LG Balakrishnan – Accumulate Call
L.G. Balakrishnan & Bros (LGB) commenced operations in 1937 as a bus fleet operator. The company later grew to become one of India’s leading roller chain manufacturers. The company broadly operates in three segments – Transmission (75% of sales), Metal Forming (15% of sales) and an LCV dealership along with two subsidiaries (10% of sales). LGB’s two subsidiaries – 1) BCW V Tech India (100% holding), is a supplier of machined components for export markets and 2) LGB USA, which owns 100% of GFM LLC. GFM’s core competency lies in precision metal stamping techniques.
2 wheeler transmission chains and sprockets (used to rotate transmission chains) are the main products and contribute about 75% of total revenue, out of which 60% is OEM. 2 wheeler OEM industry volumes grew mere 2% in FY13. But in FY14 and FY15, 2wheeler OEM volumes have grown 7% and 10% YoY which shows improvement in industry demand. Revenue from the segment grew 16% and 10% Y-o-Y respectively and we are expecting it to grow at 12% CAGR over the next 2 years.
4QFY15, LG Balakrishnan & Bros (LGB) posted standalone top-line growth of 3% YoY to 2.3bn and PAT stood at 131mn which were below our estimates. Top-line growth was subdued because 2W gear chain segment (75%) reported a lower than expected growth of 2% YoY to Rs2bn while Metal forming (~20%) segment reported a growth of 4% YoY to Rs481mn.
Others segment (LCV Dealership) reported loss of Rs. 33mn as compared to a profit of Rs. 11mn last year same quarter. We are expecting LCV segment to show signs of improvement over the next couple of quarters supported by uptick in investment cycle.
The company has a robust business model reducing the inventory cost by setting up the manufacturing plant near to the OEM’s. The company has continually expanded its balance sheet by utilizing its own cash. LGB plans to commence a Greenfield project with capex of ~Rs1.6bn in Jalna (Aurangabad) in the near term. The plant would mainly execute orders for Bajaj Auto and replacement market. To add spin to its global footprint, it also plans to acquire firms in Europe, US and elsewhere, after having successfully acquired and integrated GFM Corporation, USA.
We expect the company would improve its volume growth with the support of key clientele like HMSL, Yamaha and TVS motors whose upcoming capacity expansion, new launches will boost the LGB frontline margin.
We forecast LGB to report Net Sales CAGR of 14.5% over FY15-FY17E to Rs15.4bn and net profit CAGR of 13%(low due to increase in tax rate) over the same period to Rs821mn in FY17E. We have Accumulate rating on the stock with a target price of Rs575 which implies FY17E P/E of 8.9x.
Currently the stock is trading @ Rs. 502