Core promoter’s unassuming stake and disproportionately large equity base dilute attraction.
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SONA BLW PRECISION OFFER AT A GLANCE |
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Offer Type |
Book Built |
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Platform |
Main Frame |
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Fresh Issue |
Rs 300 Cr |
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Offer for Sale |
Rs 5250 Cr |
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Face Value |
Rs 10 |
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Price Band |
Rs 285 – 291 |
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Mkt/Bid Lot |
51 Nos. |
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Implied M-Cap |
Rs 16974 Cr |
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Implied Eq-Cap |
Rs 583.29 Cr |
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Implied Free Float |
32.7% |
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Lead Manager |
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Registrar |
KFin Technologies |
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Listing At |
BSE, NSE |
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INDICATIVE ISSUE SCHEDULE |
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Opening : 14-Jun-2021 |
Closing : 16-Jun-2021 |
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Allotment : 21-Jun-2021 |
Refunding : 22-Jun-2021 |
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Demat Credit : 23-Jun-2021 |
Trading : 24-Jun-2021 |
The Offer
The two and a half decades old Sona BLW Precision Forgings Ltd (SBPF) is making an initial public offer of Rs. 5,550 cr. which consists of a fresh issue of Rs. 300 cr. from the company and an Offer for Sale of Rs. 5,250 cr. from the private equity-turned-promoter. The offer is being made through the book-building route with a price band of Rs. 285-291 for a Rs. 10 paid up share. The quantum of offer will thus work out to more than 19 crore shares.
Applicants should bid for a minimum lot of 51 shares and multiples thereof. The shares are proposed to be listed on the main frame of BSE & NSE on June 24, 2021. Investment bankers Kotak Mahindra, Credit Suisse, JM Financial, JP Morgan and Nomura Financial are managing the offer and KFIN Technologies has been roped in as the registrar to the issue. The bidding opens on Monday, June 14 and closes on Wednesday, June 16, 2021.
Lineage
Auto ancillary business is not new to the Kapurs of Sona Group. Dr Surinder Kapur, son-in-law of Bharat Gears and Apollo Tyres promoter Raunaq Singh, having gained considerable experience at Bharat Gears, floated public Sona Steering in 1988 which was sold by the Kapurs to their Japanese partner in 2017. Dr Kapur is no more. His son, Sunjay Kapur whose is more popular as ex-husband of Bollywood star Karishma Kapoor, is now floating Sona BLW Precision Forgings Ltd which was incorporated by the Kapurs in as early as 1995.
Even though the Kapurs formed the company, Sona BLW is predominantly owned by a private equity fund affiliated to the Blackstone Group, which is said to be a special purpose vehicle incorporated under the laws of Singapore for the purpose of acquiring stake in Sona BLW.
Key Management
Notwithstanding their financial stake in the company and their standing in the auto ancillaries industry, the Kapurs do not hold any executive position in Sona BLW. Sunjay Kapur is a Non-Executive Chairman on the board. Vivek Vikram Singh, who holds a bachelor’s degree in technology (computer science and engineering), is the Managing Director and Group Chief Executive Officer of the company.
Stakeholders
The Kapurs do not hold any stake in individual names. Their minority stake of 33.72% is held by Sona Autocomp Holding Pvt Ltd. Private equity promoter, Singapore Topco, holds 66.28%. Post-offer for sale, whereas the public would hold 32.7% equity at a steep cost of Rs. 291(at the cap price), Kapurs’ holding company will have 33.72% at an average cost of Rs. 5.81 a share. Nevertheless, the average cost of holding for the private equity fund, which would control 34.18% will be extremely negative (-201.74) which could trigger large scale offloading after the lock-in period.
Business Track
Sona BLW is claimed to be 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, belt-driven starter generator systems, electric vehicle traction motors and motor control units to automotive OEMs across US, Europe, India and China, for both electrified and non-electrified power train segments.
According to an industry report, in calendar year 2020, Sona BLW 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. The company was also amongst the top ten global starter motor suppliers. It boasts of gaining global markets across products to reach a share of approximately 5% for differential bevel gears, 3% for starter motors and 8.7% for BEV differential assemblies in the year 2020.
Sona BLW reportedly has nine manufacturing and assembly facilities across India, China, Mexico and USA. Six units are located in India supplying products to six out of the top ten global passenger vehicle manufacturers, three out of the top ten global commercial vehicle OEMs and seven out of the top eight global tractor OEMs by volume.
The company’s business is dependent on the performance of the automotive sectors in US, Europe, India and China. For fiscal 2021, it derived 36.1% (Rs 536.81 cr.), 26.5% (Rs 395 cr.), 25% (Rs 373 cr.) and 7.6% (Rs 113 cr.) of its income from sale of goods with end-use in North America, Europe, India and China, respectively.
