LG Balakrishnan Bros (Q1 FY15)

India Infoline News Service | Mumbai |

LG Balakrishnan Bros (LGB) reported an in line with expectations revenue growth of 12.1% yoy but a decline of 3.9% sequentially.

CMP Rs443, Target Rs939, Upside 112% 
  • Revenues at Rs2.5bn higher by 12.1% yoy; in line with our estimates, the growth was driven by robust sales in transmission and metals forming segments

  • OPM at 12.1% was higher by 210bps yoy and 154bps qoq and was highest since Q3 FY11, improvement in gross margins was the kry driver

  • PAT at Rs153mn was higher by 73% and was in line with our expectations

  • Maintain our rating to BUY with a 2-year price target of Rs939

Result table
(Rs m) Q1 FY15 Q1 FY14 % yoy Q4 FY14 % qoq
Net sales 2,504 2,234 12.1 2,605 (3.9)
Material costs (1,174) (1,113) 5.5 (1,239) (5.2)
Personnel costs (306) (248) 23.6 (324) (5.5)
Other overheads (711) (642) 10.9 (757) (6.0)
Operating profit 312 231 34.8 284 9.7
OPM (%) 12.5 10.4 210 bps 10.9 154 bps
Depreciation (95) (75) 26.0 (82) 16.0
Interest (44) (48) (8.7) (39) 11.3
Other income 12 3 304.1 4 179.0
PBT 185 111 66.6 167 10.5
Tax (32) (23) 41.6 (29) 8.3
Effective tax rate (%) 17.2 20.3 17.6
Adjusted PAT 153 89 73.0 138 10.9
Adj. PAT margin (%) 6.1 4.0 215 bps 5.3 82 bps
Ann. EPS (Rs) 78.0 45.1 73.0 70.3 10.9
 (Rs m) Q1 FY15 Q1 FY14 % yoy Q4 FY14 % qoq
Revenues
Transmission 1,905 1,588 19.9 1,992 (4.4)
Metal Forming 446 360 23.9 461 (3.3)
Others 154 285 (46.1) 152 0.9
Total 2,504 2,233 12.1 2,605 (3.9)
EBIT
Transmission 198 159 24.8 171 16.0
Metal Forming 54 38 42.9 25 116.6
Others (24) (38) (37.7) 11 (312.8)
Total 229 159 44.0 207 10.6
EBIT Margins
Transmission 10.4 10.0 41 bps 8.6 183 bps
Metal Forming 12.2 10.6 162 bps 5.4 676 bps
Others (15.3) -13.2 (207) bps 7.3 (2,258) bps
Total 9.1 7.1 202 bps 7.9 120 bps
Source: Company, India Infoline Research

Revenues in line with expectations

LG Balakrishnan Bros (LGB) reported an in line with expectations revenue growth of 12.1% yoy but a decline of 3.9% sequentially. The performance was in line with the growth in the two wheeler industry OEM sales which grew by 13.7% yoy in Q1 FY15. In terms of segments transmission and metal forming segments reported very strong growth of 19.9% and 23.9% yoy respectively. However, this was marred by 46.1% yoy fall in the others segment. Sequentially, transmission and metals forming segment saw declines of 4.4% and 3.3% respectively while others segment remained flattish with 0.9% rise.


OPM surges 210bps yoy to 12.7%, highest since Q3 FY11

LGB reported OPM of 12.7% compared to our expectations of 11.6% and were higher by 210bps yoy and 154bps qoq. Operating profit jumped by 34.8% yoy and 9.7% qoq. The margins were highest since Q3 FY11. Improvement in margins was driven by 292bps yoy and 67bps qoq improvement in gross margins. Sequentially, staff costs and overheads were also lower by 21bps and 66bps respectively. On a yoy basis though, benefits of better gross margins were negated by 162bps increase in staff costs. In terms of segments, the company reported 41bps and 162bps yoy improvement in EBIT margins of transmission and metals forming segments on the back of a healthy revenue growth. Sequentially too the EBIT margins of the two segments were higher by 183bps and 676bps respectively. However, the others segment which reported 46.1% decline in revenues reported a negative EBIT margin of 15.3% as compared to positive 7.3% in Q4 FY14.


Cost analysis
As a % of net sales Q1 FY15 Q1 FY14 yoy Q4 FY14 qoq
Raw material 46.9 49.8 -292 bps 47.6 -67 bps
Personnel Costs 12.2 11.1 114 bps 12.4 -21 bps
Other overheads 28.4 28.7 -31 bps 29.1 -66 bps
Total costs 87.5 89.6 -210 bps 89.1 -154 bps
Source: Company, India Infoline Research

Maintain BUY

LGB over the years has seen sustained growth in revenues, at times better than two-wheeler industry growth. In FY13, when revenue growth was soft at 4.8% yoy margins shrunk 210bps. However, with strong recovery in revenues, margins were back to FY12 levels in FY14. We expect the revenue growth to remain strong given our belief of a strong recovery in two wheeler sales growth led by scooters over the next 3-5 years which will also translate into robust margin expansion for LGB. The company on back of strong cash flows has built a healthy balance sheet with D/E of 0.4x at the end of FY14. In spite of robust fundamentals and outstanding growth prospects the stock trades at a substantial discount to the average valuation parameters of domestic auto ancillary players. We believe this discount will narrow down over the next couple of years leading to near doubling of the stock price. Maintain BUY.


Financial Summary
Y/e 31 Mar (Rs m) FY13 FY14 FY15E FY16E FY17E
Revenues 9,562 11,086 12,784 14,889 17,569
yoy growth (%) 4.8 15.9 15.3 16.5 18.0
Operating profit 893 1,261 1,510 1,795 2,188
OPM (%) 9.3 11.4 11.8 12.1 12.5
Pre-exceptional PAT 327 627 788 943 1,167
Reported PAT 327 627 788 943 1,167
yoy growth (%) (26.0) 91.6 25.7 19.6 23.8
           
EPS (Rs) 20.9 40.0 50.2 60.1 74.4
P/E (x) 21.2 11.1 8.8 7.4 6.0
Price/Book (x) 2.7 2.3 1.9 1.6 1.4
EV/EBITDA (x) 9.3 6.5 5.4 4.5 3.6
Debt/Equity (x) 0.6 0.4 0.4 0.3 0.3
RoE (%) 13.4 22.1 23.5 23.8 24.8
RoCE (%) 16.1 22.0 23.9 25.5 28.0
Source: Company, India Infoline Research
 

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