Systematix Sona BLW Initiates Coverage

Systematix
Institutional Equities
Sona BLW Precision Forgings 27 October 2021
Play on the global electrification trend

INITIATING COVERAGE Sona BLW Precision Forgings (Sona) is a leading supplier of forged drivetrain
Sector: Auto Rating: BUY components, motors (starter/traction) & controllers to the fast-growing battery electric
vehicle (BEV) markets. It enjoys a global market share of 13% in differential assemblies
CMP: Rs 625 Target Price: Rs 735
(DA) in EVs, 6% in differential gears (gears) and 5% in starter motors. The company has
Stock Info first-mover advantages from developing affordable EV products across the powertrain
Sensex/Nifty 61,350/18,268 in-house. We see Sona as a direct play on global electrification in passenger vehicles
Bloomberg SONACOMS IN (PVs) and the rising share of e-2W and e-3W in India. The opportunity size from just the
Equity shares (mn) 573mn DA and traction motors is expected to increase to USD 4.1bn per annum by CY30 (from
52-wk High/Low Rs 813/295 USD 105mn in CY20). It has a strong order book of Rs 140bn (average Rs 14bn pa) over
Face value Rs 10 the next 10 years. A technological edge complemented by its manufacturing and
M-Cap Rs 373bn/USD 5.0bn engineering capabilities has created high barriers to entry in its business lines. Each
3-m Avg volume USD 0.9mn product segment thus enjoys a RoCE of >30% and generates free cash flow. Significant
growth potential in the fast-growing EV segment and inorganic opportunities to widen
Financial Snapshot (Rs mn) its technological edge should further strengthen Sona’s position in the EV supply chain.
Y/E Mar FY22E FY23E FY24E We forecast a revenue/PAT CAGR of 40%/57% over FY21-24E and initiate coverage on
Net Sales 20,617 31,956 43,141 the stock with a BUY rating. Our target price of Rs 735 is based on 45x FY23 EV/EBITDA,
EBIDTA 5,693 9,110 12,164 in line with the valuation range of global EV plays and our DCF model (Exhibit 38).
PAT 3,218 5,703 7,911
• EVs to drive growth over the next decade: At 2.2mn units, EVs accounted for 3% of
EPS (Rs) 5.6 10.0 13.8
global volumes in CY20 and will be the fastest-growing segment over the next
PE (x) 111 63 45
decade. This will be driven by the strong regulatory push, reducing battery costs and
EV/EBITDA (x) 63 40 29
aggressive model launch pipelines by OEMs. Ricardo estimates e-PVs to grow at a
RoE (%) 21 28 28
RoCE (%) 25 35 37
CAGR of 36% over CY21-25E. The EV penetration in India’s 2W and 3W segments is
P/B (x) 23 17 13 also expected to increase sharply over the next three years.
• Market share gains and rising content per vehicle: Sona commands a 13% market
Shareholding Pattern (%)
share in DA supplies to the EV segment (higher than its market share in gears and
Sep’21 Jun’21 Mar ’21
motors globally). The content per vehicle is also 25% higher (vs. internal combustion
Promoter 67.3 67.3 100.0 engines-ICEs) driven by higher torque requirements and stringent NVH (noise,
–Pledged - - - vibration, harshness) requirements. The company supplies to the largest EV player in
FII 10.4 13.9 - the luxury segment and is confident of developing a cost-efficient solution for mass-
DII 16.4 15.2 - market EVs, significantly increasing the addressable opportunity. Sona also supplies
Others 5.9 3.6 -
traction motors (along with controllers) to the e-2W and e-3W segments in India,
marking its entry into a new segment. The company has also developed traction
Stock Performance (1-year)
motors for the mass market EV/plug-in hybrid EVs and these are being tested at the
800
customer level (a very competitive segment). Traction/BSG (belt-driven starter
700
generator) motors are 5-10x more expensive than conventional starter motors which
600
will further aid revenue growth.
500
400 • Product development continues to surprise: We remain confident about Sona’s

300 product development capabilities driven by its technological edge and first-mover
Jul-21
Aug-21
Sep-21
Jun-21
Oct-21
advantage. The company developed prototypes for DA and traction motors in 2018
when the industry was still skeptical of EVs. It has other products under
SONACOMS Sensex
development for EV powertrain – magnet less BLDC motor, DC-DC converter,
inverter and e-axle. The company is also scouting for partnerships/inorganic
Ronak Sarda opportunities to improve its technological capabilities.
ronaksarda@systematixgroup.in
+91 22 6704 8059 • Initiate with a BUY rating: We estimate Sona to report revenue/EBITDA/APAT CAGRs
of 40%/40%/57%, respectively, between FY21-24E. At the CMP, the stock trades at
Poorvi Banka
poorvibanka@systematixgroup.in 63x / 45x PER and 40x / 29x EV/EBITDA on FY23/24 estimates.
+91 22 6704 8063
Investors are advised to refer disclosures made at the end of the research report.
Systematix Research is also available on Bloomberg SSSL <Go>, Thomson & Reuters Systematix Shares and Stocks (India) Limited 1
27 October 20216 October, 2018 HeroMotocorp
Sona BLW Precision Forgings
Contents
Story in charts ....................................................................................................................................................................3
Company background .........................................................................................................................................................5
Corporate governance checks..............................................................................................................................................8
Investment Analysis ...........................................................................................................................................................9
Driveline business ..............................................................................................................................................................9
Electric business ............................................................................................................................................................... 13
Product development in the EV space ............................................................................................................................... 16
R&D capabilities ............................................................................................................................................................... 20
Production Linked Incentive (PLI) Scheme ......................................................................................................................... 21
Financial analysis ............................................................................................................................................................. 22
Valuation & Recommendation .......................................................................................................................................... 24
Key risks ........................................................................................................................................................................... 26
Financials ......................................................................................................................................................................... 29
Story in charts
Exhibit 1: Revenue mix (FY21)
Product-wise mix Segment-wise mix Geography-wise mix
Others, 1% Differential North America,
OHV, 17% Other markets,
gears, 28% 36%
5%
Other gears, 3%
China, 8%
CVs, 14%
Conventional PVs, 68%
starter motors, Micro-hybrid
24% starter motors,
27% India, 25% Europe, 27%
Differential
assembly, 18%
Source: Company, Systematix Institutional Research

Exhibit 2: Share of BEVs in Sona’s revenue mix increasing
100%
8%
90% 20%
80% 35% 24%
70%
32%
60% 18%
50%
40% 47%
28%
30%
51%
20%
10% 17% 20%
0% 1%
FY19 1QFY22 FY24E
Battery EV Micro-hybrid / Hybrid Powersource nuetral ICE dependent
Exhibit 3: Electrification strategy – Aims to be present across the value chain
Exhibit 4: Domestic traction motors & controllers to be a USD 1.1bn market by FY30;
further opportunity in PVs
Rs mn FY21 FY25 FY30
We expect E-2W penetration to increase E-2W
from <1% in FY21 to 10% in FY25 and 50% Units (`000) 35 750 12,500
in FY30. For E-3Ws, we expect Motor Price (Rs) 6,500 5,525 4,144
penetration to increase from <1% in FY21 Controller (Rs) 3,500 2,975 2,231
to 10% in FY25 and 40% in FY30. We are Industry size 350 6,375 79,688
not considering opportunity in PVs as of E-3W
now.
Units (`000) 5 80 200
Motor Price (Rs) 7,800 6,630 4,973
Revenue from BEVs will rise to 51% of sales Controller (Rs) 3,850 3,273 2,454
(Rs mn)
Industry size 58 792 1,485
25,000
Opportunity size 408 7,167 81,173
21,969
20,000
Sona’s target market share (%) 5% 20% 20%
Target revenues 20 1,433 16,235
15,000 126X
13,314 Source: Company, Systematix Institutional Research
10,000 Exhibit 5: Global BEV DA market to cross USD 3bn by CY30

6,543 USD mn CY20 CY25 CY30
5,000
Performance segment
2,057
174 234
Units (mn) 0.5 5 25
-
FY19 FY20 FY21 FY22E FY23E FY24E
% of vehicles with AWD/4WD 1.4 1.5 1.6
Average realisation (USD) 50 43 32
Industry size 34 287 1,275
Mass market
Ricardo expects the penetration of Units (mn) 1.5 7 55
AWD/4WD in both performance segment % of vehicles with AWD/4WD 1.1 1.2 1.3
and mass market segment BEVs to Average realisation (USD) 40 34 26
increase, expanding the addressable Industry size 66 286 1,753
opportunity. Opportunity size 100 572 3,028
Sona’s target market share (%) 9% 15% 15%

