EV growth, market share positive for auto component maker Sona BLW

Auto component maker Sona BLW Precision Forgings (Sona) stock has been under pressure since the beginning of the financial year, falling 16.4 per cent. In comparison, the BSE Auto Index has outperformed the stock with a gain of nearly 20 per cent over the period. While key markets such as Europe and the US corrected due to macro concerns and margin pressure, some brokerages have turned positive on the stock, which is present in the fast-growing auto segment, lower commodity prices and valuation relaxations.

Some pressure on the sales front, particularly in the internal combustion engine or ICE-based business, was reflected in the June quarter due to weakness in global automotive sales (Europe and China) due to supply disruptions. Recession due to Ukraine and COVID related lockdown. The company indicated that the situation has improved in the last quarter and is expected to improve further gradually.

Some of the weaknesses in the ICE business were offset by a 68 per cent year-on-year growth in the electric vehicle (EV) segment. Given the strong growth in this segment, the share of EVs in total revenue has increased to 29 per cent in Q1 as compared to 25 per cent in FY22.

Rishi Vora and Ishwar Bavineni of Kotak Institutional Equities say, although the near term may remain challenging given the risk of recession, especially in the EU geography, medium-term growth prospects remain strong. This will be led by a strong order book, particularly in the Differential Assembly and Traction Motor segment, a higher mix of the EV segment and an increase in content per vehicle led by new product launches.

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A key trigger for the stock is its exposure to the electric vehicle segment and a healthy order book providing growth visibility. The company won six new events and added four new customers in the EV segment in the first quarter. The total order book is now Rs 20,500 crore. More importantly, two-thirds of the order book belongs to the EV segment; It should grow as its flagship products are gaining market share.

Growth prospects in the domestic market are strong, and Sona has a high market share for differential gear that varies between 60-95 per cent across passenger and commercial vehicles product segments. The electric two- and three-wheeler motor controller business is also expected to see strong growth on the back of electrification trends and new orders. However, the company is facing the risk of margin pressure in the global market.

Operating profit margin fell 350 basis points year-on-year and 40 basis points sequentially to 24.2 percent. Margins were impacted by a sharp increase in raw material costs, which was only partially offset by an improved product mix. A correction in commodity prices and favorable currency effect is expected to positively impact margins in the current quarter. The company has guided for a margin range of 26-28 per cent over the long term.

Raunak Mehta and Vivek Kumar of JM Financial expect the company to post annual revenue growth of 39 per cent in the period FY 22-24. They believe that a diversified revenue stream, growing EV share, strong order book and financial metrics make Sona Comstar one of the best plays in the EV space.

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While there are near-term pressures, the stock’s recovery in recent months has made valuations relatively cheap, from 50 times FY25 earnings per share in early 2022 to 40 times currently. Furthermore, given the strong long-term outlook, investors can add shares on the downside from a longer-term perspective.