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L G Balakrishnan & Bros review and analysis

August 20, 2014, Wednesday, 16:47 GMT | 11:47 EST | 20:17 IST | 22:47 SGT
Contributed by Angel Broking

Recovery in two-wheeler industry would benefit L G Balakrishnan & Bros (LGBL): During FY2014, the domestic sales of two-wheelers stood at ~14.8 million units (growing 7.3% yoy) and exports recorded sales of ~2.1 million units (growing 6.3% yoy). In the FY2013, the Indian two-wheeler industry reported a subdued volume growth. But in FY2014, the industry showed some recovery in the domestic (on back of strong rural demand and festive season sales) as well as export markets. During 1QFY2015, the two-wheeler industry has reported a strong growth of 15.5% due to recovery in domestic and export markets. We expect growth momentum in the two-wheeler industry to sustain owing to an anticipated recovery in the economy coupled with revival in the investment cycle. This would be on the back of the new pro-reforms government having come at the centre and on an expected decline in interest rates. We expect two-wheeler sales to improve going forward which would benefit auto ancillary companies like LGBL.

Capacity expansion at key clients would drive growth for LGBL: The company’s automotive chains segment caters to the OEM market for two-wheelers. In the OEM segment (LGBL has a 70% market share in this segment), the company has tied up with leading two wheeler players like Bajaj Auto, Hero MotoCorp (HMCL), Honda Motorcycle and Scooter India (HMSI), TVS Motor, Yamaha Motor etc., all of which have good growth prospects. These OEMs are increasing their capacity and also entering newer geographies for export which would drive growth of the industry. Hence, going forward, we believe that expansion plans at various OEM clients would trigger volume growth for LGBL.

Outlook and Valuation: We forecast LGBL to report Net Sales CAGR of ~16% over FY2014-16E to ~Rs.1,484cr and Net Profit CAGR of ~12% during the same period to Rs.79cr. At the current market price of Rs.497, the stock trades at 11.7x and 9.9x its FY2015E and FY2016E EPS of Rs.42.6 and Rs.50.4, respectively. Based on 12x FY2016E EPS, we arrive at a target price of Rs.605 for LGBL, indicating an upside of ~22% from the current levels. Thus, we recommend a Buy on LGBL.