Novelic buy adds to Sona BLW's growth opportunities; stock up 6% in one day

Brokerages are neutral on the stock given near term challenges and valuations

The stock of Sona BLW Precision Forgings (Sona BLW) was up 5.92 per cent in trade on Tuesday after the acquisition of a 54 per cent stake in Serbia-based Novelic. The radar sensor technology company, with a focus on in-cabin sensing technology, was purchased by Sona BLW for an enterprise value of €64.5 million or about Rs 566 crore.

Novelic has a topline of €9.3 million (about Rs 82 crore) and has been growing its revenues by 53 per cent annually over the last ten years; it is estimated to have ended the 2022 calendar year (CY22) with a net profit of €2.5 million (Rs 21 crore). The company is valued at 26 times its estimated CY22 earnings.

With the acquisition, the Sona BLW is looking at expanding its presence in the electrified autonomous vehicle segment globally. A part of this is the advanced driver assistance system or the ADAS market, which is expected to hit the $43-billion-mark by CY30, from about $12 billion in CY20.

The company highlighted that the acquisition -- with its full vertical integration from chip and sensor design to signal processing software -- allows partnerships across the value chain of original equipment manufacturers, audio-visual makers, tier-1 suppliers and chip manufacturers.

Though the acquisition will be earnings accretive from the start, its contribution will be negligible in the near term. Says Motilal Oswal Research, “While the acquisition will not contribute meaningfully to the company’s financials in the near term (with 3 per cent revenue contribution in the 2022-23 financial year or FY23), it could be a 10-15 per cent revenue contributor by FY29 if it achieves management’s expectation of $100 million revenues over the next six to seven years.”

The $100-million revenue from the vertical is expected to be driven by in-cabin solutions, outside cabin solutions (ASPER) and engineering & licensing services, wherein a large part of the current revenue comes from licensing fees.

The brokerage believes that the company is a good proxy play for the global electrification trend, given electric vehicle revenue mix/order book and its focus on expanding product portfolio, global scale, and expanding customer base.

While this will translate into strong earnings growth and healthy capital efficiency, valuations of over 45 times FY24 consolidated earnings per share largely factor in these positives. Motilal Oswal Research has a ‘neutral’ rating on the stock.

Kotak Institutional Equities, too, has a similar view. Rishi Vora and Praveen Poreddy of the brokerage believe that the medium-term growth prospects remain strong while the near-term may remain challenging, given looming recession risks in developed geographies. The brokerage has cut its FY2023-25 earnings estimates by 1-7 per cent on lower revenue growth assumptions, given delay in order book execution owing to multiple challenges and high interest cost assumptions offset by consolidation of Novelic.

Given the near term worries and valuations, investors should await better entry points.