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Sona BLW Precision IPO review (May apply)

Review By Dilip Davda on Jun 9, 2021

•    SBPFL is a global player in critical auto components with a thrust on the EV segment.
•    Despite growth in the top line, it suffered a setback in the bottom line for FY21.
•    Based on financial parameters, the issue appears fully priced.
•    This mega issue consists of 94% secondary offer.
•    SBPFL's future hinges on developments in the EV segment.

PREFACE:
After a dry spell for the month of May 2021, the primary market is gearing for a hectic season with about half a dozen mainboard IPOs. Among them, this auto part segment company is bringing the first-ever mega IPO in this sector and that too with 94% by way of OFS in the total size of the issue. The company is pinning its future prospects with Electrical Vehicles (EVs) that will gain momentum in the coming years.

ABOUT COMPANY:
Sona BLW Precision Forgings Ltd. (SBPFL) is one of India's leading automotive technology companies, designing, manufacturing and supplying highly engineered, mission-critical automotive systems and components such as differential assemblies, differential gears, conventional and micro-hybrid starter motors, BSG systems, EV traction motors (BLDC and PMSM) and motor control units to automotive OEMs across US, Europe, India and China, for both electrified and non-electrified powertrain segments.

According to the Ricardo Report, in the calendar year 2020, SBPFL was among the top ten players globally in the differential bevel gear market on the basis of overall volumes of differential bevel gears supplied to PVs, CVs and tractors. It is also amongst the top ten global starter motor suppliers based on exposure to the PV segment and market share in the calendar year 2020, according to the Ricardo Report.

The company has been gaining global market share across products to reach a share of approximately 5.0% for differential bevel gears, 3.0% for starter motors and 8.7% for BEV differential assemblies, in the calendar year 2020, according to the Ricardo Report. SBPFL has nine manufacturing and assembly facilities across India, China, Mexico and USA, of which six are located in India, from where it supplies products to six out of the top ten global PV OEMs, three out of the top ten global CV OEMs and seven out of the top eight global tractor OEMs by volume, according to the Ricardo Report.

The company is a global supplier and around 75% of its revenues are from overseas selling. It is also one of the two largest exporters of starter motors from India, according to the Ricardo Report. SBPFL is a technology and innovation-driven company. With a strong focus on research and development ('R&D'), it develops mechanical and electrical hardware systems, components as well as base and application software solutions, to meet the evolving demands of its customers.

SBPFL is one of a few companies globally, with the ability to design high power density EV systems handling high torque requirements with a lightweight design, while meeting stringent durability, performance and NVH specifications, enabling EV manufacturers to enhance the vehicle range, acceleration and overall efficiency.


ISSUE DETAILS/CAPITAL HISTORY:
To part finance its plans for repayment/pre-payment of identified borrowing (Rs. 241.12 cr.), general corpus fund needs, SBPFL is coming out with a maiden IPO of Rs. 5550.00 cr. that includes fresh equity issue worth Rs. 300 cr. and the rest by way of offer for sale. The company has fixed the price band of Rs. 285-Rs. 291 per share and the minimum application is to be made for 51 shares and in multiples thereon, thereafter. The issue opens for subscription on June 14, 2021, and will close on June 16, 2021. Post allotment, shares will be listed on BSE and NSE.

This is the first mega IPO in the auto part sector that has just 6% primary offer and 94% secondary offer.

Book Running Lead Managers for this issue are Kotak Mahindra Capital Co. Ltd., Credit Suisse Securities (India) Pvt. Ltd., JM Financial Ltd., J.P. Morgan India Pvt. Ltd. and Nomura Financial Advisory and Securities (India) Pvt. Ltd. while KFin Technologies Pvt. Ltd. is the registrar to the issue.

SBPFL will be issuing 10309293 fresh equity shares of Rs. 10 each and 180412347 shares by an offer for sell thus making the total issue size of 190721640 shares. It has allocated 75% for QIBs, 15% for HJNs and 10% for retail investors. The issue constitutes 32.70% of the post issue paid-up equity capital of the company.

