Sona BLW Precision Forgings (SBPF) is primarily engaged in designing, manufacturing and supplying highly engineered, mission critical automotive systems and components such as differential assemblies, differential gears, conventional and micro-hybrid starter motors, BSG systems, electric vehicles (EV) traction motors [brushless direct current (BLDC) motor and permanent magnet synchronous motor (PMSM)] and motor control units to automotive original equipment manufacturers (OEMs) across US, Europe, India and China, for both electrified and non-electrified powertrain segments.

The company is among the top ten players globally in the differential bevel gear market and in the starter motor market by respective volumes supplied to its end segments in the calendar year 2020 and has been gaining global market share across products.

The company is one of a few companies globally, with the ability to design high power density EV systems handling high torque requirements with a lightweight design, while meeting stringent durability, performance and NVH specifications, enabling EV manufacturers to enhance the vehicle range, acceleration, and the overall efficiency. The company currently supplies differential assemblies, differential gears, EV traction motors to customers in US, China and India, for use in hybrid and battery electric passenger vehicles, hybrid and battery electric light commercial vehicles, electric two-wheelers and electric three-wheelers.

The company have been gaining global market share across products to reach a share of approximately 5% for differential bevel gears, 3.0% for starter motors and 8.7% for BEV differential assemblies, in calendar year 2020.

The company originally incorporated as SonaOkegawa Precision Forgings Limited on Oct 27, 1995 has changed its name to Sona BLW Precision Forgings Limited on June 28, 2013 and a fresh certificate of incorporation dated July 23, 2013. During FY20, the company acquired 100% stake in Comstar Automotive and Comstar Automotive HK for an aggregate consideration of USD 124 million as per the share purchase agreement (SPA) between the company, Comstar Automotive, Comstar Automotive HK and Singapore Topco dated Oct 16, 2018 and subsequently amended on July 2, 2019. The acquisition was completed on July 5, 2019 and the Comstar Entities became Subsidiaries ofthe Company with effect from July 5, 2019. Under the SHA Blackstone acquired 66.2% stake in Sona BLW. On Dec 20, 2019, the BoD of the company approved a scheme of merger of Comstar Automotive with the company with appointed date being July 5, 2019. The Scheme is currently pending approval by the NCLT Chandigarh and is subject to receipt of requisite approvals.

It has nine manufacturing and assembly facilities across India, China, Mexico, and USA. Of the six units located in India 3 units (including 2 leased units)were located at Gurugram; one leased unit at Manesar; 1 owned unit at Pune & 1 owned unit at Chennai. While its facilities in India (Chennai), China, Mexico and USA manufacture conventional and micro-hybrid starter motors and BLDC traction motors that located at Gurugram, Manesar and Pune in India manufacture differential gears, differential assemblies, and other gears. Its facilities in India are manufacturing plants, but the facilities in US, Mexico and China operate as satellite final assembly plants.

Indian manufacturing facilities supplies products to six out of the top ten global PV OEMs, three out of the top ten global CV OEMs and seven out of the top eight global tractor OEMs by volume. It also has eight warehouses, of which five are in India and three across USA, Germany, and Belgium. Further it has its digital simulation, testing and validation facilities located at three R&D centers in India.

IPO consists of two components, i.e., fresh issue aggregating Rs 300 crore and offer for sales by one of the promoters, aggregating to Rs 5250 crore. One of the promoters, Singapore VII Topco III Pte Ltd., an affiliate of The Blackstone Group Inc is selling part of its stake through offer for sale aggregating upto Rs 5250 crore. Post OFS, the shareholding of Singapore VII Topco III will decline to 34.18% on expanded post issue equity down from 66.28% pre-IPO.

Currently SunjayKapur and SonaAutocomp Holding Private Limited along with Singapore VI Topco III Pte. Ltd, an affiliate of the Blackstone Group Inc are the promoters of the company. While SonaAutocomp Holding and SunjayKapur Family trust holds 33.12% stake post IPO expanded equity (down from 33.72% pre ipo) and that of Blackstone at 34.18% Post IPO expanded equity.

Proceeds from fresh issue will be used for repayment and pre-payment of identified borrowings in full availed by the company to the extent of Rs 241.117 crore and balance for general corporate purposes.

Total debt of the company as end of March 31, 2021, stood at Rs 366.26 crore including long term loan of Rs 249.748 crore up from Rs 306.782 crore as end of March 2020.

Strengths

Strong product basket comprising differential gears, differential assembly, starter motors catering to various auto segment such as passenger, commercial, and 2/3 wheelers as well as ICE/Hybrid/Battery Electric based vehicles. The company in FY 2021 got about 27.8% (down from 41.5% & 34.8% in FY2019 and FY2020) of its revenues from differential gears, 17.6% (up from 4.5% & 5.6% in FY2019 and FY 2020)from differential assembly; 23.8%( against 33.8% and 25.9% in FY2019 and FY2020) from conventional starter motors; 26.7% (against 17.0% & 29.5% in FY2019 and FY2020)from micro hybrid starter motors and 2.8% (up from 2.3% & 3.3% in FY2019 and FY2020) from other gears.

