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Published on: June 14, 2021, 5:47 p.m.
Sona Comstar gears for future mobility
  • Sona Comstar is the largest manufacturer of differential gears for PVs

By Lancelot Joseph. Executive Editor, Business India

Production of passenger vehicles (PVs) in India recorded a healthy growth of 5.2 per cent compounded annual growth rate (CAGR) between 2015-16 and 2018-19, due to a spurt in domestic and exports demand. “Domestic demand was driven by the expansion in the addressable market, development of infrastructure and stable cost of vehicle ownership, as crude oil prices remained low except in the few months when output was reduced due to sanctions imposed on Iran,” says a CRISIL research report.

Demonetisation and implementation of the Goods & Services Tax (GST) resulted in the weakening of the economy. Coupled with the emission and safety norms introduced by the government of India, this resulted in sluggish growth in the PV industry after 2017-18. Production in 2018-19 remained flat, with India producing 4.03 million PVs, of which 3.38 million vehicles were sold in the domestic market and 0.68 million, exported.

“However, in 2019-20, lower private consumption and inventory adjustment because of a change in emission norms from BS IV to BS VI, liquidity crisis and the onset of Covid-19 resulted in a decline of 15 per cent in production. Domestic sales fell 18 per cent, whereas exports remained flat. As Covid-19 spreads on close contact, the use of public transportation and shared mobility services were expected to be impacted and this has given a boost to personal mobility. Despite the real GDP likely to contract by 7.5 per cent in 2020-21, PV production is expected to decline by 3-5 per cent, as domestic sales are expected to come down by 3-5 per cent too, while exports may fall even further – say, by 30-35 per cent,” adds the CRISIL report.

Sona BLW Precision Forgings, which is an automotive technology company, is primarily engaged in designing, manufacturing and supplying highly engineered, mission-critical automotive systems and components. It makes components, such as differential assemblies, differential gears, conventional and micro-hybrid starter motors, BSG systems, EV traction motors and motor control units to automotive OEMs across the US, Europe, India and China, for both electrified and non-electrified power-train segments.

In addition, Sona is a leading supplier to the fast-growing global electric vehicle (EV) markets and derived 13.8 per cent of its revenue from the battery EV (BEV) market and 26.7 per cent from the micro hybrid market in 2020-21. “Our global market share of BEV differential assemblies 2020 was 8.7 per cent,” affirms Sunjay Kapur, chairman, Sona Comstar. “The company is among the top 10 players globally in the differential bevel gear market as also in the starter motor market, on the basis of respective volumes supplied to its end segments in 2020; also, it has been gaining global market share across products.”

 “A differential gear is a critical component of a vehicle’s power transmission system,” adds a Canara Bank Securities’ report on the company. “Differential gears are mounted as an assembly of high-precision bevel gears on the drive axle. A differential assembly plays an integral role in how a vehicle turns. These transitions between various players within the chain CDR market have only added to its burgeoning growth.” The report goes on to state that Sona Comstar, Sundaram Fasteners and India Pistons are the key manufacturers of differential gears in India – Sona Comstar being the largest manufacturer of differential gears for PVs, with an estimated market share of 55-60 per cent.

According to CRISIL Research, the differential gears market in India – catering to original equipment manufacturers (OEMs) – is estimated to be about 23 million units in 2019-20 (in terms of volume). The market is estimated to be valued at Rs3.3–3.5 billion. Most vehicle manufacturers procure differential gears as individual components from component manufacturers and perform the differential gear assembly operation in-house.

Interestingly, for commercial vehicle (CV) manufacturers in India, Sona Comstar, American Axle, Meritor and Dana are the leading suppliers of differential gears. Sona Comstar is the largest manufacturer of the CV segment differential gears with 80-90 per cent market share (estimated). “Even for tractor manufacturers in India, Sona Comstar is the largest supplier of differential gears, with an estimated market share of 75-85 per cent. The rest of the tractor OEM demand for differential gears is met through in-house manufacturing by tractor OEMs or through players like New Allenbery, Punjab Bevel Gears, GNA, Bharat Gears, etc,” says the Canara Bank report.

According to the Ricardo report, Sona serves six of the top 10 global PV OEMs, three out of the top 10 global CV OEMs and seven out of the top eight global tractor OEMs by volume. The company has strong R&D, engineering and technological capabilities in precision forging, mechanical and electrical systems, as well as base and application software development. It is diversified across geographies, products, vehicle segments and customers.

 R&D expenditure

The company has developed strong in-house capabilities to deliver evolving green technologies for future mobility, with an aggregate expenditure on R&D of Rs1,566.47 million during 2017-18, 2018-19 and 2019-20 and the nine-month period ended 31 December 2020. The company’s R&D expenditure, as a percentage of revenue from operations, were 1.8 per cent for 2017-18; 1.7 per cent for 2018-19; 3.3 per cent for 2019-20; and 6.8 per cent for the nine months ended 31 December 2020. In comparison, the average spend of the top 10 listed auto component players was 0.9 per cent over 2017-18 to 2019-20, says the CRISIL report. As on 31 December 2020, the company had 175 on-roll employees engaged in R&D activities, representing about 15 per cent of the total on-roll manpower, with 14 software engineers focussed on R&D.

The company has the highest operating profit (EBIDTA) margin, PAT margin, RoCE and RoE in 2019-20, when compared to the top 10 listed auto component manufacturers in India by market capitalisation. It has consistently delivered more than 26 per cent EBIDTA margin and more than 35 per cent average RoE each year over 2018-19 to 2020-21. CRISIL Research estimates overall PV production to grow at a robust pace of 8-10 per cent CAGR in the next five fiscals and reach 4.9 million units by 2025-26.

The company is raising up to Rs5,550 crore with a fresh issuance of equity shares, at a price band of Rs285-291, aggregating up to Rs300 crore and an offer for sale of equity shares aggregating up to Rs5,250 crore by the selling shareholder, namely, Singapore VII Topco III. The company intends to utilise the proceeds for repaying about Rs241.12 crore of its borrowings.

“Sona provides an exciting play on electrification and possesses healthy financial strength (28 per cent margins, 20 per cent RoCE) but the valuations proposed are rich (74 times P/E on 2020-21 basis). Nevertheless, we believe the company offers a good investment case on the back of strong growth prospects,” – an ICICI Securities research report recommending a ‘buy’.

The company’s growth drivers for the exports market rely on the capacity expansion by top players and stable crude oil prices to aid demand from African and Latin American geographies. Besides, continued expansion, undertaken by players into newer markets and a production-linked incentive (PLI) scheme, are expected to provide further boost to the exports.

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