Midcap Magic: Sona BLW forges electrifying growth in auto ancillary space

Sona BLW Precision Forgings shares have been on an uptrend since March end, gaining more than 32 percent since then. The stock was trading at Rs 550 around 10 am today morning.

Since listing in June 2021, the stock of the auto ancillary manufacturer has gained over 50 percent. It is set to be added to the MSCI Global Standard Index in May, which, according to Nuvama Alternative Research, could cause an inflow of $175 million.

Also read: CEAT zooms on Q4 profits, surprise gross margin improvement

Investor interest is also visible in the rise in institutional holdings. Mutual funds almost doubled their holdings to 27 percent in March 2023 from about 14 percent in June 2022. Foreign institutional investors more than doubled their holdings to 24.69 percent in March from 11.27 percent in December 2022.

The optimism seems to be driven by the company’s increasing presence in electrification of mobility, in both the domestic and overseas markets. This was reflected in the earnings for the fourth quarter, which exceeded expectations.

The company’s net profit increased 54 percent to Rs 119.8 crore from a year earlier. Quarterly revenue was the highest at Rs 744 crore, a 35 percent. The revenue share of the battery electric vehicle (BEV) business was 28 percent, with revenue from this segment Rs 203.7 crore, a 37 percent YoY rise.

Electric entry

EVs made up Rs 16,600 crore – or 77 percent – of Sona’s total orderbook of Rs 21,500 crore as of March 31. The company has 42 EV projects in various stages, including 20 in the production/ramp-up stage, to service 26 customers.

Also read: Subros: Wider EV adoption, PV demand augur well

Sona BLW, based in Gurgaon, entered the electric commercial vehicle (e-CV) segment in the previous financial year by getting a Rs 500 crore order to supply gear-box parts to a North American company. Jefferies analysts noted that this was “a relatively small-sized order” at ~2 percent of the order book but added that it marked Sona’s entry in a new category with a high-value bundled offering of $600-900 per vehicle.

ICICI Securities’ analysts too noted that the new export order kickstarted the company’s journey in the global e-CV segment, after it established a significant presence in e-passenger vehicles. Currently, 66 percent of its total order book is made up of e-PVs, 3 percent comes from CVs, while 8 percent is from two-wheelers.

With all the investor interest, is the stock too expensive? Or is there an upside? The consensus price target is Rs 573, which means over 4 percent upside from the previous close.

Jefferies, which has a ‘buy’ rating on the stock, expects the company’s revenue, operating profit and earnings per share to grow 31 percent, 35 percent and 40 percent CAGR, respectively, over FY23-FY26E. They said its current market price, which is 45x and 33x their FY24 and FY25 earnings estimate, may appear rich but “the premium valuations will sustain, given strong long-term growth outlook.”

They see more upside if production-linked incentive scheme (PLI) benefits accrue. Last March, Sona BLW was one of 75 companies picked for the Component Champion Scheme, one of two categories under the PLIs for the automotive industry.

Analysts at ICICI Securities too have a ‘buy’ rating on the stock but reduced their earnings estimates for FY24 by 6 percent to account for a possible removal of PLI benefits.

Motilal Oswal increased its earnings estimates for FY24/25 by 4.5 percent and 6.4 percent, respectively, to factor in healthy order book execution, a ramp-up in new orders in FY25, and operating leverage. But its earnings estimates for FY24/25 show that the stock’s current stock price factors in all the positives.