Target revenues 9 86 454
Exhibit 6: Order book stands at Rs 140bn as of 1QFY22; EV programs form 57% of the order book
Company background
Sona BLW is a global automotive technology company that designs, manufactures
and supplies highly engineered precision-forged drivetrain components and motors
to original equipment manufacturers (OEMs) across the US, Europe, India and China,
for both electrified and non-electrified powertrain segments. Its product offerings
include differential assemblies, differential gears, conventional and micro-hybrid
starter motors, BSG (belt starter generator) systems, EV traction motors (brushless
direct current-BLDC and permanent magnet synchronous motor-PMSM) and motor
control units that find applications across vehicle categories i.e. passenger vehicles
(PVs), commercial vehicles (CVs), off-highway vehicles/tractors and two/three-
wheelers (only electric). It has nine state-of-the-art manufacturing & assembly
facilities across the US, India, Mexico and China (of which 6 are located in India) and
three in-house R&D facilities. The company claimed a global market share of 6% in
gears, ~5% in starter motors and 12.5% in BEV DA in 1HCY21. In the domestic
market, Sona holds a market share of 55-60%, 80-90% & 75-85% in PVs, CVs &
tractors, respectively in the gears segment. Some of its key OEM customers include a
global OEM of EVs, a North American OEM of PVs and CVs, Ampere, Tata Motors,
Ashok Leyland, Daimler, Escorts, Geely, JLR, John Deere, M&M, Maruti Suzuki,
Renault Nissan, Revolt, TAFE, Volvo Cars and Volvo Eicher.
Exhibit 7: Management team
Management team Designation
Sunjay Kapur Chairman and Non-Executive Director
Vivek Vikram Singh Managing Director and Group CEO
Kiran Deshmukh Group CTO
Rohit Nanda Group CFO
Sat Mohan Gupta CEO, Comstar Automotive
V Vikram Verma CEO, Driveline division
Source: Company
Exhibit 8: Company milestones

1995 Incorporated as ‘Sona Okegawa Precision Forgings’- a JV with Mitsubishi Materials Corp.
1998 Started production of gears at the first plant at Gurugram.
2005 Commissioned a new manufacturing plant at Pune.
2005 Sona Autocomp Holding Pvt Ltd became a minority shareholder in the company.
2008 Acquired ThyssenKrupp’s precision forging business.
2013 Rechristened as ‘Sona BLW Precision Forgings Ltd’.
2016 Received investment from JM Financial Trustee.
2016 Terminated technical know-how agreement with Mitsubishi Materials & Metals One.
2017 Commenced operations in 2 new plants at Gurugram.
2018 Won the first contract for the supply of DA for the EV passenger car segment.
2019 Blackstone acquired a controlling stake in the company.
2019 Acquired Comstar Automotive Technologies Pvt Ltd & its subsidiaries.
2019 Adopted Sona Comstar as the company’s brand name.
2019 Commenced operations at a new plant in Manesar, Haryana.
2020 Completed vehicle level trails for belt starter generator (BSG) with an OEM.
2020 Won contracts for BLDC motor supply by two domestic E-2W OEMs.
2021 Became a public company listed on the BSE.
Source: Company
Exhibit 9: Manufacturing facilities
Source: Company
Exhibit 10: Segment-wise business details
Product segment Driveline business Electric business
Revenue Mix (FY22E) 55% 45%
Leading supplier of precision forged gears & assembly for One of the top two exporters for starter motors for
Description ICE as well as electric powertrains for domestic and ICE/mild hybrids from India. Several traction motors for
global OEMs. electric 2Ws in the domestic market under development.
• Differential gears • Starter motor
• Differential assemblies • BSG
Product Portfolio • Final drive assembly • BLDC motor
• Integrated e-axle • PMSM motor
• Other gears • Motor controllers
ICE, Hybrid, Traction motors for electric (BLDC, PMSM,
Powertrain ICE, Hybrid, Electric
etc.) under development
Segments PV, CV, OHV (tractors, etc.) PV, 2W, 3W
Manufacturing facilities 5 plants across Gurugram (3), Manesar & Pune 4 plants across Chennai, China, Mexico & the USA
Ashok Leyland, Eicher, Tata Motors, Volvo, Marui Suzuki, Dana, Daimler, Tata Motors, JLR, Geely, Ampere
Key customers
M&M, Escorts, Hyundai Motors, John Deere Vehicles, Revolt
Exhibit 11: Impact of electrification on Sona’s content per vehicle across different products
ICE with Micro-hybrid Battery Electric Vehicle
ICE ICE-Mild Hybird ICE-Full Hybrid
(Start-Stop) (BEV)
=/+ +
= =
Differential Gears 100 Certain changes in design Increased durability &
No change No change
requirements NVH requirements
=/+ +
Differential = =
100 Certain changes in design Increased durability &
Assembly No change No change
requirements NVH requirements
+
Improved starter motor = =
Starter Motor 100 NA
design to handle No change No change
increased no. of cycles
+ NA/+
Belt Starter
NA NA BSG provides torque May or may not have an NA
Generator (BSG)
assist, other functionality engine with a BSG system
+/NA ++
++
Depending on topology, Depending on topology,
Depending on the drive
there could be an there could be one or
Traction Motor NA NA type, there could be a
additional traction motor more traction motor
traction motor at front or
integrated in integrated in
rear or both axles
transmission or rear axle transmission or rear axle
Exhibit 12: Global market share across product categories… Exhibit 13: …enjoys market leadership in gears in India
14% 100%
13%
12% 90% 80-90%
75-80%
80%
10%
70%
55-60%
8% 60%
6% 50%
6%
5% 40%
4% 30%
2% 20%
10%
0%
0%
Differential gears Differential assembly Starter Motors
PVs CVs Tractors
(BEV)
Source: Company, Systematix Institutional Research Source: Company, Systematix Institutional Research
Corporate governance check

Annual report takeaways
Exhibit 14: Key takeaways from annual reports
Demand outlook R&D Acquisitions/JVs Others
• Growing electrification trend

to benefit Sona as it has
product offerings for all
electrified power trains.
• 48V BSG motor for hybrid PVs
• Intend to penetrate the • As of 31st March 2021,
with features that enable fuel
European market for DA and Sona had 11 EV
savings as well as a reduction
gears, where the company programme awards for the
currently has limited market
in CO2 emissions under • Apart from Sona Comstar
testing. production of DA & gears
share. eDrive Private Limited, no
for supplies to EV
• With the evolving vehicle other company has become
FY21 • Well-positioned to benefit or ceased to be a subsidiary,
manufacturers across
electrification trend, a key North America, Europe,
from the expected growth in joint venture or associate of
area of focus is integrating China and India, of which
the Indian EV market across the company during the year.
the powertrain and the five programmes are
all vehicle categories with its
drivetrain components by currently under regular
products like traction motors
creating an integrated drive production.
and motor control units.
unit.
• The shift in trend towards a
preference for multi-axle
vehicles to significantly
increase demand for gears.
Exhibit 15: Contingent liabilities, director remuneration and related party transactions
(Rs mn) FY20 FY21
Contingent liabilities
Disputed excise and service tax matters 15 15
Income tax matters 74 83
EPCG obligations 1,291 2,904
Total 1,380 3,002
% of total liabilities 21 34
Director remuneration
MD remuneration 28 32
% of PAT 1.9 1.6
Auditor fees - 25
% of PAT - 1.1
Pledged shares (%) - -
Related party transactions (Rs mn)

Purchase of products, services & fixed assets 0.2 -
Sale of products, services & fixed assets 2.5 0.1
Dividend paid - 599
Investment Analysis
Driveline business | 55% of revenue
Differential
Differential gears Final drive assembly Other gears E-drive
assembly
Source: Company
Exhibit 16: Sona improved its offering with technologically superior DAs in the electric vehicle segment
Differential assemblies (26% of revenue) – Play on electrification in global PVs

