ICICI Securities Maintains Buy Call On This Midcap Auto Ancillary Stock, Sees 40% Potential Gains

Leading brokerage firm ICICI Securities in its recent report on Sona BLW Precision Forgings Limited (SONA) maintains its buy call with a revised target price of Rs 645 per share. With the given target price, the stock is likely to witness a potential upside of 40% from its current level. Sona BLW Precision Forgings is a mid-cap auto ancillary sector company. The company got listed on the stock exchange last year in 2021 on 24 June. It has a market cap of Rs 27,096.44 crore.

Stock Outlook & Returns

Sona BLW Precision Forgings' shares Price at the of writing is Rs 465.10 per share on the NSE. The stock is trading 0.19% up as compared to its previous close.

The stock in the past 1 week has fallen 4.1%, whereas, in the past 1 month it gave 0.04% positive returns. In the 3 months, the stock has fallen 18.37%. The stock has given 26.9% negative returns in the past 6 months. Over the past 1 year, it gave 28.37% negative returns. The stock since its listing on the stock exchange has given 28.63% positive returns.

Its 52-week low level is Rs 453 recorded on 13 October 2022, and the 52-week high is Rs 839.90 recorded on 14 December 2021, respectively.

Key takeaways from earnings call

EV-driven orderbook continues to be strong with 68% contribution to the overall orderbook at Rs140bn. Share of BEV-driven business was down QoQ mainly due to slowdown in major EV dominant geographies of EU and China. SONA was able to convert its second major domestic customer to be a supplier of DGA from differential gears, production for which is slated to start from FY24 itself. Thus, across its portfolio, SONA now has 37 EV-driven orders from 23 separate customers with the addition of Rs4bn in new orders in Q2FY23 against a similar amount consumed. Macro and geopolitical issues impacting EU and Asia businesses resulted in SONA's revenue mix from DGA and hybrids declining from 54% to 42% from FY22 to H1FY23. Overall revenue grew on the back of stronger performance in North America and India.

SONA has received order for its new spiral bevel gear from an off-highway OEM and is working on developing a similar hypoid shaped product for PVs. The market opportunity for spiral bevel gear is expected to be similar to differential gears.

Domestic 2W traction motor business improved significantly to 4% of revenue mix from 1% in the past couple of quarters (BLDC + PMSM motors combined). SONA has a capacity of 250k units for hub motors and 75-100k units for PMSM motors per annum with total capacity utilisation at 35-40% currently.

In-line result; huge scope for margin expansion, buy Target Price Rs 645

According to the brokerage firm, Sona BLW's (SONA) Q2FY23 EBITDA margin came in at 25.2% (up 102bps QoQ) as the company clocked its all-time high quarterly revenue of ~Rs6.6bn despite the impact of geopolitical situation in EU and covid-led slowdown in China. "EBITDA margin recovered above 25% post a two-quarter break with steel alloy rates still being hardly below June levels. Thus, from profitability perspective, we believe, huge scope for reversal in optical effect on gross margin is still left other than revival in operating leverage and inclusion of PLI benefits. Addition of DGA business from domestic PV OEMs is a positive sign from mix perspective as other than traditional DG supply OEMs are also resorting to buy DGAs for their upcoming EV portfolio. "We continue to believe in SONA's quest to attain a 'right-to-win' with its series of innovative products in the EV space, and sustain profitability, helping it deliver an FCF CAGR of ~30% through FY24E-FY30E, driven by ~14% revenue CAGR. We maintain our BUY rating on the stock with DCF-based target price of Rs645 (earlier: Rs726), implying ~50x FY24E EPS)," the brokerage has said.

Disclaimer

The stock has been picked from the brokerage report of ICICI Securities. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.