AVCJ Awards 2022: Operational Value Add: Sona Comstar

From the outset, Sona Comstar was intended to be a platform play. The Blackstone Group wanted to buy an automotive components manufacturer and, through M&A, reposition it to serve the electric vehicle (EV) market. What it did not anticipate was how quickly the two parts – Comstar Automotive Technologies and Sona BLW Precision Forging – would gel.

“We’ve done buy and build before and we have a playbook – putting in place the right management, doing M&A, investing in technology, driving forward and backward integration. We use our global network and our portfolio operations team,” said Ganesh Mani, a managing director at Blackstone.

“But the scale of what we have achieved with Sona Comstar in a short period is unique. To complete the journey the company has undertaken, from pivoting to EV, creating new products, improving business development to delivering public market results, in four years is incredible.”

The private equity firm has already locked in some of the gains. Sona Comstar went public in June 2021, raising INR 55.5bn (then USD 750m) in the largest IPO by a private equity-controlled company in India. Blackstone received INR 52.5bn of the proceeds and pared its holding from 66.3% to 34.2%. The stock performed strongly on debut and ended the year at a 155% premium to its IPO price.

Another partial exit came through a block trade – the largest Blackstone has transacted in India – in August 2022. Priced at a 75% premium to the IPO price, it generated proceeds of INR 40.4bn (USD 506m). The private equity firm retains a 20.5% interest in Sona Comstar valued at INR 54.6bn as of late January. The stock remains 57% above the IPO price.

“An IPO was always the goal. Such assets are rare in India, so we thought there would be significant demand in the public markets,” said Mani. “It is the only company listed in India that has sustained 20%-plus revenue growth, a 20%-plus EBITDA margin, and 20%-plus ROE [return on equity] consistently over the last five years.”

Mix and match

The first piece of the puzzle fell into place in 2018 when Blackstone acquired Comstar for a reported enterprise value of INR 10bn. (The private equity firm declined to comment on the specific sums invested across the different transactions.) The company was a traditional automotive systems and components manufacturer, best-known for producing the world’s lightest starter motor.

Blackstone assessed several merger targets based on scale, margins, geographic coverage, customer type, and product range, but ultimately settled on Sona, a leading player in the automotive drivetrain solutions space. Sunjay Kapur, the company’s promoter, who took a minority stake in the combined entity, played a key role in making the deal happen in July 2019.

“It wasn’t an easy transaction because there were two businesses, one in India and one in Europe. We carved out the India piece and merged it with Comstar,” said Mani. “But when we approached Sanjay, he realised the potential of what we were proposing and was very supportive. Full credit to him and the management team for seeing the bigger picture.”

That bigger picture involved building a business that leveraged India’s established reputation as a component supplier to international original equipment manufacturers (OEMs) and extending it into EV. Global EV penetration was 4% in 2020, according to International Energy Agency. It surpassed 8% in 2021 and is expected to reach 22% by 2030, with sales rising from 6.6m units to 27m units.

Completing the merger was a nine-month process, given the structural complexity and the need for regulatory approvals. This gave Blackstone ample time to plan integration – thinking about how to bring the teams together and align cultures while preserving some elements of independence.

There were obvious opportunities in cross-selling: the two companies had very different product suites and Comstar primarily served the Indian market while Sona was export-focused. However, the overriding objective was EV-oriented product innovation. To this end, Blackstone consolidated the engineering and M&A capabilities and invested heavily in technology.

A team of more than 200 engineers was recruited to work on traditional hardware competencies, system design and integration, and software. This contributed to the development of differential assemblies, traction motors and controllers for EVs and predictive active suspension systems for autonomous or connected passenger vehicles.

Blackstone also strengthened management – promoting the CFO of Sona to CEO of the merged entity and bringing in executives who had previously worked at the likes of General Motors and Hyundai India – and revamped business development strategy. In the three years ended March 2022, new annual order wins exceeded 50% of revenue and the current order book is 10x annual revenue.

“It was a case of making sure the company was focused on the right areas. We went from supplying components to supplying systems; we had strong products and customer references worked well,” said Mani. “In addition, we added business development people in the US and Europe to help them penetrate those geographies. Previously, it was just a team working out of India.”

By the numbers

As of March 2022, Sona Comstar had 3,555 staff in nine manufacturing plants, three R&D centres, and eight warehouses. Revenue for the year reached INR 21.3bn, up from INR 15.7bn in 2021 and INR 12.2bn in 2020. Over the same period, EBITDA grew from INR 2.4bn to INR 4.4bn to INR 5.5bn.

Net profit has been more volatile, in part reflecting the impact of discontinued operations, falling from INR 3.6bn to INR 2.2bn and then rebounding to INR 3.6bn.

Notably, EV accounted for INR 5bn in revenue in the 2022 financial year, representing a 29x increase on 2019. In percentage terms, the segment has risen from 1% to 25%. The company has become India’s largest EV components supplier with 36 programmes serving 23 customers across North America, Europe, and Asia. When Blackstone invested, there was just one programme.

Moreover, this performance came despite the wider automotive industry struggling with the effects of COVID-19. Light vehicle sales rebounded in 2021 but they remain well short of pre-pandemic levels and growth was flat last year. According to Blackstone, the industry has shrunk by about 7% over the past two years. In contrast, Sona Comstar’s sales have grown nearly 75%.

Mani acknowledges that COVID-19 has been disruptive, not least to supply chains. The slump in automotive sales prompted semiconductor manufacturers to prioritise growth areas like data centres and consumer electronics, which meant there wasn’t enough product available when demand returned. But Sona Comstar emerged stronger from the experience.

“There was a period when supply chains were severely impacted and the team did well to go out and win new orders – that’s how we got through it,” he added. “It goes to show that if you’ve got a play on EV competence globally, and the right technology and solutions, you can gain market share.”

Pictured: The Blackstone Group's Alan Miyasaki (left) collects the Operational Value Add award from Oliver Stratton of Alvarez & Marsal

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• Topics
• South Asia
• Industrials
• Buyouts
• India
• manufacturing
• automobiles
• Electric Vehicles
• The Blackstone Group
• AVCJ Awards