Driven by stringent emission and fuel economy (Corporate Average Fuel Economy-
CAFE) regulations across the globe, electrification is emerging as the biggest trend in
the automobile industry. Hence, pure ICE will continue to decline - the company
expects the share of pure ICE vehicles in CY25 to be ~18% of the total global
production. Depending on the severity of the norms across the regions, OEMs have a
choice of micro (12V start-stop), mild/full hybrids, BEVs (Battery Electric Vehicles)
and FCEVs (Fuel Cell Electric Vehicles) to meet the CAFÉ standards. Amongst the
available propulsion technologies, BEV has been the fastest-growing with a CAGR of
~46% between CY15 to CY20 (36% CAGR expected between CY20-25E), accounting
for ~12% of the global production. In CY20, the global production of BEVs stood at
approximately 2.3mn units. Tesla accounted for ~21% of the share (23% in 1HCY21;
70% in luxury EV segment) while Renault Nissan & Volkswagen accounted for ~12%
and ~10%, respectively. For the next five years, automakers across the globe have
announced plans to release more than 200 new electric car models.
Electric vehicle (EV) drivetrains are more complicated than those for conventional
vehicles. Therefore, DA for EV & PHEV require more durability and lower NVH (noise,
vibration, and harshness) as compared to their ICE counterparts. Sona’s in-house
developed DA have gained a significant market share in this segment with supplies to
the largest EV player. The company’s overall market share in global BEV DA stood at
12.5% in 1HCY21 (from 9% YoY and higher than its market share in conventional
products). Additionally, we believe it can replicate its success with other global OEMs
that have aggressive electrification plans. Globally, OEMs are expected to
increasingly outsource components for their upcoming EV products, which should
help Sona broaden its reach to new customers. Further the rising trend of 4WD/AWD
also aids well for Sona. A 4WD/AWD requires two DA vs. one in a rear-wheel-drive
variant.
Exhibit 17: Passenger electric vehicles – AWD/ 4WD increase the content for DA
The company has received new EV programmes for the production of DA and gears
for supplies to EV manufacturers across Northern America, Europe, China and India.
Revenue from DA & YoY growth (%) As of Jun’21, it has won 8 new programs from 5 global customers for the driveline,
(Rs mn)
most of which are yet to reach their SOP (start of production). The company also
14,000 350%
316% plans to target the mass market segment with an affordable option which should
300%
12,000 significantly increase its market opportunity. We estimate Sona’s market share in DA
250%
10,000 to increase to 15% by CY25E on the back of its cost-competitive products (in-house
8,000
200% proprietary low-cost technology) and increasing penetration with other global EV
150% players. We expect revenues from Sona’s BEV DA segment to grow (from Rs 2.7bn in
6,000 93%
60%
100% FY21) at a CAGR of 65% over FY21-24E. The company’s driveline business is expected
4,000 45%
19% 8%
50% to become a dominant segment in the long run on the back of significant growth
2,000 0% anticipated in its DA supplies.
- -50%
FY19 FY20 FY21 FY22E FY23E FY24E The company’s growth in the medium-term will be driven by 1) the increasing pace
Revenue (Rsmn) YoY growth (%, RHS) of electrification by global automotive OEMs and 2) Sona’s increasing global market
share.
Differential gears (29% of revenue) – Market leader position
Gears are a critical component for automobiles and other wheeled vehicles (PVs, CVs,
tractors & construction equipment), which go in the DA and facilitate the
transmission of power from the power source to a pair of driving wheels while
allowing them to rotate at different speeds. Gears are mounted on the rear and/or
front axle, depending on the design of the power transmission system. The intensity
of gears in vehicles depends on the vehicle type and configuration. More gears are
required for a higher number of axles (see exhibit 18 below). For instance, two-
wheel-drive (2WD) passenger vehicles (PV) have a set of four gears whereas a four-
wheel-drive (4WD) PV has two sets of four gears mounted on each of the axle (rear
and front) along with an inter-axle differential. Likewise, M&HCV trucks, in a 4WD
configuration, have a total of 20 gears. Price realisation per gear also improves with
an increase in the payload capacity. The automotive industry, in India as well as
globally, is experiencing a growing market preference for multiple-axle vehicles in
PVs, CVs as well as tractors. A gradual shift in demand towards 4WD vehicles,
particularly in the SUV segment, will likely result in higher gear content per vehicle.
The gears business is a cash cow segment for Sona as driveline products are common
across platforms and don’t undergo changes with different model launches (thus
creating high barrier to entry). The company develops high precision-forged gears in-
Revenue from gears & YoY growth (%) house; these gears offer superior quality, increased strength, higher durability,
(Rs mn) design flexibility, consistency & uniformity, long-lasting performance and lighter
14,000 55% 60%
45%
weight. Further, its in-house proprietary technology for manufacturing gears (with in-
50%
12,000
40%
house tools & dies) entails lower raw material consumption which makes its product
10,000 23% 30% cost-effective for customers and provides the company with a competitive
8,000 12% 20% advantage. Its global market share in gears stood at 6% in 1HCY21 (vs. 5% in CY20)
5% 10%
6,000
and it is amongst the top-10 global players for gears. In the domestic market, Sona is
0%
4,000 -10%
the market leader in the gear segment with 55-60%, 80-90% & 75-85% market share
-27% -20% in PVs, CVs & tractors, respectively. With a robust market positioning, Sona enjoys
2,000
-30% strong pricing power in the segment.
- -40%
FY19 FY20 FY21 FY22E FY23E FY24E The company’s growth in the medium-term will be driven by 1) order wins in global
Revenue (Rsmn) YoY growth (%, RHS) electric platforms, 2) the impending recovery in the domestic CV market (higher
Source: Company, Systematix Institutional Research content per vehicle than PVs) and 3) industry shift towards 4WD in PVs and multi-
axle vehicle in CVs.
Exhibit 18: Higher content per vehicle in multi-axle vehicles
No. of DA No. of gears
PV
Two-wheel drive (2WD) 1 4
Four/ All-wheel drive (4WD/AWD) 2 8
CV
LCV (2WD) 1 6
MHCV (4WD) 2 20
Exhibit 19: Market leadership in gears across segments in India… Exhibit 20: … and rising global market share
100% 7%
90% 80-90% 6.0%
75-80% 6%
80% 5.0%
70% 5% 4.5%
55-60%
60%
4%
50%
40% 3%
30% 2%
20%
10% 1%
0% 0%
PVs CVs Tractors CY19 CY20 1HCY21
Electric business | 45% of Revenue

Belt-driven Starter
Starter motors Traction motors Motor controller units
Generator (BSG)
Source: Company
Conventional & mild-hybrid starter motors (18% & 27% of revenue respectively)
Starter motors are responsible for turning the engine over during ignition in an ICE or
mild hybrid powertrain. A traditional ICE vehicle and micro hybrids require a starter
motor to crank the engine. BEVs, however, use traction motors to run the
powertrain.
Sona has a long-proven expertise here with enhanced durability to meet stop-start
applications, increased cold-cranking capability and proven reliability for long
product life, design flexibility and vibration & environmental resistance. The
company’s global market share in starter motors has increased from 3% in CY20 to
~5% in H1CY21. Sona and SEG Automotive (Ex-Bosch arm) are two of the largest
starter motor exporters from India with a combined market share of 70%. Globally,
across all segments (passenger vehicles, commercial vehicles, tractors), Sona’s key
competitors include Denso, Borg Warner, SEG Automotive, Hitachi and Valeo. With a
single-digit market share in all major global markets (the biggest starter motor
market for Sona is Europe, followed by North America), the company has huge
potential for market share gains and revenue growth in the segment, especially with
the competitive intensity in the segment moderating. With electrification picking
pace globally, the population of pure ICE passenger vehicles and micro hybrids (12v
start-stop) is expected to decline to 55% by CY25 from 86% in CY20 whereas the
proportion of BEVs is expected to increase to 12% in CY25 from 3% in CY20. Despite a
decline in ICEs/mild hybrids, there will still be a significant PVs volume that would
require starter motors in CY25. The company expects to benefit from market share
gains in the starter motors segment during this time.
New products added for EVs - Traction motors (BLDC, PMSM), BSG, motor
controllers
Given the global electrification trend, Sona has been focused on adding several EV
products to its electric business portfolio. It started supplying BLDC (Brushless DC)
motors for Indian E-2Ws and E-3Ws from Nov’20 and has become one of the leading
suppliers in the country. With the need for higher localization to be eligible for FAME
II benefits, local sourcing for BLDC motors is also likely to increase, benefiting Sona.
Its BLDC drive motors are 48V, 72V and 96V for electric 2Ws/3Ws, with peak power
generation of up to 30kw (targeting E-2W, E-3W and small cars). It is already
supplying its EV motor products to several incumbents as well as new age E2W start-
ups. It aims to reach a domestic market share of 15-20% in the segment in the long
run. The company has also tied up with Israel-based IRP Systems to produce a high-
efficiency, low-cost, magnet-less powertrain (motor + controller) for E-2/3Ws, for the
global market. Additionally, it is developing controllers in-house for these motors.
Success in these segments would help capitalise on the potential strong demand in
this segment.
Sona has also developed a 48V brushless starter generator (BSG) motor for hybrid
PVs and LCVs with features that enable fuel savings as well as a reduction in CO2
emissions. BSG motors will find acceptance in most mild-hybrid vehicle
configurations as they will help meet the Corporate Average Fuel Economy (CAFE)
norms for players globally. The company plans to expand its presence in China for the
supply of its micro-hybrid starter motors for PVs and LCVs as well as 48V BSG systems
for hybrid PVs, as it expects to benefit from China’s growing position as a leading
market for EV manufacturers. Any major order wins in this segment would add to
Sona's revenue considerably.
The company has also developed Permanent Magnet Synchronous Motors (PMSM)
with a peak power output of 15-30kw used in hybrid PVs. The content per vehicle is
significantly higher for these motors and the company plans to manufacture & supply
these soon. Increasing penetration of electric vehicles and an anticipated increase in
power range alongside (higher realisations) should lead to strong growth in the
traction motor market in the coming years. Sona’s several traction motor products
Starter motor revenue & YoY growth (%)
across the EV range (mild hybrids, PHEVs, BEVs) have completed the product
(Rs mn)
12,000 25% development stage and are currently under testing at the customer end. The product
24%
20% segment has very high competition with global majors such as BorgWarner Inc. (US),
20%
10,000 17% 18% Schaeffler Group (Germany), Valeo (France), Nidec Corporation (Japan), Robert Bosch
15% GmbH (Germany), and ZF Friedrichshafen AG (Germany).
8,000
10% Sona has also developed motor controllers for electric two-wheelers, three-wheelers
6,000 and PV applications using the latest software and design solutions as per
5%
international standards. Motor control units control the power given to motors for
4,000
0% providing torque and speed to the vehicle. They also charge the battery during the
2,000 -5%
braking of the vehicle. The company is developing controllers for peak power rating
-6%
-4% range from 1.2kw to 20kw and expects to launch some of these models/platforms by
- -10% FY22. Traction motors are generally accompanied by motor controller units which
FY19 FY20 FY21 FY22E FY23E FY24E
Revenue (Rsmn) YoY growth (%, RHS)
have an incremental realisation of ~Rs 4,000 per unit (almost the cost of a motor).
This will thus help in increasing the content per vehicle for the company.
We expect Sona’s starter motor (conventional + micro-hybrid) revenues to grow at a
CAGR of ~21% over FY21-23E to Rs 11.5bn. However, given the impending transition
to electric vehicles and aggressive EV plans of most global OEMs from FY25 onwards,
we expect this revenue momentum to decline after FY23E.
Exhibit 21: Global market share in starter motors rising Exhibit 22: Share of ICE starter motors to decline sharply
4.5% 100%
4.0%
4.0% 90% 21%
80% 34%
3.5%
3.0% 53% 53%
3.0% 70% 60%
2.5% 68% 69%
2.5% 60%
50%
2.0%
40% 79%
1.5% 66%
30%
1.0% 47% 47%
20% 40%
32% 31%
0.5% 10%
0.0% 0%
CY19 CY20 1HCY21 FY18 FY19 FY20 FY21 FY22E FY23E FY24E
Micro-hybrid starter motors (% of total) Conventional starter motors (% of total)
With the global electrification pace intensifying over the medium term, we expect
pure ICE starter motors to become redundant by FY30 and consequently Sona’s share
of the revenue from the segment to become zero from ~20% currently. During the
same period, however, we believe the company will ramp up revenues from its
newer EV products (traction motors like BLDC & PMSM, BSG and motor control units)
from a negligible level currently to 17% by FY24E. The company is also well-
positioned to combine motor and driveline parts as integrated drive units for vehicles
where the value can be much higher.
Exhibit 23: Starter motor applications across powertrains
The growth in the medium-term will be driven by: 1) market share gains in the
micro hybrid starter motor segment, 2) order wins for new-age traction motors
developed for domestic E-2Ws/global EV platforms and 3) motor controllers as a
bundled service driving content per vehicle.
Product development in the EV space

