Sona Comstar slumps to 52-week low: Falling knife or solid buy on dip opportunity?

The company derives a quarter of its revenue from the global battery EV segment – a fast growing vertical for the firm that has reported 77 percent year-on-year (YoY) growth in the current calendar year so far despite multiple headwinds.

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What has worked for the company is consumers’ increasing preference for battery electric vehicles, incentives given by the government, and newer launches by automakers, partly offset by lockdowns in China due to the outbreak of Covid-19.

And, this is what has analysts signing carols for the stock.

“We remain optimistic on the growth prospects, and it will help the company navigate through the global economic slowdown,” said Rishi Vora of Kotak Institutional Equities. “In addition, for the company’s key EV customers, H2FY23 is expected to be better on improving supply-chain bottlenecks and ramp-up of their plants in Europe and the US.”

Kotak Equities expects differential assembly segment revenues to grow at 44 percent CAGR in FY22-25, led by over 35 percent growth in BEV industry volumes and ramp-up of order wins from automakers.

Flurry of orders

The auto industry has emerged from years of slowdown and automakers have been flooded with bookings. For some models, leading manufacturers have reported backlogs of over 18 months.

Moreover, more and more players with the latest being Mahindra & Mahindra have announced their entry into the EV segment as they see it as a new frontier of growth. Existing players like Tata Motors are launching new models. We have seen similar enthusiasm in two-wheeler and three-wheeler segments.

This is not just good news for automakers but also suppliers like Sona Comstar.

Analysts underline that the ramp-up of new order wins in traction motor category in EV two-wheeler and three-wheeler segments and resilient demand in domestic passenger vehicle (PV) and commercial vehicle (CV) segments augur well for the company.

“As per our estimates, the company’s market share in the 2W traction motor category has reached 14-15 percent, led by a ramp-up of production of its key customer,” said Vora. “In addition, the company has won a new order for EV traction motors from an existing two-wheeler maker for its new launch, for which the company will soon start production.”

This will further drive market share gains in the traction motor system. Besides, the company has also won an order for three-wheeler traction motors and motor controllers from new-age manufacturers, which will also drive growth for the company, analysts said.

Angel Broking noted that the global battery EV segment has been fastest growing and is expected to maintain high growth rates, which are positive for Sona BLW. The company's combined motor and driveline capabilities have enabled them to gain market share across its products especially for products related to EV, it added.

Besides, Sona BLW has a strong market share ranging from 55-90 percent for differential gears for PV, CV, and tractor makers in India, which make it a dominant player.

Challenges

The biggest challenge for the company is its sales in the European region. It is expected that automotive sales recovery will remain muted in the EU due to the looming energy crisis and inflationary pressures. The company has already seen its sales dwindle in the region. The revenue mix of the EU region has declined to 13 percent in Q1FY23 from 26 percent in FY22.

Further, China mix for the company has declined to 8 percent in Q1FY23 from 11 percent in FY22, where automotive sales have stalled due to Covid-19-related lockdowns.

However, this has been compensated by the mix of Indian geography in its revenue that has improved to 32 percent in Q1FY23 from 22 percent in FY2022, where demand in PV and CV segments continues to be strong.

Moreover, analysts believe margins of the company that have been on slide recently have now bottomed. They now expect margin trajectory to improve going forward, led by the recent correction in commodity prices.

Potential money spinner

The stock on September 28 hit its 52-week low of Rs 458. In the past one year, Sona Comstar has fallen 17 percent while in the current calendar year so far, the stock has delivered a negative 37 percent returns.

However, thanks to the green shoots emerging for the company’s business analysts the correction in share price as an opportunity. They believe valuations are favourable for investors to start accumulating the stock.

“Recent correction in stock price provides a good entry point, in our view,” Vora said, upgrading the rating on the stock to ADD from REDUCE earlier. He has set a target price at Rs 525, meaning a potential upside at 15 percent.

Angel Broking also believes that Sona Comstar will continue to command a higher multiple which is justified by an expected 49 percent earnings CAGR over FY21-24. The broker has an extremely bullish target of Rs 843, which translates into a potential upside of 84 percent.

Similarly, IDBI Capital, which terms the company as the “first EV breakthrough in the domestic market”, has a target of Rs 770 on the stock, meaning a potential upside of 68 percent.

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