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Sona BLW stock outlook strong with diversification into rail sector - Investec

EditorEmilio Ghigini
Published 10/25/2024, 03:12 PM
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On Friday, Investec raised the price target for Sona BLW Precision Forgings (SONACOMS:IN) to INR 785 from INR 760, while maintaining a Buy rating on the stock. The adjustment follows the company's reported second-quarter financial year 2025 (Q2FY25) performance, which showed a profit after tax (PAT) of Rs 1.5 billion, marking an 18% year-on-year increase. This figure surpassed estimates by approximately 6-9%, bolstered by higher revenues and increased other income.

The company's revenue growth of 17% year-on-year was particularly noteworthy given the current concerns over a global slowdown in the automotive and electric vehicle (EV) sectors. This growth was attributed to the successful execution of new order wins. Additionally, Sona BLW Precision Forgings announced its acquisition of the Railway Equipment Division of Escorts Kubota for Rs 16 billion, signaling a strategic move to diversify and expand into the rapidly growing rail segment.

The acquisition is expected to provide a significant long-term growth opportunity for Sona BLW Precision Forgings and is projected to account for approximately 20% of the company's consolidated revenues after its full year of incorporation in the financial year 2027 estimates (FY27E).

Despite the initial return on capital employed (ROCE) for the acquisition being lower at around 12-13% compared to the company's ROCE of about 28%, Investec chose to give the management the benefit of the doubt. This optimism is based on the management's proven track record of successful scale-up and integration of past acquisitions such as Comstar, as well as their overall good execution track record.

In summary, while acknowledging some reservations about the acquisition's initial ROCE and the potential for the new business vertical to require significant management attention, Investec reaffirmed its Buy rating for Sona BLW Precision Forgings. The analyst's comments underscore the company's strong quarterly performance and the potential for further growth and diversification through its latest acquisition.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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