Verdict: Yeh Sona hain sone se mehenga
Rs. 5,550 cr IPO: Essentially a part-exit for co-promoter Blackstone (from 66% holding to 34%) as 95% of IPO is OFS. Balance Rs. 241 cr fresh issue proceeds will repay debt to bring down net debt to Rs. 97 cr.
IPO date: Mon 14th June to Wed 16th Jun 2021
Price band: Rs. 285-291 per share
Post issue Mcap: Rs. 17,000 cr implying a high dilution of 33%
Listing date: 24 Jun 21.
Auto Component Player, with 75% international sales
Owned by Blackstone (66%) and Sona Group (34%), Sona BLW garners 25% of Rs. 1,566 cr revenue from India, 36% North America, 27% Europe, 8% China, enjoying 8% global market share in battery electric vehicle (EV) differential assembly, 5% in differential bevel gear and 3% in starter motor. Since it does not cater to 2Ws, which witnessed maximum volume de-growth last year due to covid, company clocked 28% YoY revenue growth in FY21, helped by new customer wins, with segmental sales for PV:CV:OHV split 68:14:17. While company has a decent EV exposure comprising 14% of revenue, starter motors (part of Comstar portfolio merged in mid-2019) accounts for half of the revenue, which is a redundant component in EVs, highlighting risk in a significant part of the portfolio.
Superior Margin with 17% RoE
Company earns superior margin over peers, as material cost accounts for ~40% of revenue against 55-60% industry benchmark. While FY21 YoY revenue growth was 28%, between FY18-21, it has been rather modest at 9% CAGR. Also, profitability was impacted during this period, with PBT margin slipping from 22% (FY18) to 20% (FY21), which is rather surprising, as global market share in key products has improved. Further, due to rising material, employee and other costs, Q4FY21 PBT margin fell to 19%, which is contradictory to most peers reporting sequential improvement in Q4FY21 margins.
FY21 revenue and PBT stood at Rs. 1,566 cr and Rs. 314 cr respectively, with an EPS of Rs. 3.75, while Q4FY21 revenue was Rs. 540 cr, with PBT of Rs. 103 cr and EPS of Re.1.04, on a large equity base of Rs. 573 cr (FV Rs. 10 each). While growth was healthy, early signs of working capital pressure was visible in FY21, with debtors rising to 3.2 months outstanding (31.3.21) and 3.4 months (31.12.20) from 2.3 months as of 31.3.20 (during peak pandemic) and historically too. Inventory also rose marginally to 2.3 months from less than 2 months earlier.
But Valuation Quite Stretched
At Rs. 291, Sona’s m cap will be close to Rs. 17,000 cr, leading to FY21 PE multiple of 77x. Even after factoring in an optimistic 35% profit growth for FY22, PE multiple works out to 57x which is very demanding, as also much higher than all mid-cap auto component players in Rs. 17,000-20,000 cr m cap category. Endurance, Minda Industries, Sundram Fasteners are trading at FY22E PE multiples between 31-39x, despite clocking comparable RoE of 16-17%. Thus, Sona’s aggressive pricing hardly leaves anything on the table for prospective investors, in light of high dilution via significant exit by co-promoter, margin pressure visible in near term and part product portfolio facing slower demand.
On the macro level, most auto component companies are presently ruling at all-time high levels, which is not comforting, given severe impact of second wave and rising commodity cost pressures.
Our short term view on the sector remains cautious, as FY22 profitability may be impacted due to sharp rise in commodity prices. In this backdrop, aggressive issue pricing factors in all the positives, without leaving much for near term upside. Hence, we recommend skipping the IPO.
Grey Market Premium (GMP) of Sona Comstar: Grey Market Premium of Sona BLW is an unofficial figure, against guidelines of SEBI and we are strongly against it. To know how it operates, read our article ‘grey market premium’.
Disclosure: No Interest.