LG Balakrishnan Bros Ltd. -- 900 cr. Scale -- Compelling Valuations -- Views Invited

[iamroopak]

Re: LG Balakrishnan Bros Ltd. -- 900 cr. Scale -- Compelling Valuations -- Views Invi

Thanks for your detailed write-up. its really impressive..

But I have a top-down approach.. and have little expertise in bottom-up stock picking.

Hope someday I will understand bottom-up style of investing..

Anyways Maheshi, whats ur profile? Do u work for a brokerage or so?

Cheers!

 

[maheshi]

Re: LG Balakrishnan Bros Ltd. -- 900 cr. Scale -- Compelling Valuations -- Views Invi

Reproducing in this and next posts my detailed Replies to many interesting queries on LGB

---------------------------------------------------------------------


Hi Mahesh,
Excellent piece of information.
can you please give the details of revenue*breakups from different segment of operation?
Regards,
*
Hi,
There are three aspects to break-up of Revenues depending on main Operating Segments and sub-Operating Segment within main operating segment....
*
Main Operating Segments are 3 in no. viz.,
*
Transmission Segment** under which company reports sales of Chains/Sprockets
Metal Forming Segment** under which company reports sales of Fine Blanked Products, Sales of its dedicated Unit for Bosch and Rolled Steel Product revenues.
Others** under which company reports sales of its other small divisions like Tata Motors dealership for LCVs and recent exclusive south-distributorship of Top1 Oil Products' premium lubricants.
*
Now, under main operating segments, especially, Transmission and Metal Forming there are sub-operating segments which are crucial for analysis of data....
*
If we break-up Transmission segment revenues then we have :
*
OEM Chains** which includes sales of chains to OEM including OE Spares (i.e. Replacement catered by OEMs),
OEM Sprockets* *which includes sales of sprockets to OEM (including OE Spares),
Replacement Chains** which includes sales of chains to Replacement market directly by the company,
Replacement Sprockets** which includes sales of sprockets to Replcement market directly by the company,
Exports** which includes sales of Chians/Sprockets to exports market,
Industrial Chains** which includes sales of Industrial chains which was subsequently divested to a JV with Renold post FY09 in which now LGB holds 25 % stake,
*
*
Similarly, if we break-up Metal Forming segment revenues then we have :
*
Fine Blanked Products** which includes sales of fine blanked products,
Bosch** which includes sales from the dedicated Unit for Bosch,
Rolled Steel Products** which includes revenues of rolled steel products manufactured mostly for captive consumption.
*
Given below are all the three break-ups for last 3 fiscals :
*
Revenue Break-up of Main Operating Segments
*

( fig. in INR cr. )
9'Months'FY12
FY11
FY10
FY09





Transmission
(Chains/Sprockets)
473.74
461.73
349.22
343.99
Metal Forming
120.91
146.24
122.43
101.01
Others
90.33
106.76
82.3
62.58





Total
684.99
714.74
553.96
507.6


*
Revenue Break-up of*Transmission Segment
*

( fig. in INR cr. )
9'Months'FY12
FY11
FY10
FY09





OEM Chains
(Including OE Spares)
-
212.4
145.1
113.7
OEM Sprockets
-
82.5
56.9
39.7
Replacement Chains
-
87.6
68.9
59.4
Replacement Sprockets
-
58.4
46.7
48.6
Exports
-
13.4
23.4
39.6
Industrial Chains
0
0
0
42.9
Others
-
7.4
8.2
-





Total
473.74
461.73
349.2
343.9

*
*
Revenue Break-up of*Metal Forming*Segment
*

( fig. in INR cr. )
9'Months'FY12
FY11
FY10
FY09





Fine Blanking Products
-
106.1
78.2
66.45
Bosch
(Dedicated Unit)
-
19.73
19.34
12.58
Rolled Steel Products
(for Captive Consumption)
-
20.35
23.83
21.39





Total
120.9
146.2
122.4
101

 

[maheshi]

Re: LG Balakrishnan Bros Ltd. -- 900 cr. Scale -- Compelling Valuations -- Views Invi

Hi,
*
Entire Auto Ancillary sector, especially small players, *have always traditionally traded at single digit P/Es.... and thats where the real opportunity is there asto with LGB now on verge of crossing 1000 cr. Revenue mark next fiscal, its still traded at valuations applied to smaller auto ancillary players... This is gross anomaly which has to get corrected sooner rather than later......
*
Second and most important reason of LGB trading at low valuations is its extremely low IR initiatives with management totally focussed on business and they don't know how to handle financial fraternity guys..... Its peer Tube Investments regularly hosts concalls/analyst meets and you can just see its valuations inspite of its metal formed division's chain and fine blaked revenues much lower than LGB......
*
Also, your observation asto narrow price-band is right to an extent if you just look at FY11 and FY12 otherwise in all preceding years after last issue of bonus (FY04), it has traded in a wide band .... I am providing you below the P/BV, P/E and Mcap/Sales multiples of each fiscal since FY05 and including both TTM and forward multiples :
*
*

