Sona BLW: Despite Blackstone’s exit, analysts see 25-35% upside in the stock

Sona BLW has fallen 1.58 percent in today’s opening after Blackstone exited the stock, selling its 20.5 percent stake.

Despite this negative development, brokerages continue to be bullish on the stock, some even expecting more than a 35 percent upside to this expensive stock.

Meanwhile, the stock could see weight adjustment on FTSE indices on March 17 and analysts estimate that this could mean an additional inflow of $25 million.

Also watch: Sona BLW's leading position in the EV space

Jefferies has initiated coverage on the stock with a ‘buy’ call and a target price of Rs 575, which is 35.6 percent more than its current price. The stock was trading at Rs 424 on March 15, 10 am. The analysts noted that the valuations appear rich at 38x FY24E PE, but they believe it will sustain given the strong outlook. CLSA trimmed its target price from Rs 566 to Rs 529 but has retained its ‘buy’ rating on the stock. Their estimate means a further upside of around 25 percent.

Analysts at both brokerages take heart from the company’s strong order book and the advantage presented by the Production-linked Incentive Scheme (PLIS). “Sona has a large order book of Rs238bn (9x FY23E revenues), which is yet to start execution and provides strong revenue visibility,” wrote Jefferies’ analysts in their report. The analysts expect 31 percent /40 percent revenue/EPS CAGR over FY23-26E with ~45 percent of revenues from battery electric vehicles (BEVs) by FY26E. CLSA has predicted a revenue CAGR of 27 percent over FY22-25, which is one of the strongest in the Indian auto-component industry.

According to Jefferies’ analysts, Sona's revenue potential over a 10-year period, based on orders under execution and unexecuted order book, has risen 50 percent in the last 6 quarters. This they see as a reflection of the company’s capability to secure new contracts, even in the face of disruptive trends such as electrification of mobility and autonomous driving. “Share of sales to BEVs (battery electric vehicles) in revenues is up from 2 percent in FY20 to 25% in 9MFY23, and we expect ~45% by FY26E. The acquisition of a 54 percent stake in Serbian start-up Novelic adds a new business line of ADAS (advanced driver assistance systems) sensors,” they wrote.

CLSA expects the margins to improve on PLIS and Jefferies believes that the stock could surprise their bullish estimate on the upside from the benefits of the scheme.

Adapting to new trends

Jefferies pointed to the company’s strategy of expanding its component portfolio to address the intensifying electrification and autonomous trends in global autos. The company, which makes differentials and motors for the global auto industry, earns a large part of its revenue from the overseas market—70 percent of it. Forty-five percent of its revenue comes from North America and 18 percent from Europe.

Sona has shown resilience during tough times, going by its performance during the pandemic and the global auto slowdown, according to Jefferies’ analysts. Its revenue and EPS increased by 15 percent and 20 percent CAGR over FY18-22, with an ROE of 19 percent.

Also read: CLSA cuts Sona BLW target price but remains bullish on growth

Now it is increasing its global share in differentials, from 4.5 percent in CY19 to 7.2 percent in CY22. “An early entry in advanced differential gears for EVs and continued R&D has enabled Sona to secure large orders and raise its global differentials market share,” noted the analysts.

“Share of differentials in Sona's revenues has risen from 47 percent in FY18 to 55 percent in 9MFY23, led by new orders, especially for BEVs. We believe Sona, with its strong R&D focus and Indian cost advantage, is well-placed to grow its differentials business,” they added.

The company’s product portfolio includes starter motors, which are required only in ICE and hybrid, and therefore vulnerable to electrification disruption. However, Sona has reduced the share of revenues from this product line from 50 percent in FY18 to 37 percent in 9MFY23. The company is developing a wide range of EV traction motors, including three magnet-less technologies. “It has already secured multiple orders for EV motors in India, and expects the EV motor business to more than offset the potential decline in starter motors in coming years,” wrote the analysts.