Having issued initial equity at par, the company raised further equity in the price range of Rs. 15 - Rs. 384.83 between June 1998 and January 2021. It has also issued bonus shares in the ratio of 11 for 1 in February 2021. The average cost of acquisition of shares by the promoters and selling stakeholders is Rs. 5.81 and Rs. 32.34 per share. Post issue company's current paid-up equity capital of Rs. 572.98 cr. will stand enhanced to Rs. 583.29 cr. At the upper price band, the company is looking for a market cap of Rs. 16973.73 cr.
 
FINANCIAL PERFORMANCE:
On the financial performance front, SBPFL has, on a consolidated basis, posted turnover/net profit of Rs. 702.50 cr. / Rs. 100.11cr. (FY19), Rs. 1043.77 cr. / Rs. 360.34 cr. (FY20) and Rs. 1565.64 cr. / Rs. 215.17 cr. (FY21). Thus though it has posted growth in top lines, its bottom line marked a setback for FY21. According to management, it suffered a setback in the bottom line for FY21 due to higher provisioning for depreciation, finance cost and rise in other costs of raw materials and other higher expenses due to pandemic.

For the last three fiscals, SBPFL has posted an average EPS of Rs. 5.10 and an average RoNW of 35.0%. The issue is priced at a P/BV of 12.79 based on its NAV of Rs. 22.75 as of March 31, 2021, and at a P/BV of 10.58 based on its post-issue NAV of Rs. 27.50 (at the upper price band).

If we attribute FY21 earnings on fully diluted post issue equity, then the asking price is at a P/E of around 78.86.

DIVIDEND POLICY:
As per offer documents, SBPFL has paid NIL dividend for FY19 but declared and paid a total dividend of 423.98% for FY20 and 189.33% for FY21 (on post bonus equity). It will continue to follow the prudent dividend policy post listing based on its performance and future prospects.

COMPARISON WITH LISTED PEERS:
As per the RHP data, SBPFL has shown Motherson Sumi, Sundaram Clayton, Varroc Engg., Bosch Ltd., Mahindra CIE, Endurance Techno, Minda Ind., Sundram Fasteners and Wabco India as its listed peers. They are currently trading at a P/E of 148.44, 91.1, 64.45, 46.18, 00, 52.84, 178.38, 53.17 and 125.07 (as on June 09, 2021). However, they are not fully comparable on an apple to apple basis.

BRLM's TRACK RECORD:
The five BRLMs associated with the offer have handled 23 public offers in the past three years out of which 8 offers closed below the offer price on the listing date.


Conclusion / Investment Strategy

Due to the pandemic, the auto sector has suffered a severe setback. However, considering the prospects of SBPFL that are hinged with the progress in the EV segment. Thus it becomes a pure long term investment offer. Based on its financial data, the issue appears fully priced. Investors may consider an investment with a long term perspective.

Review By Dilip Davda on Jun 9, 2021

Review Author

DISCLAIMER: No financial information whatsoever published anywhere here should be construed as an offer to buy or sell securities, or as advice to do so in any way whatsoever. All matter published here is purely for educational and information purposes only and under no circumstances should be used for making investment decisions. Readers must consult a qualified financial advisor before making any actual investment decisions, based on information published here. Any reader taking decisions based on any information published here does so entirely at its own risk. Investors should bear in mind that any investment in stock markets is subject to unpredictable market-related risks. The above information is based on RHP and other documents available as of date coupled with market perception. The author has no plans to invest in this offer.

(SEBI registered Research Analyst-Mumbai).


About Dilip Davda

Dilip Davda, a freelance journalist

Dilip Davda is veteran journalist associated with stock market since 1978. He is contributing to print and electronic media on stock markets/insurance/finance since 1985.

Dilip Davda is a leading reviewer of public issues and NCDs in the primary stock market in India. The knowledge he gained over 3 decades while working in the stock market and a strong relationship with popular lead managers makes his reviews unique. His detail fundamental and financial analysis of companies coming up with IPO helps investors in the primary stock market. Dilip Davda has a special interest in analyzing the SME companies and writing reviews about their public issues. His reviews are regularly published online and in news papers.

Email: dilip_davda@rediffmail.com

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