Financial Track
Sona BLW has put up a somewhat mixed performance in last three years. In fiscal, 2019 whereas revenue grew by Rs. 76 cr., net profit increased by 95 cr., operating margin vaulting from 26% to over 39%! Fiscal 2020 witnessed a record margin of 45.7% and the company posted a net profit of Rs. 360 cr. on a capital of Rs. 47 cr. However, next year, despite the top line zooming 50%, net profit dipped 40%, profit margin sliding to 27.3%. At a time when the bottom line nose-dived to Rs. 215 cr., the company disproportionately hiked its equity capital to an unjustifiable level of Rs. 583 cr. Such a bloated equity could work against the stock on the trading screen in the coming years.
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Sona BLW Consolidated Financials (in Cr) |
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Year Ended |
Mar-21 |
Mar-20 |
Mar-19 |
Mar-18 |
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Revenue |
1566 |
1038 |
699 |
623 |
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Operating Profit |
427 |
474 |
273 |
162 |
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OPM% |
27.3 |
45.7 |
39.1 |
26.0 |
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Other Income |
2 |
6 |
3 |
3 |
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EBIDTA |
429 |
480 |
277 |
165 |
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EBIDTA % |
27.4 |
46 |
39.4 |
26.3 |
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Interest |
33 |
26 |
18 |
19 |
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Depreciation |
97 |
67 |
31 |
23 |
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Net Profit |
215 |
360 |
173 |
78 |
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Equity (Implied) |
583 |
47 |
28 |
28 |
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Reserves (Implied) |
1021 |
1130 |
146 |
0 |
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Borrowing |
305 |
261 |
112 |
429 |
Valuation
In the current market scenario, a price of Rs. 291 for Rs. 10 paid-up share may not look that steep. But, for a company whose turnover is less than Rs. 2000 cr. the implied market cap of close to Rs. 17,000 cr. is indeed on the higher side. Moreover, as compared to the most recent auto ancillary IPO, Craftsman Auto, the valuation of Sona BLW is very steep.
Both these companies have almost same top line but, Sona’s bottom line is double of Craftsman. The ultra-large equity base of Sona drags its EPS to less than Rs. 4 while the attractively small equity of Craftsman lifts its EPS beyond Rs. 46. As a result, Sona’s price to earnings ratio works out to double of Craftsman. Thus, at the current valuation, Craftsman looks more attractive than its peers.
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HOW SONA BLW COMPARES WITH SELECT PEERS |
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Financials |
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(Amount in Cr) |
Sona BLW |
Mahindra CIE |
Craftsman Auto |
Wabco India |
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Market Cap |
16974 |
8249 |
3842 |
12932 |
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Revenue |
1566 |
6050 |
1560 |
1864 |
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Other Income |
2 |
55 |
10 |
39 |
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EBIDTA |
429 |
556 |
448 |
245 |
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Interest |
33 |
55 |
107 |
2 |
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Net Profit |
215 |
106 |
97 |
104 |
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Equity Cap |
583 |
379 |
11 |
9 |
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Reserves |
1021 |
3001 |
959 |
1987 |
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Features |
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Current Price (Rs) |
291 |
217 |
1819 |
6818 |
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Face Value (Rs) |
10 |
10 |
5 |
5 |
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Book Value |
27.5 |
89.17 |
459.01 |
1052.53 |
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Core Promoter % |
33.7 |
71.6 |
59.8 |
80.4 |
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Profitability |
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OPM % |
27.27 |
8.29 |
28.1 |
11.04 |
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Net Margin % |
13.72 |
1.74 |
6.2 |
5.46 |
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Cash EPS |
5.35 |
10.89 |
137.22 |
102.39 |
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Earnings Per Share |
3.69 |
2.81 |
46.1 |
54.73 |
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Returns |
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RONW % |
16.5 |
3.1 |
10.0 |
5.2 |
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ROCE % |
20.7 |
5.0 |
16.4 |
7.7 |
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Discounting |
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Price/Earnings |
78.9 |
77.5 |
39.5 |
124.6 |
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Price/Cash EPS |
54.4 |
20.0 |
13.3 |
66.6 |
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Price/Book Value |
10.6 |
2.4 |
4.0 |
6.5 |
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Price/EBIDTA |
39.5 |
14.8 |
8.6 |
52.9 |
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Concern
• Core promoter stake is only 33.72% that too at a low holding cost of Rs. 5.81 a share, which does not instill confidence.
• Cost of holding of the private equity-promoter being extremely negative, he can sell his holdings at any throw-away price after the lock-in period.
• Company’s bloated equity would result in excess liquidity which could dampen the share price in the long run.