Transmission stock LG Balakrishnan Bros (LGB) has given multibagger returns to its investors in the past 2 years. Since hitting its all-time low of ₹164 per share in March 2020, the stock has surged over four times till date. It has skyrocketed as much as 316 percent since March 2020 to currently trade around ₹683.
In the last 1 year, the stock has advanced 67 percent as against a 6 percent rise in benchmark indices, It rose around 6 percent in 2022 YTD and added 17 percent just in July.
The firm's net sales came in at ₹520.94 crore in June 2022 quarter up 32.71 percent YoY from ₹392.55 crore in the year-ago period. Its quarterly net profit jumped 77 percent YoY to ₹58.29 crore in Q1FY23 from ₹32.96 crore in June 2021.
About the firm
Established in 1937, the firm is a manufacturer of chains, sprockets and metal-formed parts for automotive applications. The Company operates through three segments: transmission, metal forming and others. The Company’s products are marketed under the brand Rolon and have manufacturing units across Tamil Nadu, Pondicherry, Maharashtra, Uttrakhand, Karnataka, Haryana and Rajasthan.
Currently, LGB holds over 70 percent market share in the domestic OEM transmission chain & sprockets products and 35 percent market share in the after-market segment. The company is surging ahead to become a metal forming Company concentrating on hot, warm & cold forging, blanking & fine blanking and precision machined parts.
Promoter holds a 34.2 percent stake in the company with Zero Pledged shares.
Investment Rationale
Brokerages remain bullish on the stock and have strong buy calls despite the recent gains. Meanwhile, for brokerage house B&K India it's 'high conviction buy'. It sees the stock surging 32 percent in the next 1 year.
"Considering better demand prospects in domestic and exports market, focus on high margin metal forming segment, entry into industrial chain business, expected better free cash flows with decent dividend payout ratio and strong balance sheet, we maintain Buy rating on the stock with a target price of ₹906," it said.
Key reasons:
Leader in the two-wheeler transmission chain segment: Considering lower base and expected demand pick up, B&K believes, the two-wheeler industry is expected to report a 4-6 percent volume CAGR for the next two years and LGB is the pure proxy play for the two-wheeler segment as it contributes 90 percent of total revenue, said the brokerage.
The company also has a strong leadership position in the domestic transmission chain segment. Historically, LGB has outperformed the 2W production volumes by a 6-8 percent range and the brokerage expects a similar trend to continue in the coming years as well supported by higher capacity and leadership position.
Clients: Its key customers in the domestic OEM players and share of the business (SOB) are Bajaj Auto (90 percent), TVS Motors (50 percent) Honda Motors (100 percent- Karnataka plant), Royal Enfield (100 percent), and Hero Moto corp (40 percent)
Scope for margin improvement: The brokerage expects margins to remain stable/ improve from current levels of 18 percent in FY22, due to: 1) Expected better contribution from the after-market segment & Exports and Product mix, 2) Benefit from investments made in captive manufacturing of machining process, which will bring down the outsourcing costs further, and 3) Expected strong cash flow from operation to aid in deleveraging the balance sheet.
View and valuation
Despite the expected drop in steel prices, B&K expects the company to continue to report a double-digit revenue CAGR of 11 percent over FY22-24E supported by volume growth on increase in the share of business with customers, improvement in after-market segment volumes and focus on exports.
In the overseas market, due to limited supply from China and Japanese manufacturers, the company tends to gain market share which is expected to support overall volume growth for the company, it added.
"The company’s foray into industrial chain products will contribute to revenues from FY25E, as the commercial production is expected to commence from 2HFY24. With a backward integration facility and a significant reduction in machining outsourcing, the company is expected to maintain its operating margins at 17 percent. Overall, we expect 13 percent bottom line CAGR over FY22-24E supported by volume growth and Nil interest outgo," predicts the brokerage.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