The company is one of the two largest exporters of starter motors from India. It is also amongst the top ten global starter motor suppliers based on its exposure to the PV segment and market share in calendar year 2020. The company is also among the top ten players globally in the differential bevel gear market by overall volumes of differential bevel gears supplied to PVs, CVs and tractors.

Strong OEM client base as it serves 6 of the top 10 global PV OEMs, 3 out of top 10 global CV OEMs and 7 out of top 8 global tractor OEMs by volumes. Some of its key OEM customers (in alphabetical order) include a Global OEM of EVs, a North American OEM of PVs and CVs, Ampere Vehicles, an Indian OEM of PVs, CVs and EVs, Ashok Leyland, CNH, Daimler, Escorts, Escorts Kubota, Geely, Jaguar Land Rover, John Deere, Mahindra and Mahindra, Mahindra Electric, Maruti Suzuki, Renault Nissan, Revolt Intellicorp, TAFE, Volvo Cars and Volvo Eicher. It also serve selected leading Tier 1 automotive system suppliers such as Carraro, Dana, Jing-Jin Electric, Linamar and Maschio.

Apart from wide product for diverse vehicles segments, it has diversified market presence across geographies. For FY 2021, it derived 36.1%, 25.0%, 26.5% and 7.6% of its total income from sale of goods with end-use in North America, India, Europe, and China, respectively.

Only about 25.1% (34.7% in FY2019 and 26.8% in FY2020) of its revenues is from Internal Combustion Engines (ICE) dependent, with balance revenues coming from EV/Hybrid/Power-Source-Neutral.

The company is a leading supplier to the fast-growing global Electric Vehicle (EV) markets and derived 13.8% revenues from the Battery EV (BEV) market and 26.7% from the Micro Hybrid / Hybrid market in FY 2021. Its global market share of BEV differential assemblies in calendar year 2020 was 8.7%. With product offerings spanning across all types of conventional and electrified powertrains, the company is one of the few automotive technology manufacturers that are well-positioned to gain from high growth industry trends. Current global trend in the automotive industry is towards electrification of vehicles, which continues to expand, driven by government regulations related to emissions, such as Corporate Average Fuel Economy standards, as well as consumer demand. Battery Electric Vehicles (BEVs) are expected to grow at a CAGR of approximately 36% between calendar years 2020 to 2025 with increased market penetration. BEV global vehicle production volume is expected to grow by five times in the next five years from 2.3 million units in calendar year 2020 to 11.2 million units in calendar year 2025. As supplier of EV differential assemblies, differential gears, BSG systems and EV traction motors into growing BEV market, the company stands to gain. The company have been supplying differential gears in the global EV market since April 2016 and differential assemblies since 2018, and according to the Ricardo Report, its global market share of BEV differential assemblies in calendar year 2020 was 8.7%. Further, as the realisation of product for EV is significantly higher than to that of conventional ICE vehicles, the company hopes to capture greater value on even lower volume. India targets about 70% of all commercial PV, 30% of private PV, 40% of buses, 80% of two-wheeler and 80% of three-wheeler sales to be electric by 2030.

As on March 15, 2021, the company had 15 development programs for supply of systems and components to EV OEMs across North America, Europe, China, and India. Of these, 15 development programs active production process has commenced for eight programs and regular production is yet to commence for seven programs. This will increase its market share in EV OEM business both in India and overseas.

The company has strong R&D, engineering and technological capabilities in precision forging, mechanical and electrical systems, as well as base and application software development.

On the back of focus on design and material selection as well as better productivity, the company enjoys operating margin of over 26% (as per pro-forma financials of the company) in the last 3 fiscals.

Opportunity to grow its market share for differential assemblies and differential gears in Europe, where it currently has limited market share with focused strategy on increased penetration.

Chennai manufacturing unit enjoys the status of a 100% export-oriented unit and thus exempted from payment of GST and customs duty on all components and capital goods imported for that unit. Similarly, its unit in Mexico is also entitled to certain tax benefits such as duty exemption for import of goods, as it is set up as a 'Maquiladora' unit.

Increase in RM prices will not have any shattering impact on the company considering its steel and copper is a complete pass through to customers; only Aluminium with finds an approx. of 50% pass through.

Weakness

Top ten customers accounted for 79%, 80.8% and 79.6% of its total income from sale of goods for FYs 2019, 2020 and 2021, respectively, reflecting higher customers concentration risks.

Majority of its business comes from the auto sector, which is cyclical in nature.

Apart from manufacturing plants located at Gurugram, Manesar and Pune all others are either operating at a capacity less than or equal to 52% with its Chinese plant operating at a capacity in early teens.

