Sona Comstar BLW - Direct EV Play

Stock Opportunities Untested - but worth a good look
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Hello Community,

I’d like to share some key insights from the Annual Report 2024, Q1 FY25 Results, and the recent AGM:

Global Presence: The company operates with 10 manufacturing facilities, 4 R&D centers, 3 engineering capability centers, 1 tool & die shop, 8 warehouses, and over 4,600 employees across the USA, Europe (Germany, Mexico, Belgium, Serbia), China, and India.

Product Development: Out of 18 products, 6 are still under development.

Working Capital Lenders: HDFC, SBI, CITI, and Yes Bank are represented as working capital lenders.

IP Achievements: The company filed 11 patents and 10 design applications and was granted registration for 13 patents and 15 designs during the year.

Order Book: The total net order book stands at ₹23,300 crore after consuming ₹400 crore in Q1 FY25 and adding ₹1,100 crore in new orders. This represents 7.3x FY24 revenue.

Revenue Distribution: As of Q1 FY25, 33% of product revenues come from the battery electric vehicle (BEV) segment, with 72% of sales directed to international markets. North America accounts for 43% of total sales.

Growth in BEV Revenue: While the company has a diversified revenue base across geographies, products, vehicle segments, and customers, the growing share of BEV revenue remains a dominant theme.

Decline in ICE Revenue: Revenue from internal combustion engine (ICE) products has shrunk to 9%.

Revenue Composition: 33% of revenue comes from BEV, 21% from hybrids, and 37% from power source-agnostic products.

New Business Wins: The company secured its first product order for its Sensors and Software business, which will be executed by NOVELIC. Additionally, more products were added to an existing Driveline order. This quarter, the company added one new customer and one new program in Asia.

EV Programs: Currently, there are 55 EV programs across 31 customers, with 27 in production, 12 fully ramped up, and 15 in various stages of ramp-up. Another 28 programs are slated to start production over the next few years.

New Commercialized Products: In Q1, the company launched two products: In-cabin Sensors (ACAM: a critical safety feature to detect the presence of a child in the vehicle) and Park Gear (enhancing the safety and reliability of commercial EVs).

Future Product Additions: Two new products were added to the technology roadmap: an Integrated HV Motor Controller, which improves thermal management and reduces energy losses, and an Integrated Hub Motor Controller, which combines the controller and motor to reduce weight and wiring complexity, enhancing system reliability for compact and lightweight EVs.

Upcoming Developments: The company plans to introduce low-voltage and high-power-density motor solutions between CY24 and CY25.

PLI Benefits: Four products have been approved for Production-Linked Incentive (PLI) benefits, with revenue recognition starting in the next financial year.

Board Composition: No significant concerns were identified regarding board composition or related party transactions. Meeting attendance is strong, and board member salaries align with industry standards and regulations. The company does not have any material subsidiaries.

Subsidiary Support: The company has provided a letter of undertaking to its subsidiary, Comstar Automotive Hong Kong Limited, to offer financial support as needed from April 1, 2024, to March 31, 2025.

Legal Matters: Labor cases are pending before the High Court and the Labor Commissioner. Legal advice indicates these cases are unsustainable, and no provisions have been made. No monetary claims are pending.

Contingent Liabilities: The total disputed amount is ₹99.48 million (31st March 2023: ₹85.88 million), with ₹8.63 million already provided for, and the remaining amount disclosed as a contingent liability.

Warranty Provision: At the consolidated level, the warranty provision increased to ₹45.12 million from ₹20.04 million in the previous year. I’m unclear if this increase is due to higher sales or changes in customer contracts, but the amount remains small compared to the company’s overall revenues.

Overall, this is a solid business with capable management. However, the company is facing softened growth in the European market. Rising commodity prices, high interest rates, and increased fuel costs may act as headwinds.

Disclaimer: I am invested with a tracking portion and may accumulate on dips, so biased.

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Just small correction in the PLI, they have submitted 7 products PLI application and they have received 6 or 7 certifications out of 7 till now.
These benefits will boost the bottom-line in FY25, if they receive the amount from Govt. Incentives are ranging from 10-18% of the product sales.
This could bring down the valuations little bit and i am expecting going forward they will submit more applications and get approvals.