Electrification is emerging as the biggest trend in the automobile industry. Sona’s
product offerings span all types of electrified powertrain and it plans to increase the
EV share of its revenue. As part of its growth strategy, the company plans to increase
its market share in the Indian as well as overseas markets by catering specifically to
EV OEMs across three product groups – DA & gears, 48V BSG motor for hybrids and
EV traction motors.
Additionally, the aforementioned products for electrified powertrains derive much
higher content per vehicle/realisation than their conventional ICE counterparts.
Gears/DA of electric cars (BEVs) must be much stronger, more precise and power-
denser than those used in ICE vehicles. Further, electric cars are inherently silent
and, therefore, demand high NVH characteristics from the components of their
drivetrains. Resultantly, the realisation for gears/DA for BEVs is ~25% higher as
compared to that for gears/assemblies used for ICE vehicles. BLDC traction motors
(incl. motor controllers) supplied by the company to domestic E-2Ws/3Ws command
5-10x of the price realisation for starter motors used in ICE 2Ws/3Ws. To cater to the
global mild-hybrid PV market (expected to grow by ~4x & account for ~21% of
propulsion split for PVs by CY25 as per the company), Sona has developed a 48V BSG
motor which is priced significantly higher than its starter motor counterpart. Within
starter motors, the growth of micro-hybrid starter motors priced at ~Rs 44 per unit is
expected to be significantly higher over the medium term vs. the conventional
starter motors priced at ~Rs 38 per unit.
Sona plans to introduce more products for the EV powertrain segment like DC-DC
converter & inverter, many of which are currently under development. We remain
confident about Sona’s product development capabilities driven by its technological
edge and first-mover advantage. The company is working on developing software,
electronic, electrical and mechanical products, with the end goal of being capable of
offering an integrated system for electric vehicles (Exhibit 24). The company aims to
be present across the power range and cater to the entire range of product
requirements for EVs in the medium to long term.
Exhibit 24: Integrated e-axle structure
Source: Industry, Systematix Institutional Research
The electrification trend presents a significant revenue opportunity to Sona. The
company currently supplies DA to the largest EV player in the luxury segment and is
confident of developing a cost-efficient solution for mass-market EVs soon,
significantly increasing the addressable opportunity. We estimate the global
opportunity size for the BEV DA segment to be 6x by CY25 and 30x by CY30 (Exhibit
5). Likewise, in the traction motor segment for domestic E2W/3Ws, we expect the
market potential to be ~18x by FY25 and ~200x by FY30 (Exhibit 4).
Integrated powertrain systems in EVs
Increasing electrification globally is an opportune time for individual component
manufacturers (mechanical or electrical) to enhance their capabilities (organically or
inorganically) to offer integrated system solutions. Integrated drive units have three
key components - DA, high voltage traction motors and high voltage inverters. Sona
is engaged in the manufacturing of electric drive motors and inverters for electric 2-
wheelers & hybrid passenger vehicles, as well as DA for battery electric passenger
vehicles. Thus, it is among the few companies globally with the capability to integrate
the three key constituents of the electric powertrain into a single matched unit,
thereby offering efficient, compact and high-value propositions to global OEMs. The
company is increasingly focusing its R&D efforts towards the same.
Exhibit 25: Average realisation per unit across addressable product segment
(USD)
Realisation per unit (USD)
1,600 1,533
1,400
1,200
Driveline business Electric business
1,000
800
600
360
400 280
235
200 127
14 50 38 44
-
BSG Motor
Gears (set of 4)
BEV DA
50KW traction motors (incl

< 2KW traction motor +

ICE Starter Motor
Micro-Hybrid Starter Motor

controller
controller
controller
.controller)
Exhibit 26: Sona’s technology & product capabilities
Exhibit 27: Electrification plans of global OEMs

Brand EV share of total sales (%) No. of electrified models Announced investment plans
Audi 40% by CY25 20 BEVs, 10 PHEVs by CY25 USD 12bn over CY20-24
BMW 20% by CY25; 50% by CY30 12 BEVs, 11 PHEVS by CY23 EUR 30bn over CY21-25
Mercedes >50% by CY25; 100% by CY30 10 BEVs by CY22 EUR 40bn over CY22-30
JLR 20% by CY26; 60% LR & 100% Jaguar by CY30 6 BEVs in LR by CY26 GBP 2.5bn per year till CY30
VW 50% by CY30; 100% by CY40 EUR 73bn over CY21-25
Toyota 80% by CY30 15 BEVs by CY25 USD 13.5bn over CY21-30
Ford 40% by CY30 USD 30bn over CY21-25
Source: Company, Auto blogs, Systematix Institutional Research
Sona's 1QFY22 results indicate that its BEV revenue mix has already reached ~20%.
Furthermore, it has a net order book of ~Rs 140bn to be executed over the next 10
years, of which ~57% is already towards EVs. As of 1QFY22, it had 17 BEV
programmes awarded across 10 customers. The company expects the global BEV
market to grow at a CAGR of 36% over CY21-25E.
Exhibit 28: Order book stands at Rs 140bn as of 1QFY22; EV programs form 57% of the order book
Exhibit 29: Key BEV order wins

