Business

Mutual funds are bullish on this undervalued mid-cap stock. This is why

Today’s high-growth companies are tomorrow’s top stocks. It’s no secret that many mutual funds are looking to invest in these companies.

Of all the stocks the mutual fund is buying, high growth stocks is the most popular. A good example is electric vehicle (EV) stock, which has high growth prospects.

Mutual funds have been betting on EV stocks for the past few years. Over the past few months, they’ve increased their allocation to a number of electric vehicle stocks. But one company stands out.

This company has a credible EV story, and it’s a game that represents EV opportunity. It is a large automotive equipment and components group Sona BLW Precision Holdings.

About the company

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

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

The company acquired a 100% stake in Comstar Automotive Technologies (CATPL) in July 2019. Both units are in the process of merging.

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

Finally, the company has increased its focus on electric vehicles. Revenue contribution from this segment increased from 1.3% in FY 2018-19 to 29% in the most recent quarter of June 2022.

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

Why fund managers favor this mid-cap company

We recently wrote to you about the five mutual fund stocks bought and sold in August 2022.

Sona Comstar is a notable mention from the midcap space. Take a look at the table below that shows a list of mutual funds that have purchased Sona Comstar.

Fund buy.

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Fund buy.

SBI Mutual Fund on August 18 acquired 8.7 million shares of Sona BLW Precision Forgings through open market trading. They are purchased for an average price of 505 per share.

With this, the stock became the most popular stock bought by MFIs. It attracted an investment of approx 19 billion.

The company, which went public on a stock exchange last year, bought from mutual funds in the most recent quarter of June 2022.

Sona BLW Precision Stock Model.

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Sona BLW Precision Stock Model.

The main reason mutual funds turned bullish on Sona Comstar was electric vehicles. It’s one of the few companies that can design a high-energy-density EV system. It also produces engines for hybrid passenger cars, which help save fuel, and EV traction engines for electric vehicles.

The company has two new projects in its kitty, receiving from a European passenger car manufacturer to supply the ultimate powertrain differential assemblies for their upcoming EV models.

In the most recent quarter, it won six new shows and added four new customers in the electric vehicle segment. The total number of orders now is 205 billion according to company records.

The company also posted good growth earnings as posted Net profit of 760 million thanks to revenue growth of 18%. This is the result of 68% year-over-year growth in its battery electric vehicle (BEV) business.

Financial summary.

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Financial summary.

The company expects its revenue share from the electric vehicle segment to reach 50% (currently 29%) in the next five years, driven by strong orders and an expanding electric vehicle market. Most of the revenue the company generates is from the electric vehicle segment.

The company’s CEO Vikram Singh recently said that if the electric two-wheeler segment grows in India, Sona Comstar’s electric vehicle sales will be even higher.

We wrote that in the electric vehicle segment, space for two-wheelers will be the biggest beneficiary. Look at the chart below for growing opportunities in the two-wheeler electric vehicle line.

Mass of electric two-wheeler.

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Mass of electric two-wheeler.

For Sona Comstar, this is the moment to take advantage. It already has a strong foothold and is increasing its market share in the electric vehicle segment. Strong orders and growing market share make the company one of the best growing players in the electric vehicle sector.

How has the stock been performing lately?

While you might think Sona Comstar would be a multi-pocket stock because it has a believable EV story, you couldn’t be more wrong.

The company’s shares have been under pressure this year due to macro concerns. The company has exposure to the European and US markets.

The June 2022 business results are proof that margin pressure is here to stay. The entire auto industry has been struggling because of supply disruptions and Russia’s invasion of Ukraine.

In 2022 so far, the company’s stock has lost 33%.

Sona BLW Predictions.

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Sona BLW Predictions.

The company with the highest quotation in 52 weeks is 839 touched on December 14 last year. It hit a 52-week low of 486 today.

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

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

This article is provided by Equitymaster.com

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