Recommendation from Auto Ancillaries - Castings/Forgings Sector

This column gives you a scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year[EasyDNNnews:PaidContentStart]

SONA BLW PRECISION FORGINGS : DRIVEN BY THE EV BOOM

HERE IS WHY
✓ Strong order book
✓ Boost in the electric vehicle market
✓ Strategic diversification plans

I ndia has become the fastestgrowing major economy in the world. The auto components industry accounts for 2.3 per cent of India’s GDP currently and by 2026 the automobile component sector will contribute 5-7 per cent of India’s GDP. As per the Automobile Component Manufacturers Association’s forecast, auto component exports from India are expected to reach USD 30 billion by 2026. The auto component industry is projected to record USD 200 billion in revenue by 2026.

Projections indicate that the Indian electric vehicle (EV) market valued at USD 2 billion in 2023 could surge to USD 7.09 billion by 2025. Industry estimates also forecast the domestic EV market to achieve 10 million annual sales by 2030. Keeping in mind this growth of the Indian auto ancillary and EV market, the choice scrip for this issue is Sona BLW Precision Forgings Limited. The company is an India-based automotive technology company engaged in designing, manufacturing and supplying engineered automotive systems and components such as differential assemblies, gears, conventional and micro-hybrid motors, BSG systems and EV traction motors across all the vehicle categories. The company develops mechanical and electrical hardware systems, components as well as base and application software solutions. In Q2FY24, on a consolidated basis, the company’s net revenue rose by 20.61 per cent YoY to ₹787.47 crore compared to ₹652.91 crore from the previous year’s same quarter. 

On a sequential basis, its revenue increased by 7.69 per cent from ₹731.38 crore. For Q2FY24, the PBIDT excluding other income increased by 36.44 per cent and stands at ₹219.99 crore from ₹161.23 crore in the previous year’s same quarter. Its net profit showed growth of 34.06 per cent and stands at ₹124.06 crore from ₹92.54 crore in the previous year’s same quarter. On a sequential basis, the net profit increased by 10.74 per cent from ₹112.03 crore. On the geographical front, the company has a well-diversified revenue mix.

For H1FY24, up to 40 per cent of the company’s revenue was derived from North America, 30 per cent from India, 23 per cent from Europe and 7 per cent from the rest of the world. In terms of vehicle segment, the company has diversified by 70 per cent from passenger vehicles, 15 per cent from commercial vehicles, 10 per cent from off-highway vehicles and 5 per cent from two and three-wheelers. The company has a strong order book of ₹22,100 crore as of Q2FY24, which is 8.3 times of its FY23 revenue. Up to 78 per cent of the orders are from the EV market with the balance 22 per cent from the non-EV market. 

The company has four major strategic priorities that include electrification, catering to the global market, diversification and a focus on technology. The company has a vision to become one of the world’s most respected and valuable mobility technology companies. Sona BLW Precision Forgings is currently trading at a PE of 72 times as against the industry PE of 32.2 times. However, this is lower than its three-year median PE of 83.2 times. In the last three years, the company has delivered average ROE of 19 per cent and ROCE of 21.6 per cent, respectively. Considering the company’s business, growth of the auto ancillary sector and boom in the EV domain, we recommend BUY.

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