End-Customer Systems and
Customer Program Name Year of Win Year of SOP
Location Components
Global Tier 1 Supplier for PVs, CVs, OHVs
Program A1 North America Gears FY16 2016
and EVs - supplying to Global OEM of EVs1
Global Tier 1 Supplier for PVs, CVs, OHVs
Program A2 North America Gears FY20 2019
and EVs - supplying to Global OEM of EVs1
Global OEM of EVs1 Program B1 North America DA FY18 2019
Global OEM of EVs1 Program B2 North America DA FY20 2020
Global OEM of EVs1 Program B3 China DA FY21 2020
Indian OEM of Electric 2Ws-scooters Program C India BLDC Motor FY21 2020
Indian OEM of Electric 3Ws1 Program D India E-Axle FY21 2021
Indian OEM of PVs, CVs, OHVs and EVs1 Program E1 India E-Axle FY21 2021
North American Tier 1 Supplier for PVs,
CVs, OHVs, and EVs - supplying to Global Program F North America Gears FY20 2021
OEM of EVs2
Chinese Tier 1 Supplier for EVs - supplying
Program G North America DA FY20 2021
to Global OEM of PVs and EVs2
European OEM of PVs and EVs2 Program H Europe DA FY21 2022
Indian OEM of PVs, CVs, OHVs and EVs2 Program E2 India DA FY20 2022
European Tier 1 Supplier for PVs and EVs -
Program I China DA FY21 TBD4
supplying to Chinese OEM of EVs3
PMSM Motor and
Indian OEM of Electric 2Ws-Motorcycles3 Program J India FY21 TBD4
controller
R&D capabilities
Sona is continuously improving the in-house R&D and engineering capabilities for its
driveline and electric businesses. By investing in growing and refining R&D
capabilities, it aims to capitalise on the global trends, like the industry shift towards
electrification, and stay ahead of the competition. It operates three state-of-the-art
R&D centres with digital simulations, testing and validation facilities in Gurugram and
Chennai. These centres constantly engage in the development of mechanical and
electrical hardware systems, components and application software solutions to cater
to the evolving needs of customers. Sona’s R&D investments are significantly higher
than industry standards. It has spent an aggregate of Rs 1,563mn (including Comstar)
on R&D development in the last 3 years, including Rs 915mn in FY21 (5.8% of
revenue). In comparison, the average spend of the top-10 listed auto component
players was 0.9% over FY18-20, as per CRISIL.
Sona was the first company in India to manufacture gears using the precision forming
process. The company has developed an in-house proprietary gear design software
that helps it create gear tooth profiles optimised for specific customer needs. With
its proprietary technology, it can generate higher material yield and thus, more cost-
effective products as compared to its peers. With its precision forming technology,
the company can provide electric vehicle OEMs with differential drive units that are
stronger, more durable, quieter and lighter in weight.
In the electric/motor segment, the company has focused its R&D efforts on
developing drive motors and controllers for different types of hybrid and electric
vehicles given the recent shift towards the electrification of the drivetrain. A
significant component of these efforts has been in developing the hardware and
software for the controllers. It has invested heavily in enabling algorithms, cyber
security, on-board diagnostics, over-the-air updates and other capabilities. Further,
the company is focusing on combining its driveline and electric capabilities to provide
integrated powertrain solutions to OEMs. It has developed extensive in-house
capabilities to develop embedded systems and application software, along with
integration capabilities to offer customers a complete solution.
The company plans to continue expanding its R&D, engineering and software
development capabilities in a cost-efficient manner to capture the future growth
trends and provide competitive solutions to customers.
Exhibit 30: Sona’s R&D spend (% of sales) is rising Exhibit 31: R&D spend (as % of sales) in comparison to peers
7.0% 12.0%
5.8%
6.0%
10.0%
5.0%
8.0%
4.0%
3.3%
6.0%
3.0%
1.8% 1.7% 4.0%

2.0%
1.0% 2.0%
0.0% 0.0%
FY18 FY19 FY20 FY21 Valeo Sona BorgWarner Bosch India Minda GKN American Meritor
Comstar Industries Automotive Axle
Production linked incentive (PLI) scheme

The government recently approved a new PLI scheme, with incentives worth ~Rs
260bn, which promotes advanced technologies, chief of which is battery-electric
technology. The scheme has two components, viz. Champion OEM Incentive
Scheme – applicable on BEVs and hydrogen fuel cell vehicles of all segments, and
Component Champion Incentive Scheme – applicable on advanced automotive
technology components of 2-wheelers, 3-wheelers, passenger vehicles,
commercial vehicles and tractors. It is effective from FY23 for a period of 5 years,
under which, based on revenues generated through PLI eligible
vehicles/components, OEMs/component makers will get incentives in the range
of 13-18%/8-18%. Eligibility criteria for auto-component makers include a
minimum revenue of Rs 5bn and investment of Rs 1.5bn in fixed assets, wherein
the base year for eligibility will be FY20. Further, component makers need to
make new investments of Rs 2.5bn over five years (Exhibit 32). A total of 50 auto
component makers will benefit from the scheme. The manufacturers of electric
vehicles will get a big boost from the PLI scheme for the automotive sector along
with the earlier launched PLI for Advanced Chemistry Cell (outlay of Rs 181bn) &
the Faster Adoption of Manufacturing of Electric Vehicles (FAME) scheme (outlay
of Rs 100bn).
Exhibit 32: Details of investments to be made under PLI scheme for the auto sector
Cumulative new domestic investment to be Champion OEM Champion OEM Component New Non-automotive New Non-automotive
achieved (Rs bn) except 2W & 3W 2W & 3W Champion investor (OEM) investor (Component)
Up to or before FY23 3.0 1.5 0.4 3.0 0.8
Up to or before FY24 8.0 4.0 1.0 8.0 2.0
Up to or before FY25 14.0 7.0 1.8 14.0 3.5
Up to or before FY26 17.5 8.8 2.2 17.5 4.4
Up to or before FY27 20.0 10.0 2.5 20.0 5.0

Source: pib.gov.in, Systematix Institutional Research
Exhibit 33: Revenue based incentives for eligible auto-component manufacturers under PLI scheme
(Rs bn) Incentive (%)
Up to Rs 2.5bn 8.0
Rs 2.5bn- 5bn 9.0
Rs 5bn - Rs 7.5bn 10.0
> Rs 7.5bn 11.0
Cumulative sales > Rs 12.5bn over 5 years 13.0
Manufacturers of battery electric vehicle & hydrogen fuel cell components Additional 5%
Source: pib.gov.in, Systematix Institutional Research
Financial Analysis
Despite the COVID-19-led weakness in the global automobile industry in FY21, Sona
registered strong revenue and profit growth. We expect the growth momentum to
continue on the back of continued strong demand for gears, focus on increasing the
global market share in BEV DA and new products ramp-up in the EV segment.
Consequently, we factor in sales/EBITDA/adjusted PAT CAGR of 40%/40%/57%
between FY21-24E. We expect operating margins to remain broadly stable at ~28%.
Its return ratios have improved consistently, and we expect the RoE & RoCE to
expand to 28% & 37%, respectively, by FY24E.
Exhibit 34: Segment-wise revenue break-up and financial summary
Rs mn FY18 FY19 FY20 FY21E FY22E FY23E FY24E
Revenue
Differential gears 5,061 5,658 4,111 4,327 5,341 8,279 12,005
Differential assemblies 514 611 658 2,739 5,295 8,472 12,284
Starter motors 5,934 6,939 6,535 7,859 9,237 11,455 11,005
Others 407 442 500 638 744 3,750 7,847
Total 11,917 13,650 11,804 15,563 20,617 31,956 43,141
YoY growth %
Differential gears 12% -27% 5% 23% 55% 45%
Differential assemblies 19% 8% 316% 93% 60% 45%
Starter motors 17% -6% 20% 18% 24% -4%
Others 9% 13% 28% 17% 404% 109%
Total 15% -14% 32% 32% 55% 35%
EBITDA 1,707 2,000 2,423 4,410 5,693 9,110 12,164

EBITDA margin (%) 27.9% 28.6% 23.3% 28.2% 27.6% 28.5% 28.2%
EBIT 1,474 1,690 1,752 3,441 4,430 7,622 10,451

EBIT margin % 24.1% 24.2% 16.9% 22.0% 21.5% 23.9% 24.2%
APAT 862 1,000 1,445 2,052 3,218 5,703 7,911

APAT margin % 14.0% 14.2% 13.8% 13.1% 15.6% 17.8% 18.3%
RoCE (%) 32% 57% 13% 22% 25% 35% 37%

RoE (%) 48704% 58% 12% 16% 21% 28% 28%
Source: Company, Systematix Institutional Research; Note: Acquired Comstar in FY19. FY18/19 revenues here include Comstar revenues.
On the back of strong profit growth, the company should generate cumulative cash
flow of ~Rs 6.2bn over FY22-24E. With the influx of IPO proceeds and expected
strong FCF generation, the company should become net debt free by FY24E (FY21 net
debt stands at ~Rs 3.4bn).
Exhibit 35: Expect free cash flow generation of ~Rs 6bn over FY22-24E
(Rs mn) FY18 FY19 FY20 FY21 FY22E FY23E FY24E
CFO before WC changes -3,581 6,468 4,474 3,439 4,705 7,358 9,734
Working capital changes 3,508 -4,207 -1,940 -2,012 -91 -2,845 -3,673
Cash flow from operations -73 2,260 2,533 1,427 4,613 4,513 6,062
Less: Capex and investment in JVs -8,337 4,754 -7,421 -2,171 -2,968 -3,000 -3,000
Free Cash Flow -8,410 7,014 -4,887 -744 1,645 1,513 3,062
APAT 862 1,000 1,445 2,052 3,218 5,703 7,911

