Sona Comstar’s Shares Jump The Most Since Listing As Nomura Initiates Coverage With A ‘Buy’

Forged gears manufactured by Sona Comstar. (Source: Company website).

Sona Comstar’s Shares Jump The Most Since Listing As Nomura Initiates Coverage With A ‘Buy’

Shares of Sona BLW Precision Forgings Ltd. jumped to a record high after Nomura initiated coverage on the auto parts maker with a ‘buy’, saying it has one of the highest growth rates and return on equities among global peers that supply to electric vehicles, and large potential opportunity with rising electrification in both India and across the world.

Sona Comstar “has a significant technological edge in making differential gears and assemblies”, the brokerage said in a note. It’s also developing technical capabilities in motors and controllers.

The company has an order book of Rs 14,000 crore, of which electric vehicles account for 57%, Nomura said. “We estimate Sona’s EV revenue to increase from around 14% in FY21 to 40% by FY24.

The brokerage expects 23% and 34% EV penetration in India two- and three-wheelers by FY30, offering an opportunity size of Rs 11,000 crore for motors and controllers. Sona, it said, is working on several new products for EVs like hybrid motors, motor controllers, higher-powered permanent magnet synchronous motors and magnet-less motors. “Success in these products can lead to significant upsides to our estimates, as we estimate the opportunity size can be above $20 billion (approx. Rs 1.5 lakh crore) by FY30. Overall, we expect Sona to deliver a 38% revenue CAGR over FY21-24 and a profit CAGR of 45% over the same period.”

Besides, the Indian government’s announcement on production-linked incentive for exporters can provide a further upside to the stock, the note said. Exports constituted 75% of Sona’s revenue in FY21.

Nomura set a target price of Rs 505 apiece on the stock, implying a potential upside of 23%. That’s also the highest target price ever set for the company, which went public in June. The stock listed at Rs 302.40 apiece, 3.3% higher than its issue price of Rs 291.

Investment Risks Cited By Nomura

  • Weak performance of automotive sector globally: Sona’s business is dependent on the performance of the automotive sectors in the U.S., Europe, India and China. Reduced demand in the market segments, deterioration in the automotive market or a change in regulations, customs, taxes or other barriers or restrictions could have a material adverse impact on the company’s financials.

  • Rapid technological changes in electric vehicles: EVs accounted for about 14% of Sona’s revenue in FY21 and any decline in the trend towards electrification due to rapidly changing technologies, price competition, additional competitors, evolving government regulations and industry standards, frequent new vehicle announcements and consumers’ limited willingness to adopt electric vehicles are risks to future growth.

  • Customer concentration remains high: The top three customers accounted for about 45% of Sona’s FY21 revenue (nearly 80% of revenue from top 10 customers). Loss of any of the top 10 customers or significant loss of market share of any customer could impact the demand for Sona’s products.

  • Limited acceptance of new and incremental businesses: The company has no firm commitments or long‑term supply agreements with customers, and instead relies on letters of intent, purchase orders and customer schedules. Any failure to realise substantially all the revenue from these sales and new and incremental business backlog, could have a material adverse impact on business, cash flows, financial condition and results of operations.

  • Significant competitive intensity.

  • Exchange rate fluctuations.

Besides Nomura, Kotak Securities and IDBI Capital Market cover the counter.

IDBI Capital downgraded the auto stock from ‘buy’ to ‘hold’, but retained its target price of Rs 460, implying a potential upside of 12%.

Sona, according to the brokerage, posted an impressive financial performance in Q1FY22. “Despite intense cost pressure, it reported 173-basis-point expansion in Ebitda margin to 27.7%, which is commendable.” The company, IDBI Capital said, is also likely to be the fastest-growing India-based auto ancillary company.

Shares of Sona Comstar rose as much as 17.7%, the most since listing on June 24, to Rs 484.30, in early trade on Monday before paring some of gains.

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