Sona BLW IPO: Information analysis

Backed by Blackstone, a global private equity firm, Sona BLW Precision Forgings (Sona Comstar) is involved in manufacturing auto components such as differential assemblies (17.6 per cent of FY21 revenue), differential gears (27.8 per cent), starter motors (50 per cent) and others. In simple terms, differentials transfer rotational power from engine to wheels while starter motors engage and turn the engine over during ignition. Sona Comstar plays on the growth of Battery Electric Vehicles (BEV) and hybrid vehicles as it derives around 40 per cent of its revenue from such vehicle types. The company derives almost 75 per cent of its revenue from international markets such as North America (36 per cent) and Europe (25 per cent) and counts marquee automakers as its customers from such markets. Merger with Comstar in 2019 vertically integrated the company with presence in both differential assembly and motor. The company is aiming for superior growth by targeting the global EV market, which is expected to grow by 36 per cent between 2020 to 2025. For this, the company has also heightened its R&D spend in recent years and is now focussing on embedded software development. Sona Comstar has been able to maintain superior operating margins of around 25-30 per cent in recent years even as the auto sector has experienced slow growth. However, intense competition coupled with moderate global market shares in various product segments remain key watch outs. The Rs 5,550 crore IPO is primarily an exit for Blackstone, which will reduce its stake from around 67 per cent to 34 per cent in the company. While Rs 300 crore fresh issue proceeds will be used towards debt repayments. Strengths 1. The company derives almost 75 per cent of its FY21 revenue from new age businesses such as electric vehicles, hybrid and power source neutral vehicles. Unlike other auto ancillary makers which run the danger of product obsoletion in coming years due to emergence of EVs, Sona BLW is safeguarded from such challenges. 2. Auto component makers work in close tandem with the original equipment manufacturers (OEMs) and generally have long-term relationships with its customers. In Sona BLW's case, the company has long-standing relationships of 15 years and more with 13 of the top 20 customers. 3. The company has focussed on heightened product development and R&D spend in the recent years (4-year average R&D spend: 3.2 per cent of revenue). Precision forging is a highly technical business and the company is enhancing its capabilities further by investing in software development. 4. Presence of Blackstone PE firm brings in global management expertise, along with intercompa