Slow transition to BEV technology or any delay in meeting the EV targets in leading auto markets such as India and some other major markets may impact the pace of growth of the company going forward.

Failure to successfully integrate the strategic investment could adversely impact its results of operations and financial condition. In the past, the company have in the interests of it and its stakeholders had to take write-offs or make provisioning related to its business entities in USA (pertaining to investment in Sona BLW Precision Forging Inc, USA) for Rs 107.162 crore and Europe (pertaining to investment in Sona Holdings B.V., The Netherlands) for Rs 32.828 crore, which had to file for insolvency proceedings.

Singapore Topco has availed a loan from certain overseas lenders. As on April 30, 2021, an aggregate principal amount of approximately USD 28 million remains outstanding under this loan. Security has been created over the entire share capital of Singapore Topco by BCP Topco I Pte Ltd., the holding company of Singapore Topco in favour of such overseas lenders in this regard. While there are no events of default that are continuing as on date under the overseas loan documents, to the extent that any amount under the loan facility remains outstanding, any continuing event of default at any time during the term of the overseas facility may lead to enforcement of the pledge, which could potentially lead to a change in control of the company.

Yet to receive approval for a write-off from the regulator in respect of its erstwhile overseas step-down subsidiary, i.e., Sona BLW Precision Forge Inc., USA, which had filed for insolvency proceedings and the company was required to take certain write-offs. As required under applicable law, the company had applied for approval to the RBI for write-off of an amount of USD 2.03 million paid by the company against invocation of a standby letter of credit issued by one of its banks in favour of a lender of its step down overseas subsidiary, among other things, in its letter dated April 24, 2017, and subsequent letters dated December 13, 2018, and January 11, 2019.

The company as of March 31, 2021, had a contingent liability of Rs 10.135 crore that had not been provided for.

Statutory auditors of the company have included an audit qualification in relation to Restated Consolidated Financial Information for FY 2020 for the matter stated below, while mentioning that it does not have any effect on consolidated profit and equity attributable to the owners for Fiscal 2021. The qualification states that due to the unavailability of the consolidated financial statements of Sona BV and its subsidiaries for the period from April 1, 2019 to July 4, 2019, the consolidated financial information of Sona BV Group for the period from April 1, 2019 to July 4, 2019 has not been included in consolidated financial statements for Fiscal Year 2020, and the assets and liabilities of Sona BV Group have been derecognized at their respective carrying values as at March 31, 2019 instead of July 4, 2019. This is because 81% shareholding in SONA BV, which was classified as a discontinued operation in the consolidated financial statements for Fiscal Year 2019, was sold to SonaAutocomp on July 4, 2019, and consequently, the company, did not exercise control over Sona BV from July 5, 2019.

Valuation

Consolidated re-stated revenues of the company for the fiscal ended March 2021 were up by 51% to Rs 1566.30 crore. The increase in sales was due to the full year impact of the acquisition of the Comstar Entities during Fiscal 2021 as compared to the impact of only nine months for Fiscal 2020 commencing from July 5, 2019. The increase in sales is also attributed to the ramp-up of sales volume for some of the new contracts and growth in sales in the Indian tractor market.Higher sales and 490 bps expansion in OPM to 28.2% facilitated 82% jump in operating profit to Rs 441.02 crore. The PBT more than doubled (up 103%) to Rs 313.90 crore. With EO expense standing higher at Rs 13.91 crore compared to a write-back of Rs 232.05 crore, the PBT after EO was down 22% to Rs 300 crore. Taxation was up 218% to Rs 84.83 crore and thus PAT from continuing business was down 40% to Rs 215.17 crore.

However looking into the 3 year pro-forma financials of the company that is more relevant and comparable, the sales for FY21 was higher by 28% to Rs 1566.30 crore. The increase was due to ramp-up of sales volume for some of the new contracts and growth in sales in the Indian tractor market. With OPM expand by 150 bps to 28.2%, the operating profit was higher by 36% to Rs 441.02 crore. After accounting for lower other income, higher interest and higher depreciation, the PBT was up by 38% to Rs 313.90 crore. With EO Expense stand higher at Rs 13.91 crore (against nil), the PBT after EO was up by 32% to Rs 300 crore. Eventually the PAT was down by 3% to Rs 215.17 crore after accounting for higher taxation that was up at Rs 84.83 crore compared to modest RS 6.16 crore in the corresponding previous period. The profits for FY21 has recovered back to FY19 levels after a dip in FY20.

Consolidated EPS for FY2021 at upper price band stood at Rs 3.9 and that works out to a PE of 74.6 times. In comparison Igarashi Motors that is into electric motors including BLDC motors for automobiles quotes at a PE of 57.9 times. However, Bosch, the auto component major with large diverse products, quotes at 97.4 times of its FY2021 consolidated EPS. Similarly Motherson Sumi Systems quotes at a PE of 72.3 times of its FY21 condolidated EPS.

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