EV growth, mkt share to forge gains for auto component maker Sona Comstar

Margins could improve given softening commodity prices

The stock of auto component maker Sona BLW Precision Forgings (Sona) has been under pressure since the start of the financial year, shedding 16.4 per cent. In comparison, the BSE Auto index has significantly outperformed the stock, gaining about 20 per cent over this period. While the correction was on account of macro concerns in key markets such as Europe and the US and margin pressures, some brokerages have turned positive on the stock given its presence in fast-growing auto segments, lower commodity prices and valuation comfort.

Some of the pressures on the sales front, especially in the internal combustion engine or ICE-based business, were reflected in the June quarter due to the weakness in global automotive sales (Europe and China) on the back of supply disruption, the war in Ukraine and the slowdown due to Covid-related lockdowns. The company indicated that the situation has improved over the past quarter and is expected to improve further, gradually.

Some of the weakness in the ICE business was offset by the 68 per cent y-o-y increase in the electric vehicle (EV) segment. Given the strong growth in this segment, the share of EVs in overall revenues has increased to 29 per cent in Q1 compared to 25 per cent in FY22.

While near-term may remain challenging given looming recession risk, especially in EU geography, medium-term growth prospects remain strong, say Rishi Vora and Eswar Bavineni of Kotak Institutional Equities. This will be led by a robust order book, especially in differential assembly and traction motor segments, a higher mix of EV segments and an increase in content per vehicle led by newer product launches.

A key trigger for the stock is its exposure to the electric vehicle segment and healthy order book offering growth visibility. The company won six new programmes and added four new customers in the EV segment in Q1. The overall order book now stands at Rs 20,500 crore. More importantly, two-thirds of the order book pertains to the EV segment; this should increase given that its key products are gaining market share.  

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

Operating profit margins were down 350 basis points y-o-y and 40 basis points on a sequential basis to 24.2 per cent. Margins were impacted by the sharp rise in raw material costs, which were only partly offset by an improved product mix. The correction in commodity prices and favourable currency impact is expected to reflect positively on the margins in the current quarter. The company has guided a 26-28 per cent margin range in the long term.

Ronak Mehta and Vivek Kumar of JM Financial expect the company to post annual revenue growth of 39 per cent over the FY22-24 period. They believe that a diversified revenue stream, increasing share of EVs, strong order book, and financial metrics make Sona Comstar one of the best plays in the EV space.

While there are near-term pressures, the correction in the stock in recent months has made valuations relatively inexpensive at 40 times currently from 50 times FY25 earnings per share at the beginning of 2022. Further, given the strong long-term outlook, investors could add the stock on dips with a long-term view.