Sona Blw Precisions Forgings : Moving In The Fast Lane
Over the years, Sona BLW Precision Forgings has expanded its offerings with more focus on the electrification trend which is driving the automotive landscape. This is what will continue to trigger its growth curve
Sona Comstar, renamed Sona BLW Precisions Forgings (SBPF) in 2013, is one of India’s leading automotive technology companies and has emerged as a major industry player since its inception in 1995. The company designs, develops and distributes highly engineered, missioncritical automotive systems and components with next-generation applications. It is among the few companies around the world with the ability to design high-power density, lightweight electric vehicle (EV) systems that meet stringent standards of durability and performance. The company operates nine state-of-the-art manufacturing facilities.
These are spread across India, USA, Mexico and China. The company’s established global presence helps it to serve the customers with greater agility. For OEMs in the US, Europe, India and China, across both electrified and non-electrified powertrain segments, the company is engaged in the production of differential assemblies, differential gears, conventional and micro-hybrid starter motors, BSG systems, EV traction motors (BLDC and PMSM) and motor control units. Its products find application across all vehicle categories.
This includes conventional passenger vehicles, commercial vehicles, off-highway vehicles, electric cars, electric light commercial vehicles and electric two and three-wheelers. The company has three state-of-the-art research and development centres in Gurugram and Chennai dedicated to development of mechanical and electrical hardware systems, components and application software solutions to cater to the evolving needs of its customers and deliver progressive green technologies for a better future of mobility.
Sector Overview
Electrification is clearly emerging as the biggest trend in the automobile industry. Driven by stringent emission and fuel economy (CAFE) regulations across the globe, pure ICE vehicles will no longer be an inclined choice for passenger vehicles. This will eventually lead to a decline in pure ICE. The share of pure ICE vehicles in CY 2025 is expected to be approximately 18 per cent of the total global production. Depending on the severity of CAFE norms across regions, OEMs have a choice of micro (12 V start-stop), mild or full hybrids, BEVs (battery electric vehicles) and FCEVs (fuel cell electric vehicles) to meet corporate average fuel economy. Electrification in India is expected to be led by three-wheelers and two-wheelers.
Electric two-wheelers are expected to grow at a CAGR of 70-74 per cent between FY 2021 to 2026 while electric three-wheelers are expected to grow at a CAGR of approximately 46 per cent between CY 2021 and CY 2025. Global light vehicle production was observed to be flat between 2015 and 2019, according to industry reports. However, vehicle production declined by approximately 18 per cent in CY 2020 due to the effect of the pandemic. In CY 2020, global production of BEVs stood at approximately 2.3 million units. Tesla accounted for approximately 21 per cent of the share while Renault Nissan and Volkswagen accounted for approximately 12 per cent and 10 per cent, respectively. For the next five years, automakers have charted plans to release more than 200 new electric car models.
Financial Overview
Considering the performance of the company for the second quarter of FY22, on a consolidated basis the company recorded net sales and other operating income of Rs 585.69 crore, indicating growth of 52.4 per cent from Rs 384.30 crore reported in Q2FY21. On the other hand, the operating profit recorded at Rs 154.96 crore in Q2FY22 as compared to operating profit of Rs 125.51 crore in Q2FY21. Q2FY22 recorded net profit of Rs 88.23 crore in comparison with net profit of Rs 72.16 crore in the same quarter in the previous year – a rise of 22.28 per cent.
On the annual front, its net sales and operating income grew by 50.9 per cent from Rs 1,037.98 crore in FY20 to Rs 1,566.30 crore in FY21. The operating profit advanced by 78.72 per cent in FY21 as compared to FY20, recorded at Rs 443.36 crore compared to Rs 248.07. On the contrary, net profit declined by 41.1 per cent in FY21 at Rs 215.17 crore as compared to Rs 365.29 crore in FY20. BEV revenue stood 143 per cent higher and currently constitutes 22 per cent of the total revenue. Revenue in Europe, India and Asia excluding India grew by 88 per cent, 33 per cent and 474 per cent, respectively.
North America’s revenue was down by 14 per cent due to relatively higher impact of semi-conductor chip shortage on some of its North American customers. On a similar note, if we consider the H1FY22 performance in comparison with H1FY21, BEV revenue was higher by 223 per cent and BEV contributed 21 per cent of the total revenue. Meanwhile, revenue in North America, Europe, India and Asia excluding India grew by 20 per cent, 151 per cent, 92 per cent and 582 per cent, respectively.
There was a positive margin impact of ~2.5 per cent and ~3.8 per cent due to operating leverage and product mix, respectively. The PAT margin saw an improvement on the back of lower finance cost and depreciation as percentage of revenue. Sona BLW Precisions Forgings saw a decent improvement in the key performance ratios like return on assets (ROA), return on equity (ROE) and return on capital employed (ROCE) in FY21 as compared FY20. The net sales growth, EBIT growth and the PAT growth recorded by the company were attractive in FY21 after taking a severe dip in FY20 due to the pandemic situation.
Outlook
The automotive industry in India as well as globally is experiencing a growing market preference for multiple axle vehicles in PVs, CVs as well as tractors. Over the years, Sona BLW Precision Forgings has expanded its offerings with more focus on the electrification trend which is driving the automotive landscape. The company has fortified its research and development capabilities and has built an experienced and able team with expertise in its areas of expertise. It serves large global OEM and Tier I customers and boasts of a rich track record of delivering high-quality automotive systems and components for EV as well as conventional powertrains.
Growth in the EV segment and global market share would be the cornerstones of the company’s growth strategy. The recovery in the global automotive market after three years of contraction should act as a tailwind. Electrification has pulled up its socks to gain further traction and projections by renowned industry publications indicate acceleration in the customer preference for electrification due to multiple factors such as improved infrastructure, reduced total cost of ownership and fiscal incentives, among others, over the coming years. It is indicative that SBPF is well positioned to gain from this megatrend. The stock of Sona BLW Precision Forgings is currently trading at a higher PE ratio as compared to its peers.
The company has reported impressive financials in Q2FY22 despite semiconductor chip shortages towards the clients’ end and high-cost inflation due to rising raw material prices. Also, the company has achieved net debt-free status during Q2FY22. The net order book of the company gives strong indications regarding aggregate sales in the next 10 years from awarded programs in the pipeline. Tagged with reputed client credentials and a robust business model, the company is on its way to be the fastest growing India-based automotive ancillary entity. Hence, we recommend HOLD.