FCF/APAT -976% 701% -338% -36% 51% 27% 39%
EBITDA 1,707 2,000 2,423 4,410 5,693 9,110 12,164

OCF/ EBITDA -4% 113% 105% 32% 81% 50% 50%
Valuation & Recommendation

Pure play EV stories have received strong investor response in India and globally.
Globally, these companies are trading at mean valuation of 42x/28x 1-year forward
PER and EV/EBITDA. Sona should trade at a premium to this global average driven by
superior return ratios and cash generation. At the CMP, the stock trades at 63x/45x
PER and 40x/29x EV/EBITDA on FY23/24 estimates. We initiate coverage on Sona
BLW with a BUY rating and a target price of Rs 735 (45x FY23E EV/EBITDA).
Exhibit 36: Valuation for global EV component players
PE (x) EV/ E (x) RoE (%)
Companies
CY21E CY22E CY23E CY21E CY22E CY23E CY21E CY22E CY23E
Sona BLW 111 63 45 63 40 29 21 28 28
CATL 116 70 50 75 46 33 15 20 22
Nidec Corp 46 38 31 27 22 19 13 14 15
Aptiv PLC 47 32 26 23 17 15 10 14 17
Shenzhen Inovance 51 39 31 46 36 29 25 25 25
Zhejiang Sanhua Int 44 34 28 34 27 23 17 19 20
Source: Bloomberg, Systematix Institutional Research; Note: Sona BLW & Nidec Corp follow fiscal year
Exhibit 37: Domestic peer set valuation table

CMP FDEPS (Rs) PE (x) EV/ E (x) RoE (%)
Companies
(Rs) FY22E FY23E FY22E FY23E FY22E FY23E FY22E FY23E
Balkrishna Ind 2,487 70 71 35 35 22 21 21 18
Bharat Forge 790 24 33 33 24 19 14 19 22
Endurance Tech 1,775 56 69 32 26 17 14 20 21
Minda Ind 768 19 24 41 32 19 16 19 20
Minda Corp 139 7 11 19 13 8 7 15 18
Varroc Eng 306 -7 21 NA 14 8 4 -4 11
Source: Systematix Institutional Research
Our DCF based valuation with a terminal growth of 5.5% and cost of equity of
9.5% comes to Rs 735/share.
Exhibit 38: Sensitivity analysis for our DCF based intrinsic price
DCF sensitivity analysis of share price (Rs)
Terminal Growth Rate
4.5% 5.0% 5.5% 6.0% 6.5%

10.5% 488 522 563 613 676
10.0% 540 583 635 700 784
WACC
9.5% 610 666 735 825 945
9.0% 680 750 841 961 1,130
8.5% 777 871 996 1,171 1,434
Source: Systematix Institutional Research
Exhibit 39: Revenue and growth trend Exhibit 40: Gross and EBITDA margin trend
(Rs mn)
80.0% 35.0%
50,000 55% 60%
51% 75.0% 28.6% 28.2% 28.5% 28.2%
45,000 48% 27.6% 30.0%
50% 70.0%
40,000 23.3%
65.0% 70.7% 25.0%
35,000
35% 40%
30,000 32% 60.0% 20.0%
25,000 30% 55.0% 58.8%
57.1% 57.0% 57.0% 57.0% 15.0%
20,000 50.0%
14% 20% 45.0%
15,000 10.0%
10,000 40.0%
10% 5.0%
5,000 35.0%
0 0% 30.0% 0.0%
FY19 FY20 FY21 FY22E FY23E FY24E FY19 FY20 FY21 FY22E FY23E FY24E
Revenue (Rs mn) YoY growth (%, RHS) Gross margin (%) EBITDA margin (%, RHS)
Exhibit 41: RoE and RoCE on an uptrend Exhibit 42: Net debt/equity to improve significantly
70% (Rs mn)
57% 4,000 0.6 0.7
60%
3,500 0.6
50% 58%
3,000 0.5
40% 35% 37%
2,500
0.4
30% 25% 2,000
22% 0.3 0.3
28% 28% 1,500
20% 13% 0.2
0.2
21% 1,000 0.1 0.1
10% 16% 0.1
12% 500
(0.0)
0% -
0
FY19 FY20 FY21 FY22E FY23E FY24E FY19 FY20 FY21 FY22E FY23E FY24E
(500) (0.1)
RoCE (%) RoE (%) Net Debt (Rs mn) Net D/E (x, RHS)
Exhibit 43: Quarterly revenue trend Exhibit 44: Quarterly EBITDA and margin profile
(Rs mn)
(Rs mn)
6,000 1,600 27.7% 30.0%
5,393 26.0%
5,007
5,000 1,400
25.0%
1,200 19.0%
4,000 20.0%
1,000
3,000 800 15.0%
600
2,000 1,534 10.0%
400
1,000 5.0%
200
0 0 0.0%
1QFY21 4QFY21 1QFY22 1QFY21 4QFY21 1QFY22
Revenue (Rs mn) EBITDA (Rs mn) EBITDA Margin (%, RHS)
Key risks
Weak global & domestic automobile volumes
The global automotive market has seen a decent recovery in demand from the
COVID-19-led slowdown. However, the global automobile industry has witnessed
severe supply constraints owing to semi-conductor shortage, which has been
impacting production across OEMs. Slower-than-expected improvement in the
supply situation can hamper near to medium term production schedules for OEMs
and thus, volumes/revenues for Sona.
Slower than expected pace of electrification in the global automotive industry
Sona’s driveline business is expected to see significant gains from the electrification
drive in the global automobile industry. Slower-than-expected pace of electrification
can pose downside risks to the revenue estimates for its driveline business,
particularly DA (current global BEV share at ~13%).
High dependence on top-10 customers
The company’s top-10 customers account for ~80% of its total revenues, wherein the
top-3 customers form 18%, 17% and 13% of the overall revenue. Any loss of contract
from these OEMs or production issues at these OEMs will significantly impact Sona’s
revenue. The company is, however, focused on expanding its customer base and
diversifying revenues.
Limited success in new products
Sona has developed/is in the process of developing several new traction motors &
motor controllers for E-2Ws/3Ws. Weak acceptance of new products can hamper the
growth prospects of the company’s domestic revenue. However, it has already won
some orders for its BLDC motor and is focused on penetrating both incumbents as
well as new age start-ups in the domestic E-2W market.
A sharp increase in commodity costs
A sharp increase in the prices of key commodities (steel, copper and aluminium) can
impact the company’s margins for a few quarters. However, as per the contracts with
OEMs, higher prices get passed on with a lag of a quarter (for gears & assemblies –
steel cost is entirely pass through; for starter motors, copper is pass through but
other costs cannot be passed through).
Exchange rate fluctuations
Given that Sona derives ~75% of its revenue from outside India (Exports +
international markets), any unfavourable movement in the foreign exchange rate can
materially hamper the company’s revenues.
Annexure
Exhibit 45: Sona’s marquee clientele & strong customer relationships
Customer Commencement of Customer relationship No. of years of customer relationship
Mahindra & Mahindra 1998 23
Indian OEM of PVs, CVs & EVs 1999 22
Global Tier 1 Supplier for PVs & CVs 1999 22
TAFE 2000 21
Dana 2001 20
North American OEM of PVs & CVs 2002 19
Maruti Suzuki 2002 19
JLR 2003 18
Indian OEM of OHVs - 3 2003 18
Carraro 2003 18
Indian Tier 1 supplier for CVs 2003 18
CNH 2004 17
Volvo cars 2006 15
John Deere 2008 13
Escorts 2008 13
North American Tier 1 supplier for PVs, CVs, OHVs & EVs 2009 12
Linamar 2015 6
Ranault Nissan 2015 6
Geely 2016 5
Global OEM of EVs 2017 4
Exhibit 46: Revenue trend by customer mix

Customer mix (%) FY18 FY19 FY20 FY21
NA PV/CV OEM 31 27 24 17
EU PV/CV OEM 12 15 20 15
Global EV OEM 0 0 1 13
Global Tier 1 supplier 6 6 6 7
Global OHV OEM 5 5 5 6
NA Tier 1 PV/EV supplier 11 10 8 5
India OEM1 5 5 5 5
India OEM2 7 7 5 4
Global OEM 1 1 2 4
Asian OEM 0 1 4 4
Others 21 21 19 20
Exhibit 47: Geographical presence & plant locations
Exhibit 48: Plant-wise capacity details

Capacity Capacity Capacity
Location and plant Annual Installed Production Manufacturing processes at the
Utilization Utilization Utilization
type capacity (Dec’20) location
(FY18) (FY19) (FY20) (FY20)
Gurugram Forging, heat treatment and
28.70 mn 111% 91% 72% 27
(manufacturing) machining for gears
Manesar Case housing and FDG machining
0.53 mn - - - -
(assembly) and final assembly
Pune Forging, heat treatment and
9.33 mn 94% 89% 72% 7.4
(manufacturing) machining
Manufacture and assembly of
Chennai
3.8 mn 47% 46% 39% 1.47 kits, starter motors and traction
(manufacturing)
motors
Hangzhou
1 mn - 7% 7% 0.07 Starter motor assembly
(assembly)
Mexico (assembly) 1 mn - 2% 26% 0.26 Starter motor assembly
Tecumseh
1 mn 25% 24% 23% 0.23 Starter motor assembly
(assembly)
Exhibit 49: Sona’s key competitors across its product segments

