Company Overview Sona BLW Precision Forgings Limited designs, manufactures, and supplies systems and components for the automotive industry in India and internationally. The company manufactures various automobile parts. Its products are used in passenger, commercial, off-highway vehicles; conventional and electric cars, and two and three wheelers. The company was formerly known as Sona Okegawa Precision Forgings Ltd. and changed its name to Sona BLW Precision Forgings Limited in 2013. The company was incorporated in 1995 and is headquartered in Gurugram, India. The company was listed as a public company in 2021. RECOMMENDATION Date Current Price Intrinsic Value: Perpetuity Method Multiple Method Industry Sector Ticker Stock Exchange Shares Outstanding Market Capitalisation HOLD 06-09-2022 INR 524 INR 359 INR 446 Manufacturing Auto Parts SONACOMS NSE | BSE 5.84 Crores INR 30.62 Crores Investment Summary HOLD recommendation for SONA COMSTAR (the “Company”) following the continued dip in the share price since DATE? against all major broker coverages. The analysis is based on a Discounted Cash Flow (DCF) Method using the Perpetuity Growth Method and Multiple Method. The recommendation relies on the following key inhibitors: (1) Stock price reached at 52W low post the IPO launch in 2021, (2) Usage of IPO proceeds to pay off long term debt obligations, and (3) Subdued outlook for the Electronic Vehicle (EV) auto parts manufacturing industry. The global outlook on the industry remains subdued to date on account of supply and demand issues, ongoing pandemic risks and the geopolitical conflicts in Europe which further prevents a BUY recommendation. The Company is a true example where an organisation delivers short-term capital gains owning to the presence of word-of-mouth but starts realizing its true value sooner than expected. Analysis finds the company to be highly overvalued given that its BF EV/EBITDA was ~37.5x while the same for its peers was ~13.4x. (Source: Bloomberg) Business Model Sona Comstar is the engine of value creation. It manufactures differential assembly and gear parts, motor control units, conventional and micro/plug-in hybrid starter motors, and EV transmission gears and traction motors. The Company has a widespread presence in terms of manufacturing units across the world. Strategic priorities involve increasing EV presence, increasing global market share, diversifying revenue mix and investing in technology. Majority of the revenues are coming from North America followed by India and Europe. The Company is operating in a niche segment for which the steps for growth in the Indian economy has been laid but much still remains as unseen. Source: Annual Report Company Strategy The company’s corporate strategy is to maintain its position as a leading electronic vehicle (EV) component manufacturer. Central to this goal is to invest more in technology than its rivals and to stay ahead of competition, which is not evident in its financials. The three main areas at which we see the future R&D being directed at are hybrid solutions, further electrification of the supply chain and taking advantage of the EV revolution. Recognizing the global trend towards subsidy grants on EV vehicles, the Company believes technology will allow it to outpace the market. Q1FY23 Results Review Sona BLW Precision Forgings (SONACOMS) Q1FY23 sales growth was relatively muted primarily on account of decline in its key markets (European and China PV market). The Company made first major EV breakthrough in domestic market for supplying traction motors to Indian Electric 2W OEM. It booked 6 new EV programs during the quarter. Its order book increased by 10% Q-o-Q to INR 205 Bn (~9x FY22 sales). KEY TAKEAWAYS: The revenue growth has been led by BEV where company have grown by 68% and reached 29% revenue share in this quarter. The Company has faced margin pressure due to increase in steel prices, power outages on the supply side and on the demand side two markets were majorly impacted due to the ongoing war between Russia and Ukraine. Despite of strong revenue growth, EBITDA margins has seen a push to the lowest level in the six years . The Company also mentioned that the Q1 was special for them as this being their 2nd best quarter ever for business development led by significant new EV program wins or final drive differential assemblies. Capital Turnover Ratio is stable at 3.9x confirming that growth in working capital is in line with the revenue growth. Fixed asset turnover ratio is at 4.5x. Research and Development (R&D) Contrasting Picture Leadership of the company dictates R&D as one of the strategic priorities. The reality is in complete contrast to the thought. Investments in R&D have gone down by ~50%. The IPO proceeds were used to reduce obligations on the long-term debt borrowings. The nature of the industry itself necessitates continued investment in R&D to ensure innovation and long-term sustainable growth thereby generating positive Total Shareholder Returns (TSR). Keeping in mind the same, “Additions to Intangibles” have been taken as nil in the DCF model as the IPO proceeds have been used up and future profits may not be sufficient to enable increasing R&D investment. Source: Annual Report Environment, Social and Governance (ESG) Leadership of the During the year under review, the Board of Directors constituted a committee called the Environment, Social Governance (ESG) Committee to have an oversight over the implementation of ESG Framework of the Company. Environment Energy Intensity and Water Intensity per rupee of turnover is < INR 1. The Company has installed a Zero Liquid Discharge (ZCD) plant at the Gurugram site. Air Emissions (other than GHG emissions) are at the minimal level. The Company recycles its Hazardous & Non-Hazardous waste product through authorized recyclers. OUTLOOK: Positive Board of Directors Audit Committee Corporate Social Responsibility Committee Stakeholders Relationship Committee Nomination and Remuneration Committee Risk Management Committee Environment, Social and Governance Committee Social The Company has a Corporate Social Responsibility (CSR) Committee as mandated by Section 135 of the Companies Act, 2013. In FY22, the Company has undertaking 11 CSR projects benefitting technology entrepreneurs, incubators, students and the general public. OUTLOOK: Neutral Governance BOARD OF DIRECTORS: Board of Directors met 9 times to discuss and deliberate on various matters. All the members of the Board attended the meeting regularly. Representation of the Board is highly skewed in favour of males and the same trend is evident as we progress down the hierarchy. EXECUTIVE MANAGEMENT: The executive team is highly experienced and has relevant education background in their specialized fields, including finance, technology and sales, which contributes to Vestas reaching its goals and vision. SHAREHOLDERS: Majority of the shareholders comprise of Promoters and Promoters Group followed by Mutual Funds and Foreign Portfolio Investors. Retail Investors constitute about 6.5% of the total shareholding structure of the company. OUTLOOK: Neutral Industry Outlook The outlook for 2022 is of continued recovery in vehicle sales, principally led by a gradual easing of supply-side constraints, particularly the availability of semiconductors. IHS Automotive expects the global light vehicle sales to reach ~80.4mn in 2022, but supply and demand issues, coupled with the ongoing pandemic risks, may cause hindrance to auto industry’s recovery throughout the year. EVOLVING COMPETITIVE LANDSCAPE: The competitive realm of the automotive industry is shifting away from traditional classifications based on legacy, established production systems or geographical factors. Due to the convergence of multiple new technologies, the sector has witnessed a plethora of new entrants and new business models. The basis of competition in the industry has shifted from cost leadership and manufacturing excellence to leadership through technology and design excellence. ELECTRIFICATION: While the automotive industry had to navigate through various uncertainties in recent years, a sustained trend has been the accelerated adoption of EVs. Rising awareness regarding climate change, regulatory guidelines with regards to stringent emission and fuel economy norms, consumer preferences to reduce CO2 emissions, coupled with favourable government policies and fiscal support, are expected to drive the growth of electric vehicles over the foreseeable future. GROWING DIGITISATION: Digitalisation drives higher process efficiency and has resulted in increased performance and safety. Customers’ expectations have increased significantly, and the features and functions that a vehicle must offer, have become increasingly relevant, as they have started viewing vehicles as digital objects which are connected and need to integrate with other products in their environment.