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After a brief lull, India’s initial public offering (IPO) market is set for high action in mid-June. With the secondary equity markets defying the impact of the second covid-19 wave, bankers have decided that this is as good a time as any for companies to tap the primary markets. Among the first to ride the wave is auto component manufacturer Sona BLW Precision Forgings Ltd (Sona Comstar). What’s more, thanks to an exposure to the electric vehicle (EV) segment, which is currently highly popular among investors, the company is priced at over 10.5 times revenues.

The company, however, does enjoy higher margins and return ratios compared to peers. On a price-earnings basis, its valuation of around 77 times is somewhat in line with rivals in the auto components space.

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Some analysts say another sign that valuations are rich is the fact that majority shareholder, Blackstone Group, is selling nearly half of its shares in the IPO to raise 5,250 crore. The upper end of the IPO price band is 291, more than nine times the average acquisition price of Blackstone about two years ago. But none of this is holding back investors—the anchor investor book of 2,498 crore was lapped up by a healthy mix of foreign and domestic institutional investors.

Sona Comstar is among companies that make differential gears for both electric and combustion vehicles, and derives about 14% of its revenues from electric vehicles. Besides, the company gets about 27% of its revenues coming from the hybrid segment.

It is largely a global play on the auto industry, with about 75% of revenues coming from overseas sales. Sona has sizeable exposure to North America at 36% of FY21 revenues, followed by Europe and India at 25-27% each, and China at 8%.

“Sona’s FY21 revenues at 1,600 crore makes it much smaller than Bharat Forge, Endurance Technologies and Motherson Sumi at 6,300 crore, 6,500 crore and 57,400 crore, respectively. However, its Ebitda margin averaged 28% over FY18-21—much higher than the 16-17% for Endurance Technologies and Bharat Forge, and 8% for Motherson Sumi," said analysts at Jefferies India in a client note. Ebitda is earnings before interest, tax, depreciation and amortization.

Some analysts are also worried that while the electric vehicle segment holds promise, competition is also high.

“The price tag is a bit too demanding, considering that there are some big global players with sizeable market share in the electric vehicle space, besides risks related to changes in technology and scalability," said Abhishek Jain, analyst, Dolat Capital Market. That may just have a bearing on the returns in the long run.

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