Product segments Key competitors
Gears American Axle, Showa Corp, Musashi Seimitsu Industries, Meritor, GKN.
DA Borg Warner, JTEKT Corp, Dana, American Axle, GKN Driveline, Hyundai WIA Corp.
Starter motors Valeo, Denso, Borg Warner, SEG Automotive, Hitachi, Lucas TVS.
BSG Valeo, SEG Automotive, Continental, Hyundai Mobis.
Traction motors for domestic E-2/3Ws Lucas TVS, SEG Automotive, Mahle electric drives India.
FINANCIALS (CONSOLIDATED)
Profit & Loss Statement Balance Sheet
YE: Mar (Rs mn) FY20 FY21 FY22E FY23E FY24E YE: Mar (Rs mn) FY20 FY21 FY22E FY23E FY24E
Net sales 10,380 15,663 20,617 31,956 43,141 Cash & bank 1,673 276 160 219 1,883
Growth, % 48 51 32 55 35 Marketable securities - - - - -
RM expenses 4,456 6,453 8,865 13,741 18,551 Debtors 2,336 4,170 5,154 7,989 10,785
Employee expenses 1,027 1,474 1,856 2,716 3,451 Inventory 1,962 3,056 3,150 4,882 6,591
Other expenses 2,474 3,325 4,203 6,389 8,975 Loans & advances 56 73 91 141 190
EBITDA 2,423 4,410 5,693 9,110 12,164 Other current assets 912 1,176 823 659 757
Growth, % 21 82 29 60 34 Total current assets 6,940 8,750 9,379 13,890 20,207
Margin, % 23.3 28.2 27.6 28.5 28.2 Investments 19 0 0 0 0
Depreciation 671 969 1,263 1,488 1,713 Gross fixed assets 11,846 14,101 17,101 20,101 23,101
EBIT 1,752 3,441 4,430 7,622 10,451 Less: Depreciation 1,195 1,935 3,198 4,686 6,400
Growth, % 4 96 29 72 37 Add: Capital WIP 896 832 800 800 800
Margin, % 16.9 22.0 21.5 23.9 24.2 Net fixed assets 11,548 12,998 14,703 16,215 17,501
Interest paid 260 325 249 195 141 Total assets 18,507 21,748 24,081 30,104 37,708
Other Income 58 23 26 28 31 Current liabilities 2,509 3,664 4,284 5,872 6,895
Non-recurring Items 2,368 -139 - - - Provisions 118 159 191 211 168
Pre-tax profit 3,918 3,000 4,207 7,455 10,341 Total current liabilities 2,627 3,823 4,476 6,083 7,063
Tax provided 265 848 989 1,752 2,430 Debt 4,100 4,886 4,036 3,436 2,836
Profit after tax 3,653 2,152 3,218 5,703 7,911 Total liabilities 6,727 8,709 8,512 9,519 9,899
Others (Minorities, Associates) - - - - - Paid-up capital 477 5,730 5,730 5,730 5,730
Net Profit 3,653 2,152 3,218 5,703 7,911 Reserves & surplus 11,302 7,309 9,840 14,855 22,079
Growth, % 265 -41 50 77 39 Shareholders’ equity 11,779 13,039 15,570 20,585 27,809
Net Profit (adjusted) 1,445 2,052 3,218 5,703 7,911 Total equity & liabilities 18,507 21,748 24,081 30,104 37,708
Cash Flow Ratios

YE: Mar (Rs mn) FY20 FY21 FY22E FY23E FY24E YE: Mar FY20 FY21 FY22E FY23E FY24E
Pre-tax profit 3,918 3,000 4,207 7,455 10,341 EPS (INR) 2.5 3.6 5.6 10.0 13.8
Depreciation 671 969 1,263 1,488 1,713 PER (x) 248 175 111 63 45
Chg in working capital -1,791 -1,694 132 -2,679 -3,563 Price/Book (x) 3 27 23 17 13
Total tax paid -265 -848 -989 -1,752 -2,430 EV/EBITDA (x) 13 82 63 40 29
CFO 2,533 1,427 4,613 4,513 6,062 EV/Net sales (x) 3 23 17 11 8
Capital expenditure -7,402 -2,190 -2,968 -3,000 -3,000 RoE (%) 12 16 21 28 28
Chg in investments -19 19 - - - RoCE (%) 13 22 25 35 37
Chg in marketable securities -2,122 611 26 28 31 Fixed Asset turnover (x) 1.0 1.3 1.3 1.7 2.0
CFI -9,542 -1,561 -2,942 -2,972 -2,969 Dividend Yield (%) 3 0 0 0 0
Free cash flow -4,887 -744 1,645 1,513 3,062 Receivable (days) 81 96 90 90 90
Equity / Debt raised/(repaid) 1,852 5,861 -937 -883 -829 Inventory (days) 68 70 55 55 55
Dividend (incl. tax) -1,170 -905 -850 -600 -600 Payable (days) 40 52 45 45 45
CFF 8,426 -1,264 -1,787 -1,483 -1,429 Revenue Growth (%) 48 51 32 55 35
Net chg in cash 1,417 -1,397 -115 58 1,664 EBIDTA Growth (%) 21 82 29 60 34
Opening cash balance 256 1,673 276 160 219 EPS Growth, % 44 42 57 77 39
Closing cash balance 1,673 276 160 219 1,883 Net D/E ratio (x) 0.1 0.3 0.2 0.1 0.0
Institutional Equities Team

Nikhil Khandelwal Managing Director +91-22-6704 8001 nikhil@systematixgroup.in
Navin Roy Vallabhaneni President & Head – IE +91-22-6704 8065 navin@systematixgroup.in
Equity Research
Analysts Industry Sectors Desk-Phone E-mail
Amar Kedia Infra, Cap Goods, Logistics, Real Estate +91-22-6704 8084 amarkedia@systematixgroup.in
Ashish Poddar Consumer Durables, Building Materials, Small & Midcaps +91-22-6704 8039 ashishpoddar@systematixgroup.in
Ashutosh Joytiraditya Consumer, Retail +91-22-6704 8068 ashutoshj@systematixgroup.in
Naushad Chaudhary Chemicals, Textiles, Building Materials, Midcaps +91-22-6704 8036 naushadchaudhary@systematixgroup.in
Praful Bohra Pharmaceuticals and Healthcare +91-22-6704 8064 prafulbohra@systematixgroup.in
Pratik Tholiya Speciality Chem, Agrichem, Sugar and Fertilizer +91-22-6704 8028 pratiktholiya@systematixgroup.in
Premal Kamdar Consumer Staples +91-22-6704 8090 premalkamdar@systematixgroup.in
Rahul Jain Metals & Mining, Cement +91-22-6704 8066 rahuljain@systematixgroup.in
Rakesh Kumar Banking, Insurance +91-22-6704 8041 rakeshkumar@systematixgroup.in
Ronak Sarda Auto, Auto Ancillaries +91-22-6704 8059 ronaksarda@systematixgroup.in
Shubhranshu Mishra NBFCs & Diversified Financials +91-22-6704 8024 shubhranshumishra@systematixgroup.in
Harsh Mittal Cement, Building Materials, Paints +91-22-6704 8098 harshmittal@systematixgroup.in
Hena Vora NBFCs & Diversified Financials +91-22-6704 8045 henavora@systematixgroup.in
Nikhil Shah Banking, Insurance +91-22-6704 8091 nikhilshah@systematixgroup.in
Poorvi Banka Auto, Auto Ancillaries +91-22-6704 8063 poorvibanka@systematixgroup.in
Pranay Shah Consumer Durables, Building Materials, Small & Midcaps +91-22-6704 8017 pranayshah@systematixgroup.in
Shweta Dikshit Metals & Mining +91-22-6704 8042 shwetadikshit@systematixgroup.in
Shilpashree Venkatesh Macro-Strategy +91-22-6704 8078 shilpav@systematixgroup.in
Tausif Shaikh Pharmaceuticals and Healthcare +91-22-6704 8046 tausifshaikh@systematixgroup.in
Varun Gajaria Midcaps +91-22-6704 8081 varungajaria@systematixgroup.in
Equity Sales & Trading
Name Desk-Phone E-mail
Vipul Sanghvi Director and Head - Sales +91-22-6704 8062 vipulsanghvi@systematixgroup.in
Ashok Kumar Agarwal Sales +91-22-6704 8058 ashokagarwal@systematixgroup.in
Jigar Kamdar Sales +91-22-6704 8060 jigarkamdar@systematixgroup.in
Nirbhay Kumar Singh Sales +91-22-6704 8061 nirbhaysingh@systematixgroup.in
Rahul Khandelwal Sales +91-22-6704 8033 rahul@systematixgroup.in
Pawan Sharma Director and Head - Sales Trading +91-22-6704 8067 pawansharma@systematixgroup.in
Mukesh Chaturvedi Vice President and Co Head - Sales Trading +91-22-6704 8074 mukeshchaturvedi@systematixgroup.in
Vinod Bhuwad Sales Trading +91-22-6704 8051 vinodbhuwad@systematixgroup.in
Rashmi Solanki Sales Trading +91-22-6704 8097 rashmisolanki@systematixgroup.in
Rahul Thakar Sales Trading - Derivatives +91-22-6704 8053 rahulthakar@systematixgroup.in
Vipul Chheda Dealer +91-22-6704 8050 vipulchheda@systematixgroup.in
Amit Sawant Dealer +91-22-6704 8054 amitsawant@systematixgroup.in
Paras Shah Dealer +91-22-6704 8047 parasshah@systematixgroup.in
Suketu Vyas Dealer +91-22-6704 8050 suketuvyas@systematixgroup.in
Corporate Access
Audrey Leolyn Mendonca Assistant Vice President +91-22-6704 8088 audreymendonca@systematixgroup.in
Production
Yukti Vidyarthi Editor +91-22-6704 8071 yukti@systematixgroup.in
Mrunali Pagdhare Production +91-22-6704 8057 mrunalip@systematixgroup.in
Vijayendra Achrekar Production +91-22-6704 8089 vijayendraachrekar@systematixgroup.in
Operations
Sachin Malusare Vice President +91-22-6704 8055 sachinmalusare@systematixgroup.in
Sugandha Rane Assistant Vice President +91-22-6704 8056 sugandha@systematixgroup.in
Jignesh Mistry Manager +91-22-6704 8049 jigneshmistry@systematixgroup.in
Ravikiran Dasaka Manager +91-22-6704 8019 ravikiran@systematixgroup.in
Ravi Agarwal Assistant Manager +91-22-6704 8016 raviagarwal@systematixgroup.in
DISCLOSURES/APPENDIX
I. ANALYST CERTIFICATION
I, Ronak Sarda, Poorvi Banka; hereby certify that (1) views expressed in this research report accurately reflect my/our personal views about any or all of the subject securities or issuers
referred to in this research report, (2) no part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this research
report by Systematix Shares and Stocks (India) Limited (SSSIL) or its group/associate companies, (3) reasonable care is taken to achieve and maintain independence and objectivity in
making any recommendations.
Disclosure of Interest Statement Update

