Sona BLW Precision Forgings (Sona Comstar) came out with its IPO about eight weeks ago. Value Research's analysis of the IPO can be found here. In this follow-up article, we focus on the IPO's performance, post-IPO events and changes in its valuations since then.
Our analysis of the IPO
We gave a score of 17 out of 27 to this auto-ancillary manufacturer when it came out with its IPO. The score was based on the company's presence in the high-growth market for electric vehicles (EVs), its strong management pedigree, moderate financial strength and expensive valuations. Although the auto-ancillary space is expected to be impacted by the advent of battery electric vehicles (BEV) and hybrid vehicles, Sona Comstar's key products such as differential gears and assemblies are not only immune to this disruption but also likely to thrive in such an environment. Co-owned by private-equity firm Blackstone, Sona benefits from its global management expertise, along with intercompany learning from other umbrella companies of the group. However, the company's IPO valuation 79 times its trailing earnings remained our key concern.
Our rating of the company was based on the following:
- On the 10 business metrics, the company did well on 7.
- On the 6 management-quality related metrics, it did well on 5.
- On the 8 financial metrics, the company did well on 5.
- On the 3 valuation related metrics, it did not do well on any of the metrics.
Performance since listing
Even amid an IPO frenzy, Sona BLW's pre-IPO response was muted, with its issue being subscribed at a moderate 2.28 times. While its Qualified Institutional Bidder (QIB) portion was subscribed 3.46 times, the non-institutional portion was subscribed only 0.39 times. On the other hand, Shyam Metallics, whose IPO came during the same time, was subscribed more than 120 times.
Sona made a tepid debut, listing at just a 4 per cent premium to the issue price. However, recognising the company's growth potential, the Street rewarded the stock price richly, as the stock reached Rs 400 within a fortnight. On August 6, 2021, the stock closed at Rs 411.8, a 42 per cent premium to its issue price of Rs 291.
The company's latest quarterly results surprised the street with strong growth. The total revenue increased 223 per cent and the company posted a profit of Rs 82 crore as against a loss of Rs 4.6 lakh in the corresponding quarter of the previous year. And even when viewed on a sequential basis, although the company's revenue declined 7 per cent, its bottom line increased by 38 per cent. The Operating margins remained consistent at 27.7 per cent and ROCE was strong at 35.3 per cent.
Following the earnings update, the company shares jumped immediately. It rose 16.5 per cent on the next trading day and touched Rs 501 as on August 13, 2021.
What to do now
While the company was not cheap at the beginning, its run-up in price has actually made it more expensive. Despite an increase in earnings, the company is currently trading at a rich valuation of 97 times of its consolidated TTM earnings.
The street is excited, and perhaps rightfully so, about the company's future growth prospects. The fact that its absolute revenue from the battery electric vehicle segment has grown by 22 times in the last three years is a clear indication of its potential. But with valuations soaring to such levels, it remains to be seen whether the company will be able to achieve high growth expectations. Only those investors who are extremely confident about the company's continued future growth should consider making fresh investments at this price point.
Disclaimer: This analysis is not meant to serve as a recommendation. Do your own research before investing in the company. If you are interested in our stock recommendations, please visit www.valueresearchstocks.com