SONA BLW Rs 700
First up, a riddle – Is there anything common between diverse Indian industries like Information Technology, Pharmaceuticals, Private Banks, Motorcycles, FMCG? Well, each of these industries enjoyed huge secular tailwinds for extended period of times turning many constituents to grow from small-caps to mid-caps to large-caps and to behemoths like TCS, Infosys, Sun Pharma, HDFC Bank, Bajaj Auto, Hero Motors, Hind Unilever, Nestle etc.
Sometimes stars so align that there is a huge demand for products or services that these industries cater to and companies operating in the field go through unfettered growth for many years. But all that glitters is not gold. For each success, there are more failures. Anyone who has been in the stock market for long enough would remember Satyam Computers, Global Trust Bank, LML, Manpasand Beverages and the list goes on.
Electric vehicles (EV) is one such industry which has a huge runway of growth for as long as the eye can see. Rising pollution levels, limited oil reserves on the planet, falling cost of batteries, growing range on full charge, rising charging infrastructure are some of the reasons for the rosy outlook. As always, there is a huge array of companies on the shelf to choose from. As investors, we want to bet on a company which stands a strong chance to become one of the winners. It is in this context that Sona BLW (Sona) is discussed hereunder.
Sona has low promoter holding of 28% but high FII and DII holding of 34% and 31% respectively. High institutional holding provides some comfort but that alone cannot be the raison d’etre to invest. Sona is one of the leading manufacturers of EV and non-EV components. Its quality and price competitiveness can be gauged to some extent by looking at export contribution to its topline. In FY24, 72% of its sales came from exports while 28% came from India. In terms of technology, EV plus Hybrid contributed over 50% while non-EV contributed the balance 47%. This break up is good as the company is straddling both categories.
In the past 3 years from FY21 to FY24, its revenues have gone up by 2x, Ebitda by 2x, PAT by 2.4x, order book by 1.6x despite events like Covid, Red Sea disruptions, Ukraine war, stagnant global auto sales etc. At the end of FY24, the company had an order book of 22600 cr equivalent to 7x FY24 sales. Around 80% of the order book is EV related. Company has been investing heavily in innovation. Till FY2023, it was spending @ 6% of sales on R&D which was higher than the likes of MNC Bosch which spends @ 4.5%. But in FY24, this was scaled down to 2-2.5% which management concedes to be an aberration. The target in FY25 is to notch it up by 100 bps.
FY24 was strong with revenues up 19%, Ebitda up 30%, PAT up 31%, EPS up 25%.
H1FY25 was also good with revenues up 20%, Ebitda up 22%, PAT up 21% even in these subdued times when EV growth especially in Europe is weak. It enjoys strong margins with OPM and PAT margins being around 28% and 16% across time frames. Management gives no guidance but sounds confident of maintaining them.
On 23 Oct 2024 Sona announced an interesting acquisition. It is buying the Railway Equipment Division (RED) of Escorts Kubota for an enterprise value of 1600 cr. This division is mainly into brakes and suspension systems for railways. RED did a turnover of 950 cr and EBIT of 179 cr in FY24. Over the last 5 years, its revenues and EBIT have grown at a CAGR of 19% and 18% respectively. The acquisition is expected to be earnings accretive from the very first year and presents significant growth opportunities as per Sona management.
At FY25 estimated eps at Rs 10, it is trading at PE of 63 which is not cheap. If it is able to continue growing at 20% for next 5 years, then with exit PE of 35, it leaves 7% on the table for investors. This is not great but has to be weighed in the context of slow global growth at present despite which, Sona is growing at @ 20%. The world is inevitably moving towards EV and when demand returns, Sona could be a major beneficiary if it is able to maintain its technological edge and price competitiveness.