LG Balakrishnan Bros (Q1 FY15)

• 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

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.

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.