Sona BLW’s acquisition of Escorts railway division to boost earnings: Philip Capital

Sona BLW Comstar acquired Escorts Kubota's Railway Equipment Division (RED) for an enterprise value of Rs 1,600 crore. The acquisition will be on a slump sale basis subject to the final terms of the agreement. It will give Sona BLW a strategic foothold in the fast-growing railway equipment space and diversified product offerings from which it can tap into this burgeoning demand in railway components, said brokerage firm Philip Capital.

A well-established supplier to Indian Railways, the capabilities of the division are centred on the production of critical safety components like brakes and suspension systems. The division reported revenue of Rs 950 crore with an EBIT margin of 18.8 per cent in FY24. The acquisition is expected to be earnings accretive from the first year of operation, positive for the bottom line and stronger for the company in the railway equipment sector, according to Philip Capital.

Sona BLW said that through the acquisition of RED, growth potential would come from line expansion in products and including advanced technology from the company, portfolio diversification, and market entry in railways, considering the high growth rate in the sector due to rapid urbanization and government investments in rail infrastructure.

Railway component segment, including brakes, is very critical and quality and reliability make a lot of difference. Sona BLW can look at cap on R&D to improve product quality or come up with innovative products in this segment, says Philip Capital. Lastly, entry barriers take the form of a long and complex vendor approval process, which characterizes the railway equipment market, making this acquisition more of an efficient means through which Sona BLW may enter the railway equipment market than organic growth efforts.

Management is confident about the competence of the existing RED management team that this would be a critical factor in ensuring an orderly transition and sustained operational performance.