After two tough years, BofA sees the business “back in high gear” and expects 20% revenue and 23% EPS compound annual growth rate over the next two years. The brokerage raised EPS estimates by 2-7%, ahead of Street consensus.
Three key growth engines are fueling this trajectory, according to the note:
1) Traction Motors to Double in Two Years
The traction motors business for electric two-wheelers and three-wheelers, currently around 10% of revenues, is set to double over the next two years. This growth is driven by Sona’s technology edge in light rare earth motors, market share gains, wins with the right customer OEMs, and scaling up of the three-wheeler business.
2) Driveline Back to Growth After Two-Year Drag
The driveline business is expected to post 12% revenue CAGR after two years of no growth due to specific customer headwinds. The recovery is led by India’s cycle recovery, higher content value, and share gains in differential gears. Fiscal 2028 should see conversion of select marquee orders, BofA noted.
3) Railways: The Underappreciated Driver
“Railways is underappreciated growth driver, we believe,” the brokerage said. Steady capital expenditure growth at Indian Railways along with portfolio expansion will underpin strong growth in this segment.
In a deep dive into Sona’s newly acquired railways business, BofA projects it will account for 25% of revenues by fiscal 2028, up from around 20% currently. The segment has potential to deliver 18-20% revenue CAGR over the medium term, supported by government capital expenditure on modernization and faster trains, along with ongoing portfolio expansion.
The margin and return profile of the railways business is “quite solid,” underpinned by the critical nature of products supplied, braking systems, entry barriers including long track record and tender process requirements, and concentrated, disciplined competition.
BofA noted that Sona’s peers in this segment, largely foreign players Wabtec and Knorr Bremse, generate 28-30% EBITDA margins and 40-60% return on capital employed. Under Sona’s ownership, the business will benefit from sharper focus, cost and process efficiencies, and faster new product commercialization, driving growth and margin upside.
“After almost 2 years of underperformance, valuations for Sona now at 37x F27 / 31x F28 PE look reasonable (past 45-50x) & are in line with the peer set,” BofA wrote. The brokerage also sees optionality on top of current valuations from differential gear share gains on European Union supplier distress, humanoids, and sensors.
The new price target of Rs 640 is based on 35x PE plus Rs 50 per share for the EU opportunity, with the valuation methodology unchanged from the previous target.
BofA’s upgrade signals a turning point for Sona Comstar after a prolonged period of subdued performance, with the brokerage’s “risk reward favorable” assessment pointing to a more optimistic outlook ahead.