Analyst holding in the stock No
Served as an officer, director or employee No
II. ISSUER SPECIFIC REGULATORY DISCLOSURES, unless specifically mentioned in point no. 9 below:
1. The research analyst(s), SSSIL, associates or relatives do not have any financial interest in the company(ies) covered in this report.
2. The research analyst(s), SSSIL, associates or relatives collectively do not hold more than 1% of the securities of the company(ies) covered in this report as of the end of the
month immediately preceding the distribution of the research report.
3. The research analyst(s), SSSIL, associates or relatives did not have any other material conflict of interest at the time of publication of this research report.
4. The research analyst, SSSIL and its associates have not received compensation for investment banking or merchant banking or brokerage services or any other products or
services from the company(ies) covered in this report in the past twelve months.
5. The research analyst, SSSIL or its associates have not managed or co-managed a private or public offering of securities for the company(ies) covered in this report in the previous
twelve months.
6. SSSIL or its associates have not received compensation or other benefits from the company(ies) covered in this report or from any third party in connection with this research
report.
7. The research analyst has not served as an officer, director or employee of the company(ies) covered in this research report.
8. The research analyst and SSSIL have not been engaged in market making activity for the company(ies) covered in this research report.
9. Details of SSSIL, research analyst and its associates pertaining to the companies covered in this research report:
Sr. Yes /
Particulars
No. No.
1 Whether compensation was received from the company(ies) covered in the research report in the past 12 months for investment banking transaction by SSSIL. No
2 Whether research analyst, SSSIL or its associates and relatives collectively hold more than 1% of the company(ies) covered in the research report. No
3 Whether compensation has been received by SSSIL or its associates from the company(ies) covered in the research report. No
Whether SSSIL or its affiliates have managed or co-managed a private or public offering of securities for the company(ies) covered in the research report in the
4 No
previous twelve months.
Whether research analyst, SSSIL or associates have received compensation for investment banking or merchant banking or brokerage services or any other
5 No
products or services from the company(ies) covered in the research report in the last twelve months.
10. There is no material disciplinary action taken by any regulatory authority that impacts the equity research analysis activities.
STOCK RATINGS
BUY (B): The stock's total return is expected to exceed 15% over the next 12 months.
HOLD (H): The stock's total return is expected to be within -15% to +15% over the next 12 months.
SELL (S): The stock's total return is expected to give negative returns of more than 15% over the next 12 months.
NOT RATED (NR): The analyst has no recommendation on the stock under review.
INDUSTRY VIEWS
ATTRACTIVE (AT): Fundamentals/valuations of the sector are expected to be attractive over the next 12-18 months.
NEUTRAL (NL): Fundamentals/valuations of the sector are expected to neither improve nor deteriorate over the next 12-18 months.
CAUTIOUS (CS): Fundamentals/valuations of the sector are expected to deteriorate over the next 12-18 months.
III. DISCLAIMER
The information and opinions contained herein have been compiled or arrived at based on the information obtained in good faith from sources believed to be reliable. Such information
has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy completeness or correctness.
This document is for information purposes only. This report is based on information that we consider reliable; we do not represent that it is accurate or complete and one should exercise
due caution while acting on it. Description of any company(ies) or its/their securities mentioned herein are not complete and this document is not and should not be construed as an
offer or solicitation of an offer to buy or sell any securities or other financial instruments. Past performance is not a guide for future performance, future returns are not guaranteed and
a loss of original capital may occur. All opinions, projections and estimates constitute the judgment of the author as on the date of the report and these, plus any other information
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Systematix Sona BLW Initiates Coverage

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Systematix Sona BLW Initiates Coverage

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Systematix

Sona BLW Precision Forgings 27 October 2021

Play on the global electrification trend

400 • Product development continues to surprise: We remain confident about Sona’s

Company background .........................................................................................................................................................5

Corporate governance checks..............................................................................................................................................8

Investment Analysis ...........................................................................................................................................................9

Driveline business ..............................................................................................................................................................9

Electric business ............................................................................................................................................................... 13

Product development in the EV space ............................................................................................................................... 16

R&D capabilities ............................................................................................................................................................... 20

Production Linked Incentive (PLI) Scheme ......................................................................................................................... 21

Financial analysis ............................................................................................................................................................. 22

Valuation & Recommendation .......................................................................................................................................... 24

Key risks ........................................................................................................................................................................... 26

Source: Company, Systematix Institutional Research

Battery EV Micro-hybrid / Hybrid Powersource nuetral ICE dependent

Source: Company, Systematix Institutional Research

Exhibit 3: Electrification strategy – Aims to be present across the value chain

Source: Company, Systematix Institutional Research

10,000 Exhibit 5: Global BEV DA market to cross USD 3bn by CY30

Sona’s target market share (%) 9% 15% 15%

Source: Company, Systematix Institutional Research

Exhibit 8: Company milestones

Corporate governance check

• Growing electrification trend

Pledged shares (%) - -

Related party transactions (Rs mn)

Source: Company, Systematix Institutional Research

Differential assemblies (26% of revenue) – Play on electrification in global PVs

Source: Company, Systematix Institutional Research

Electric business | 45% of Revenue

Micro-hybrid starter motors (% of total) Conventional starter motors (% of total)

Source: Company, Systematix Institutional Research

Product development in the EV space

Source: Industry, Systematix Institutional Research

50KW traction motors (incl

< 5KW traction motor +

Micro-Hybrid Starter Motor

< 10KW traction motor +

Source: Company, Systematix Institutional Research

Source: Company, Systematix Institutional Research

Exhibit 27: Electrification plans of global OEMs

Source: Company, Systematix Institutional Research

Exhibit 29: Key BEV order wins

1.8% 1.7% 4.0%

Production linked incentive (PLI) scheme

Up to or before FY27 20.0 10.0 2.5 20.0 5.0

EBITDA 1,707 2,000 2,423 4,410 5,693 9,110 12,164

EBIT 1,474 1,690 1,752 3,441 4,430 7,622 10,451

APAT 862 1,000 1,445 2,052 3,218 5,703 7,911

RoCE (%) 32% 57% 13% 22% 25% 35% 37%

APAT 862 1,000 1,445 2,052 3,218 5,703 7,911

EBITDA 1,707 2,000 2,423 4,410 5,693 9,110 12,164

Valuation & Recommendation

Exhibit 37: Domestic peer set valuation table

Terminal Growth Rate

4.5% 5.0% 5.5% 6.0% 6.5%

Exhibit 46: Revenue trend by customer mix

Source: Company, Systematix Institutional Research

Exhibit 48: Plant-wise capacity details

Exhibit 49: Sona’s key competitors across its product segments

Cash Flow Ratios