Mutual Funds are loading up on this beaten down midcap stock. Here’s why

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Today’s high-growth company is tomorrow’s leading stock. It’s no secret that many mutual funds are looking to invest in these companies.

Out of all the stocks that mutual funds are buying, high growth stocks are the most popular. A good example is electric vehicle (EV) stocks, which have high growth prospects.

Mutual funds have been betting on EV stocks for the past couple of years. Over the past couple of months, they have increased allocations to some EV stocks. But one company stands out.

This company has a credible EV story and it’s a proxy play to the EV opportunity. It’s the auto component and equipment major Sona BLW Precision Holdings.

A word about the company

Sona BLW Precision (Sona Comstar) manufactures precision forged bevel gears, differential case assemblies, and synchroniser rings for automotive and other applications.

It has five manufacturing plants, three in Gurgaon, one in Manesar, and one in Pune.

The company acquired 100% of Comstar Automotive Technologies (CATPL) in July 2019. Both entities are in the process of being merged.

CATPL manufactures starter motors, starter motor kits, and alternators for automotive applications. Its manufacturing facilities are spread across Chennai (India), Tecumseh (US), Hangzhou (China), and Irapuato (Mexico).

Of late, the company has increased focus on EVs. The revenue contribution from the segment jumped from 1.3% in fiscal 2018-19 to 29% in the most recent June 2022 quarter.

In the most recent quarterly results, 29% of the company’s revenue and 62% of its order book came from its battery electric vehicle (BEV) business.

Why fund managers are loading up this midcap company

We recently wrote to you about the top five stocks mutual funds bought and sold in the month of August 2022.

Sona Comstar was a notable mention from the midcap space. Take a look at the table below which shows the list of mutual funds which bought Sona Comstar.

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Fund buys.

SBI Mutual Fund on 18 August acquired 8.7 m shares of Sona BLW Precision Forgings via open market transactions. These were bought at an average price of 505 per share.

With this, the stock became the most popular one purchased by MFs. It attracted an investment of approximately 19 bn.

The company, which debuted on the stock exchanges last year, has seen buying from mutual funds in the most recent June 2022 quarter.

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Sona BLW Precision Shareholding Pattern.

The main reason for mutual funds turning bullish on Sona Comstar has to be electric vehicles. It’s one of the few companies that can design high-power-density EV systems. It also manufactures motors for hybrid passenger vehicles, enabling fuel savings and EV traction motors for electric vehicles.

The company has two new projects in its kitty, received from a European passenger vehicle maker to supply final drive differential assemblies for their upcoming EV models.

In the most recent quarter, it won six new programs and added four new customers in the EV segment. The overall order book now stands at 205 bn according to the company’s filings.

The company also posted good profit growth as it posted 760 m net profit on the back of 18% growth in revenues. This was a result of a 68% year-on-year growth in its battery electric vehicle (BEV) business.

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Financial Snapshot.

The company expects its revenue share from the EV segment to touch 50% (29% at present) in the next five years on the back of a strong pipeline of orders and an expanding EV market. Most of the revenues which the company generates is from the EV segment.

The company’s CEO Vikram Singh recently said if the electric two-wheeler segment takes off in India, the EV segment revenue for Sona Comstar would be even higher.

We’ve have written that in the EV segment, the 2-wheeler space will be the biggest beneficiary. Look at the chart below to see the rising opportunity in the 2-wheeler EVs.

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Electric two-wheeler volumes.

For Sona Comstar, this is the time to capitalise on the opportunity. It already has a strong foothold and is increasing market share in the EV segment. Strong order book and increasing market share make the company one of the best plays in the EV space.

How the stock has performed recently

While you may think Sona Comstar will be a multibagger stock as it has a credible EV story, you couldn’t be more wrong.

Shares of the company have come under pressure this year on the back of macro concerns. The company has exposure to European and US markets.

The June 2022 quarter results were proof that margin pressures are here. The entire automotive industry has struggled on the back of supply disruption and Russia’s invasion of Ukraine.

In 2022 so far, shares of the company have lost 33%.

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Sona BLW Precisions.

The company has a 52-week high quote of 839 touched on 14 December last year. It touched a 52-week low of 486 today.

At the current price, the company trades at a PE multiple of 89x and a price to book value multiple of 14.7 times.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com

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