Sona BLW shifts gear with order boost from electric vehicle space

Firm's efforts to broaden portfolio, scale-up, and diversify customer base will lead to strong earnings growth: Analysts

From its lows this month, the stock of Sona BLW Precision Forgings is up 10 per cent on better-than-expected results. The stock rose by 4 per cent in the trading session on Tuesday after Japan’s Nikkei Group said that the Indian automotive component major has topped its rankings in terms of competitive advantage.

The competitive advantage rankings are based on sales, profit margin, capital expenditure, research and development, and market capitalisation.

The near-term trigger for the stock is the better-than-expected operating performance in the October-December quarter of 2023-24 and the trend of strong order wins, with a majority of them in the electric vehicle (EV) space.

The company reported consolidated revenue of Rs 780 crore, a 13 per cent year-on-year (Y-o-Y) increase on the back of new order execution. However, its performance on a sequential basis was impacted by the United Auto Workers union strike in the US. The strike in October last year had an impact of Rs 25 crore, and the impact is expected to partially reverse in the January-March quarter.

The company outperformed on the revenue growth front in key markets due to the scale-up of revenue from new programmes. The company indicated that the light vehicle market in the US and the European Union remains healthy, even as the Indian automotive segment remains volatile.

EV revenue saw a growth of 7 per cent on a sequential basis, and the share of EVs in overall revenue was at 28 per cent for the nine months ended December. This is expected to improve as new EV order wins constitute 79 per cent of the net order book.

Analysts Ronak Mehta and Vivek Kumar of JM Financial Research expect a strong net order book at Rs 24,000 crore and consistent expansion in the product portfolio to aid growth.

The brokerage believes that the company is one of the best plays in the EV space, given a diversified revenue base, increasing share of EVs, and a strong order book. It expects Sona BLW to post a 28 per cent revenue growth and a 36 per cent earnings growth over 2022-23 (FY23) through 2025-26 (FY26). It has a ‘buy’ rating with a target price of Rs 740 per share.

However, Nuvama Research expects revenue growth to moderate to 22 per cent over FY23-26 after growing at 30 per cent over 2019-20 through FY23.

“Despite the large order book of Rs 24,000 crore, we expect growth to moderate owing to marginal growth in the underlying industry, delays in order ramp-ups, and slower global EV penetration,” says analyst Raghunandhan N L of the brokerage.

Growth prospects are moderating for underlying global light vehicles for North America, Europe, and Asia regions with the expectation of marginal growth (<2 per cent) over calendar years 2023 through 2025, he adds.

While revenue growth in the third quarter was in line, margin performance was strong. Gross margins expanded 330 basis points (bps) year-on-year (Y-o-Y) to 59.1 per cent, compared to estimates which are 200 bps lower. The gains were on the back of a better product mix and falling input costs.

The gains on the gross margin front were offset by higher-than-estimated employee expenses, which were up 240 bps Y-o-Y as a percentage of sales (due to the employee stock ownership scheme), resulting in an operating profit margin of 29.3 per cent, up by 210 bps. Given the lower raw material costs, the company expects margins to be around the 28 per cent mark in the near term.

Motilal Oswal is positive on the prospects of the company and highlights that after a challenging FY23, Sona BLW is firmly back on a growth trajectory, led by the recovery in underlying markets and a strong order book.

Further, its focus on broadening the product portfolio, expanding global scale, and cultivating a diverse customer base should translate into strong earnings growth and healthy capital efficiency, say analysts Amber Shukla and Aniket Desai of the brokerage. They, however, have a ‘neutral’ rating as valuations at 49x 2024-25 earnings largely factor in the positives.