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Thank you, Murali, for pointing that out :grinning:. I missed the recent notifications regarding the PLI. With revenue recognition starting in the next financial year, I’m optimistic about seeing strong numbers in the company’s bottom line next year.

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I believe the next 3-4 years will be pivotal for the company.

In the next 3-4 years, growth should remain 20-25% or more:

  • They need production growth to avail of PLI benefits. The company hasn’t mentioned the exact quantum of PLI benefits but they have termed them as “Significant”. Further, these benefits are not yet reflected in the P&L. They will be reflected only in Q1 FY26.
  • EVs (In general auto space) should do well in the rate-cut environment; EMIs get cheaper, and people buy cars.
  • The fundamentals should further improve in this duration - Margins should expand as their EV revenue mix will expand compared to ICE revenue. Further, growth will create operating leverage benefits improving RoE and RoCE further.
  • The company will continue to generate free cash flow during this duration.
  • Last point from the price action view → Stock will surpass its Jan 21 high in some days/ months, this will eliminate the past overhang. Because, generally during rebounds, “trapped investors” sell when their price comes, which in turn makes stock price growth difficult.

Risk - PE multiple of 70-75; For such a FCF generating, predictable business, a PE of >50 is easily justified. But, I believe only a few companies can sustain such high PE over the long term.
Hence, if PE correction happens, this is a business to do a downward average in my personal opinion. Because this is a great business to hold forever at right valuations.

Stance - Invested and bullish

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Sona BLW in talks to acquire rail engg biz of Escorts Kubota, likely to launch Rs 2,000-cr QIP: CNBC-TV18 (moneycontrol.com)

*Company has received certification for another Product i.e. *
Hub Wheel Motor for electric two wheelers
Microsoft Word - Intimation - PLI_Corporate_04092024 (bseindia.com)

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SonaCom posted fair set of numbers in Q2 FY25. Key takeaways from the numbers.

  • Total revenue for Q2 FY25 was INR 9,251 million, a 17% increase compared to Q2 FY24
  • The light vehicle sales trend in Sonacom’s key markets (North America, India, and Europe) decreased by 2% in the same period.
  • BEV revenue in Q2 FY25 was INR 3,172 million, a 53% increase compared to Q2 FY24
  • The BEV segment contributes 36% to Sonacom’s total revenue
  • Adjusted EBITDA margin for Q2 FY25 was 28.5%, compared to 28.3% in Q2 FY24
  • Adjusted PAT margin for Q2 FY25 was 17.1%, compared to 16.3% in Q2 FY24.
  • Secured 1 new program in Europe, 1 in Asia, and 14 in India during Q2 FY25

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Other highlights/extracts from Inv. Presentation.

Revenue Growth: Total revenue for Q2 FY25 reached INR 9,251 million, reflecting a significant 17% year-on-year increase. This growth outpaced the overall light vehicle sales trend in Sonacom’s key markets (North America, India, and Europe), which experienced a 2% decline. This suggests that Sonacom is effectively capturing market share and expanding its presence.

BEV Revenue Surge: Notably, Sonacom’s Battery Electric Vehicle (BEV) segment witnessed remarkable growth. BEV revenue in Q2 FY25 reached INR 3,172 million, a substantial 53% increase compared to the same period last year. This highlights Sonacom’s successful strategic focus on the rapidly expanding EV market. The BEV segment now contributes a significant 36% to Sonacom’s total revenue, demonstrating its growing importance to the company’s overall performance.

Profitability: Despite various challenges like the UAW strike, Sonacom managed to maintain stable EBITDA margins. The adjusted EBITDA margin for Q2 FY25 was 28.5%, slightly higher than the 28.3% recorded in Q2 FY24. This consistent profitability underscores Sonacom’s operational efficiency and ability to manage costs effectively, even amid a dynamic market environment.

PAT Margin: Sonacom’s adjusted PAT margin for Q2 FY25 was 17.1% compared to 16.3% in Q2 FY24. This growth in PAT margin indicates the company’s ability to translate its topline growth into even stronger bottom-line performance.

New Programs and Customers: Sonacom has secured new programs across various regions in Q2 FY25, demonstrating its continued success in acquiring new business. The company added 1 new program in Europe, 1 in Asia, and 14 in India, further expanding its global reach.

Key Takeaways about Sonacom’s Railway Equipment Division (RED)

  • Market Leader and Pioneer: RED is the market leader in railway brake systems in India. It introduced manufacturing compressed air brake systems for railway applications for the first time in India, making it a pioneer in the industry.

