Novelic buyout is a smart move for Sona BLW

Sona BLW’s share price soared by nearly 6% on Tuesday on the NSE.

The deal opens the doors to a growing market for the company as more and more vehicles are electrified and autonomous. The advanced driver assistance systems (ADAS) sensors market size is estimated to reach $43 billion by 2030.

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The acquisition adds a new segment, ‘sensors and software’, for Sona, which is present in manufacturing and supplying of automotive systems and components to original equipment manufacturers, including electric vehicle makers.

“We like the company’s strategy of focussing on high technology products for the global market,” said analysts at Nomura Financial Advisory and Securities (India) in a report on 9 January.

Novelic has seen consistent growth in revenue and profit after tax over the past few years. However, the transaction may not move the needle much in terms of earnings for Sona. For perspective, Novelic’s CY22 revenue is estimated to be at €9.3 million or roughly $10 million. This is a mere 3.3% of Sona’s H1FY23 annualized revenue. However, the management expects to scale up Novelic’s revenue to $100 million within 6-7 years. It expects the acquisition to be earnings-per-share- accretive from the first year.

The deal’s valuation multiples are reasonable considering the growth opportunities, said analysts.

Novelic’s enterprise value is at €64.5 million on a pre-money basis, implying a valuation multiple of 26 times CY22 estimated profit after tax. The acquisition is expected to close by FY23-end.

To be sure, despite the rise in Sona’s share price on Tuesday, the stock is almost 44% below its 52-week high of ₹794.80 apiece seen in January 2022.

The correction in the stock was led by expensive valuations to begin with. Global challenges, such as supply chain issues and a muted European market, added to investor woes.

Moreover, the outlook of one of its key customers was weak. However, there has not been much respite on valuations. Continued earnings cuts are keeping the stock’s valuation elevated, said a Nuvama Research report.

Bloomberg data showed that the stock is trading at 41 times FY24 estimated earnings.