in 1995. It is one of the leading automotive technology companies in India. It is engaged in designing, manufacturing, and supplying high-quality mission-critical automotive components such as differential assemblies, gears, conventional & micro-hybrid starter motors, etc. The company is among the top 10 auto-component manufacturers. Sona Comstar was among the top 10 global players for the differential bevel gear segment and among the largest exporters of starter motors in India in 2020. The company supplies its products to automotive OEMs across various countries such as India, the US, Europe, and China. The company is not dependent on a single product, vehicle segment, customer, or geography. It is also one of the two largest exporters of starter motors. Sona Comstar is diversified across platforms, products, geographies, customers, and end segments. 

Competitive strengths 

Diverse product portfolio across different areas. 

A leading manufacturer in the automotive sector. 

Strong research and development (R&D) resources. 

One of the leading manufacturers & suppliers to the global EV market. 

Consistent financial performance track record. 

Financials 

The company reported a profit after tax of Rs 215.1 crore, Rs 360.3 crore, and Rs 172.9 crore for FY 2021, FY 2020, and FY 2019, respectively. As per the red-herring prospectus, the total operating income has grown at a CAGR of 10.9 per cent from the fiscal year 2016 to 2020 as compared to the average CAGR of 8.1 per cent for the top ten listed auto-component manufacturers in India by market capitalisation during the same period. The firm has industry-leading financial metrics with EBITDA margins of around 25 per cent and ROE of 35 per cent. 

Valuation & recommendation  

The company has nine manufacturing and assembly facilities across India, China, Mexico, and USA; out of which, six are located in India. The company is a leading supplier of brushless DC electric motor in India for the two-wheeler and three-wheeler EV market. The company has derived 13.8 per cent of revenue from the battery EV market and 26.7 per cent from the hybrid market in FY21. Some of the listed peers of the company are Motherson Sumi Systems, Sundaram Clayton, Varroc Engineering, Bosch, Bharat Forge, Endurance Technologies, and Minda Industries. The company serves six of the top 10 global passenger vehicle OEMs, three out of the top 10 global CV OEMs, and seven out of the top eight global tractor OEMs by volume. The company reported the highest operating EBITDA margin, PAT margin, ROCE, and ROE in FY20, as compared to the top 10 listed auto component manufacturers in India by market capitalisation. It has consistently delivered more than 26 per cent EBITDA margin and more than 35 per cent average ROE each year in FY19-21. The company is among the limited number of players that are well-placed to combine its motor and driveline capabilities to offer a compelling value proposition to the EV customer base. Looking at the above positives, we believe that the company will keep growing its business at a healthy rate, and hence, you can invest for a listing gain.