Sona Comstar IPO: Should you subscribe to the issue?

The Rs 5,550-crore initial public offer (IPO) of automotive supplier Sona BLW Precision Forgings (Sona Comstar) opened for subscription on Monday, amid  'subscribe' rating from most brokerages, based on the company's growth prospects. The price band for the issue, which closes on June 16, is fixed at Rs 285–291 per share.

The issue consists of a fresh sale of Rs 300 crore and an offer for sale (OFS) worth Rs 5,250 crore, of shares held by Singapore Topco, an affiliate of the Blackstone group. Singapore Topco's current holding stands at 66.2 per cent of the pre-offer paid-up equity capital of the company. Sona BLW Precision Forgings garnered Rs 2,497.5 crore from anchor investors on June 11.

The company intends to use the proceeds from the fresh issue to repay Rs 241 crore of borrowings.

About the company

Sona Comstar designs, manufactures, and supplies automotive systems and components such as differential assemblies, differential gears, conventional and micro-hybrid starter motors. And motor control units to automotive original equipment manufacturers (OEMs) across the US, Europe, India and China.

The company has nine manufacturing and assembly facilities across India, China, Mexico and the US, of which six are located in India.

On the financial front, over FY18-21, Sona Comstar's revenue/Ebitda/Adj. PAT grew at a robust CAGR of 36 per cent/37 per cent/39 per cent given its thrust in the global EV market while earnings before interest, tax, depreciation, and ammortisation (Ebitda) margins expanded 76bps to 28.2 per cent. "Its margins are much superior vis-a-vis peers, given its critical component products. The net D/E stood at 0.3x as of FY21, which post repayment, would reduce to zero. Return ratios are healthy with FY21 RoE/RoCE at 16.5 per cent/15.3 per cent," Motilal Oswal said in an IPO note.

Here's how top brokerages across the country said about the issue.

ICICI Securities -- Subscribe

Sona Comstar stands apart from much of the rest of the auto component universe by providing a strong play on the upcoming mega opportunity of electrification. As of FY21, the company obtained around 40 per cent of revenues from battery EVs. Moreover, it is among the top 10 companies globally for differential bevel gears for passenger vehicles (PVs), commercial vehicles (CVs) and tractors, and for starter motors in PVs.

SBWL provides an exciting play on electrification and possesses healthy financial strength but valuations proposed are rich (around 74x P/E on FY21 basis). Nevertheless, we believe the company offers  a good investment case on the back of strong growth prospects. Accordingly, we recommend 'Subscribe' only for long term. Slower than anticipated revival in auto sales volumes, steep rise in metal prices, and Forex transactional impact on financials remain the key concerns for the company.

Motilal Oswal -- Subscribe

We like SBPFL given its presence in the fast growing global EV market, diversified portfolio across categories and robust financials. The  issue is valued at 74.1x FY21 P/E on a post issue basis. Though the valuation appears fully priced in, given its thrust in fast evolving EV space both in India and globally, the market would like to give premium to such emerging growth story. Hence, we recommend 'Subscribe' for long term.

Sharekhan -- Subscribe

At the IPO price band of Rs 285-291, the offer is valued at 76.0/77.6 x its FY2021 EPS, considering the diluted equity at the upper and lower price band. The company has a strong margin profile due to its critical components offerings, in India as well as globally. In addition, the company makes superior return ratios. In FY21, the company’s return on net worth (RONW) stood at 16.5 per cent, which was better than most  of its peers.

The company’s strong established relationships with leading OEMs in India and globally, improved outlook of automobile industry, gain from its strong manufacturing and engineering capabilities, and growing opportunities in EV space would help in improving growth prospects in the coming years.

Ventura Securities -- Subscribe

Sona BLW Precision Forgings Ltd is one of India’s leading automotive technology companies. We expect its overall revenues/EBITDA/PAT to grow at a CAGR of 42.5 per cent/ 45.6 per cent/56.4 per cent, respectively, by FY24. Ebitda and net margins are expected to improve by 190 bps and 440 bps to 30.1 per cent and 18.2 per cent, respectively, over the same period. Consequently, return ratios, RoE and RoIC, are also expected to improve by 1,300 bps and 1,600 bps to 29.5 per cent and 36.0 per cent, respectively by FY24.

That said, the automotive industry's cyclical nature and the fact that SBPF derives a significant percentage of revenues from its top 10 customers remain its key concern areas.