The IPO frenzy has returned to the Indian stock markets. Sona BLW Precision Forgings, one of the leading auto components manufacturers in the world, had launched its three-day initial public offering (IPO) on June 14. In this article, we take a closer look into the company and its IPO.
Company Profile – Sona BLW Precision Forgings
Sona BLW Precision Forgings Ltd (SBPFL) is an automotive technology company headquartered in Gurugram, Haryana. It was incorporated in 1995. The company is widely known as Sona Comstar. It is primarily engaged in the design, manufacturing, and supply of mission-critical automotive systems and components in India and around the globe. Their products include differential assemblies, gears, conventional and micro-hybrid starter motors, etc. The company also manufactures a range of electric vehicle (EV) traction motors. Hence, they provide essential components required for the production of all types of vehicles.
Last year, Sona Comstar secured its position as one of the top 10 global players in the differential bevel gear segment. It is also the largest exporter of starter motors in India. According to a recent report by Ricardo plc (a consultancy firm), Sona Comstar obtained a global market share of 5% for differential bevel gears and 3% for starter motors in 2020. They also secured an impressive global market share of 8.7% for BEV differential assemblies (used in EVs).
The company caters to the rising demands of some of the largest manufacturers of passenger vehicles (PV), commercial vehicles (CV), and tractors in the world. Their client list includes Ashok Leyland, Volvo, Mahindra & Mahindra, Maruti Suzuki, Daimler, and Renault Nissan.
SBPFL supplies its products across India, Europe, China, and the United States. Close to 95% of its total revenue comes from sales in overseas markets. They own and operate 9 manufacturing and assembly units across India, China, the US, and Mexico. Sona Comstar is also well known for its extensive Research & Development (R&D) activities. The company is run by a set of highly experienced managers and promoters, led by Sunjay Kapur. He has over 21 years of experience in the auto industry. They are backed by US-based investment firm Blackstone Group.
About the IPO
In May 2021, Sona BLW Precision Forgings received approval from SEBI to float an initial public offering (IPO). The public issue will open on June 14, 2021, and close on June 16, 2021. The total issue size of the IPO is Rs 5,550 crore. This comprises a fresh issue of equity shares aggregating up to Rs 300 crore. It also includes an offer for sale (OFS) of up to Rs 5,250 crore by an existing shareholder— Singapore VII Topco III Pte. Ltd. The company will issue a total of ~19.07 crore shares. The price band for the IPO has been fixed at Rs 285-291 per share.
Individual investors can bid for a minimum of 51 equity shares (1 lot), which will amount to Rs 14,941. The maximum number of shares that can be applied by a retail investor is 663 equity shares (or 13 lots). Thus, the maximum amount one can invest in the IPO is Rs 1,92,933. But take care not to apply for more than 1 lot, as your capital may get blocked for no reason if the IPO is oversubscribed.
Sona Comstar will utilise the net proceeds from the IPO for two main purposes. The main priority is to make repayment or pre-payment of its existing debts. The company will spend Rs 241.12 crore from the IPO proceeds to reduce debt. The remaining amount will be used for general corporate purposes. The total promoter holding in the firm will reduce from 100% to 67.30% post the successful completion of the IPO.
Financial Performance
From the table, it is clear that Sona Comstar has posted strong financial growth over the past few years. Its total income has grown at a CAGR of 22.9% between FY18-FY21. In FY20, the company secured the highest operating EBITDA margin, profit margin, Return on Capital Employed (ROCE), and Return on Equity (ROE) when compared to the top 10 publicly listed auto component manufacturers in India.
The net profit for the financial year 2020-21 (FY21) declined by 40.2% YoY to Rs 215.17 crore. This was mainly due to higher provisioning for depreciation and an increase in the cost of raw materials amidst the Covid-19 pandemic. Earnings Per Share (EPS) came down to Rs 3.76 in FY21, compared to Rs 7.06 in FY20. However, the company’s total income increased by 50% YoY to Rs 1,565.64 in FY21. As mentioned earlier, a majority of its revenues come from large automakers from around the globe. The high demand for their innovative products (especially those for electric vehicles) has been a key factor for revenue growth.
The company’s ROCE stands at 35%, which is very high when compared to its competitors. This means that for every Rs 100 worth of capital employed, Sona Comstar earns Rs 35 on it. The Return on Net Worth (RoNW) stood at 30.6% in FY20 and declined to 16.5% in FY21. RoNW shows how much profit a company generates from the investments made by equity shareholders.
Risk Factors
- The company’s business is highly dependent on the performance of the automotive sector globally. Any drastic changes in conditions affecting its key markets (US, Europe, India, and China) could adversely impact their overall operations and financial performance.
- The revenue derived from Sona Comstar’s top 10 customers represents around 79.9% of its overall sales income (as of December 31, 2020). The loss of any one of these customers or even a reduction in purchases by them will negatively affect financial results.
- Like most other companies, the Covid-19 pandemic caused a severe impact on Sona Comstar’s operations. All manufacturing and assembly facilities were shut worldwide due to strict lockdowns. The company had also experienced a sharp decline in overall demand for its products. Such health threats could adversely affect its business/financial growth.
- Sona Comstar has admitted that it may not be successful in implementing its growth strategies, including the strategy to capture opportunities in the highly promising electric vehicle (EV) market. Their R&D segment could fail to develop new and improved products on time or may exceed estimated budgets.
- The company faces a very high level of competition in both the domestic and international markets. When compared to peers, it may not be able to launch new products based on rapidly-changing customer demands or requirements.
IPO Details in a Nutshell
The finalisation of the basis of allotment is likely by June 21. Kotak Mahindra Capital, Credit Suisse Securities, JP Morgan India, JM Financial, and Nomura Financial Advisory & Securities have been appointed as the book-running lead managers to the public issue. Sona BLW Precision Forgings had filed draft papers for its IPO in February 2021. You can read it here.
Ahead of the IPO, Sona Comstar raised Rs 2,497.5 crore from anchor investors on June 11. The investors include the Government of Singapore Investment Corp (GIC), Nomura Asset Management, Morgan Stanley, RWC Funds, Goldman Sachs Asset Management, etc.
Conclusion
The global auto components industry is growing at a fast pace. According to a report from Automobile Component Manufacturers Association (ACMA), the Indian auto components industry is expected to grow to a $200 billion (~Rs 14.50 lakh crore) market by 2026. Sona BLW Precision Forgings has transformed into one of the best-performing and innovative companies in this industry. Even though most of the firms in the auto sector suffered from the Covid-19 pandemic, SBPFL was able to post higher revenues. It has changed its focus towards delivering green technologies and launching components suitable for the future of mobility— EVs. This indicates that one could invest in the company based on its future growth prospects.
Sona Comstar will be directly competing with major players such as Motherson Sumi Systems, Sundaram Clayton, Bosch Ltd, Mahindra CIE, Sundaram Fasteners, and many more.
Before applying for Sona Comstar’s IPO, I will personally wait to see if the portion reserved for institutional investors gets oversubscribed. Due to its impressive track record, the company is expected to attract significant investor participation. As always, do consider the risks associated with this company and come to your own conclusion.
What are your opinions on this IPO? Will you be applying for it? Let us know in the comments section of the marketfeed app.