  • Diversified Portfolio: RED possesses a diversified portfolio of products, with brake systems being the largest segment. Other products include couplers, suspension systems, electrical panels, HVAC systems, automatic plug door systems, friction and rubber products, and brake cylinders.

  • Historical Growth and Profitability: RED boasts an attractive financial track record characterized by high growth, profitability, and return metrics. Its revenue grew consistently from FY21 to Q1FY25, with EBIT margins ranging from 13.8% to 20.5% and ROCE exceeding 38% in recent years.

  • High Growth Potential: RED is poised for high growth, driven by the introduction of new products and the overall expansion of the railway sector. The division is strategically positioned to capitalize on the increasing demand for railway equipment in India and potentially other regions.

Summary
Q2 FY25 performance underscores its resilience and strategic positioning within the evolving automotive landscape. The company’s focus on high-growth segments like BEVs, coupled with its operational excellence, positions it well for continued success.

Disclaimer: Invested and Biased. Less than 7% of PF. No transactions in the last 30 days. Post purely for study purposes. Consult your advisor before any transactions.

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The new acquisition,Railway Equipments from Escorts - their customer is Indian Railways and their current EBITDA margin is around 20%. Given the customer is a government entity, will there be a scope for margin improvement by controlling cost? If not, it may bring down the overall consolidated margins of Sona BLW by a few percentage points from their current level of 27%

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Can anyone highlight that they have only 28% of promoters holding? Is that concerning?

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Its a huge concern if you feel skin in the game matters… If not, then you are good.

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If you see history of Sona, in past majority owned by PE fund. They had have many A&M and later equity diluted at time of IPO. It’s not that promotes significantly reduced stake recently and the company is managed by professional CEO. The role of promoter is not much in co like Sona. Just my pov.

Disc: Invested and views are biased

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Thank you for the clarifications! I was just thinking from the decision-making perspective at the organizational level.

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There are many pros and cons to both Professionally Managed cos., Vs Promoter Managed. Even in a Promoted managed cos., we see professionals employed to handle Strategic as well as managerial decisions.
Many of the indian cos., are professionally managed, including banks, many of the MNC cos., ITC, Infosys, TCS etc. etc…

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Still the Public float is merely around 8%.

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@Ashfak2b Sir. I am a beginer. I see in their filing that their promoter has requested to get the people from ‘Promoter’ to ‘Public’ category does that have any impact or is it normal? Am i understanding that letter filed on 22Jan25 incorrectly? I see that they have I see the companies is managed by professional and doing it in a very effective manner Which can be seen in their Q3-FY25 results as per my understanding

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Sona Blw Precision | Management Interview

Revenue
:point_right: Q4FY25 will be weak but optimistic of recovery
:point_right: FY27 revenue to double vs FY24

On Trump Tariffs
:point_right: Not viable for US to impose tariffs on auto component imports
:point_right: Believe India will be a beneficiary

Watch here - https://youtu.be/y3KkVacOWSc

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I will present few challenges also.
1)one of their major customer is going through some model upgradation so there will be some drop in revenues in Jan & Feb from this customer.
2) EU PV segment is very weak, no reversal is expected in the near term.
3) CV and Off highway vehicles market is also weak in India, improvement can be expected in few quarters.

Recently commercialized product Predictive Active Suspension Integrated Motor Controller Module can be a huge revenue potential in 3-4 years going forward when other OEMs also want to incorporate the same in their vehicles also.

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Sona BLW Update

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  • Land Purchase: Acquiring 33,423 sq. yards in Sector 24, Faridabad from Escorts Kubota for ₹110 Cr.
  • Expansion Potential: Escorts Kubota will relocate its spare parts division before transfer completion.
  • Railway Equipment Division (RED): Board approved an amendment & restatement of the BTA with Escorts Kubota for RED acquisition.
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Significant correction was observed in the valuations, I think further downside is very minimal, its time to accumulate more at this price.
We are all aware that there will be some dip in Q4 revenues as stated by the Management.

Growth will continue as usual from Q1 onwards.

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The PE has corrected from 75 to 50. That is a lot of correction. But isn’t 50 already a high valuation, especially given the slowness in auto and specifically EV sector worldwide?

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