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Sona BLW Precision Forgings (SBPF) is primarily engaged in designing, manufacturing and supplying highly engineered, mission-critical automotive systems and components

Blackstone-backed Sona BLW Precision Forgings or Sona Comstar, one of the leading auto component manufacturers, launched its Rs 5,500 crore initial public offering (IPO) on Monday, June 14.

The auto ancillary firm has fixed the price band at Rs 285-291 per share. The public issue will close for subscription on Wednesday, June 16, 2021. Investors can bid for a minimum of 51 equity shares and in multiples, thereafter, translating to a minimum investment of Rs 14,841. A retail investor can at max apply for 13 lots or 663 shares for 1,92,933.

Ahead of the IPO on Friday, the company raised Rs 2,498 crore or 45% of its IPO by issuing shares to institutional investors as part of the anchor book allotment. Only 10% of the IPO is reserved for retail investors while 75% is for qualified institutional investors and 15% of the offer is reserved for non-institutional investors.

Grey market premium

In the grey market, Sona BLW Precision Forgings shares were trading at Rs 302 marking a premium of Rs 11 or 4% over the IPO price on Monday.

“On the financial front based on annualised FY21 EPS (earnings per share), the PE (price to earnings ratio) comes around 80x while the Price/Book Value comes around 12.93x which makes the issue costly which may result into a dull response. However, the company may get benefitted from the electric vehicle theme so, it would be prudent to watch the performance of upcoming quarters,” explained grey market tracker Abhay Doshi, Founder of Unlisted Arena.

Should you subscribe?

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Despite its rich valuations, considering its visibility of topline growth, competitive edge, superior profitability as compared to peers, prudent cost management, return ratios, wide clientele spread across the globe, sound R&D base, and technological progress investors can subscribe to the IPO.

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Sona BLW Precision Forgings 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 ~40% of revenues from ‘electrified’ platforms, including ~14% from pure battery EVs. The company provides an exciting play on electrification and possesses healthy financial strength (~28% margins, ~20% return on capital employed) but valuations proposed are rich (~74x Price to earnings on FY21 basis). Nevertheless, the company offers a good investment case on the back of strong growth prospects.

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Given Sona BLW Precision Forgings 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 the fast-evolving EV space both in India and globally, the market would like to give a premium to such an emerging growth story.

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Despite the highly cyclical nature of the auto ancillary industry, the company has been able to maintain margins in the 26 – 28% range. Sona Comstar has also spent a significant % of sales on R&D and plans to increase its focus on the precision EV space. It currently has 14% of its revenue from Battery EV’s and 27% of its revenues from Hybrid EV’s and plans to increase this number going ahead.

Sona Comstar has also been awarded 15 EV systems and component development programs by 10 different customers. Further, the long-standing nature of the relationships with clients also provides long-term visibility of revenues. The offer is priced at ~ 10.6 x Price to FY21 Sales. Although this seems higher than the industry average, it is justified considering the opportunities and rapidly growing market share.

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Considering the FY-21 adjusted EPS of 3.69 on a post-issue basis, the company is going to list at PE of 78.9X with a market cap of Rs. 1,69,737 mn while its listed peers namely Motherson Sumi and Minda Industries are trading at a PE of 73.7X and 196.0X. We recommend to “Subscribe” this IPO as the company is a global player in critical auto components with a thrust on the EV segment and has a strong financial track record of growth and profitability.

Timeline

The issue is likely to finalise the basis of allotment by June 21, and the initialisation of funds will take place by June 22. While the credit of equity shares to depository accounts of allottee on June 23. The auto ancillary firm is expected to make its stock market debut on June 24, 2021.

(Disclaimer: The recommendations in this story are by the respective research and brokerage firm. Money9 & its management do not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)