Fiscal Year
P/BV
TTM
P/BV
Forward
Mcap/Sales
TTM
Mcap/Sales
Forward
P/E
TTM
P/E
Forward








FY 11

1.13 – 1.98
0.94 – 1.6
0.29 – 0.58
0.25 – 0.45
6.8 – 12.95
4.1-7.02
FY 10

0.60 – 1.51
0.55 – 1.33
0.20 – 0.41
0.18 – 0.38
7.9 – 25
3.8-8.53
FY 09

0.51 – 1.6
0.48 – 1.64
0.16 – 0.39
0.16 – 0.43
4.4 – 15.21
7.2-25.92
FY 08

1.18 – 2.98
1.01 – 2.57
0.31 – 0.74
0.26 – 0.64
6.1 – 16.3
9.1-24.45
FY 07

1.69 – 3.84
1.25 – 2.84
0.42 – 0.87
0.38 – 0.76
10.98 – 26.58
7.1-16.6
FY 06

2.74 – 4.57
2.41 – 4.02
0.55 – 0.88
0.48 – 0.77
12.3 – 21.9
15.02-26.58
FY 05

1.21 – 4.07
1.10 – 3.56
0.31 – 0.94
0.24 – 0.69
6.4 – 20.8
5.3-17.1


From above you can make out the fact that, except FY09 which was a tough year for the industry, LGB has traded at much higher valuations than current ones.... At present market rate LGB is trading at :
*
1.22 TTM (FY11) P/BV* and* 1.08 forward (FY12e) P/BV
*
0.33 TTM*Mcap/Sales** and* 0.26 forward Mcap/Sales
*
5.17* TTM P/E** and* 4.8* forward P/E
*
and these forward FY12e valuation will become TTM valuations from next week as we enter FY13.... Hence, actually it means that LGB is currently trading at historical low valuations thereby limiting downside considerably.... Now, what is left is FY13 and FY14 earnings visibility and if one is convinced rgdg. even moderate growth in earnings of LGB in coming two fiscals then he can easily make out that *current rate could surely become a history very soon now whether it will be beacuse of any bonus issue or any business development that we don't know but it surely has to happen....These are my assumptions based on the study of history and I can be wrong.
*
Rgds.

 

[maheshi]

Re: LG Balakrishnan Bros Ltd. -- 900 cr. Scale -- Compelling Valuations -- Views Invi

Hi,

Please find my replies in Bold :
-----------------------------------
1) I can see the huge opportunity in replacement mkt. Since the com had faced production capacity constraints earlier, how will they address the same next few years? Any capex required? The capacity utilisation for chains as per AR was 60% for FY-11, still there was a shortage on capacity?
---------------------------------------------
The Two Wheeler Automotive Chains market is growing so well that its players, being conservative on increasing capacity only when the visible future growth is there as also to manage its fund-resources well of not getting over-leveraged,*need to increase*capacities at regular intervals to address the demand. One can gauge the market demand by the performance of LGB in this fiscal (FY12) itself wherein its Chains/Sprockets sales are again reaching optimal capcity utilisation this fiscal on back of 70 % capacity increase of last year.
Now, to address your specific query, if you observe closely, LGB has been incurring average 50 cr. p.a. CAPEX*since last 6 fiscals till FY11.... In FY11 it incurred a CAPEX of 67 cr. to set-up 5 manufacturing plants -- the results of which you are seeing in this fiscal.....Now, with ~65 cr. net cash accruals in FY11 and more than that expected in FY12, I don't think such steady CAPEX is going to be a problem for LGB..... It will need to incur reasonable CAPEX regularly to improve production processes, increase capcities, acquire tecnology, etc. Except significant capacity increases as was done last year, and any partnership on four wheeler chains front, the CAPEX going forward should be much reasonable than we have seen over last many years.
The capacity utilisation at 60 % that you are seeing last fiscal is because of increase in capacities coming on stream this fiscal otherwise 70-75 % optimal utilisation one can expect mainly because of power shortages in the state.
*
--------------------------------------------
2) Any idea on the replacement bus margin compared to OEM?
---------------------------------
OEM margins should be approximately 8.5-9 % while replacement margins should be ~12-13 % depending on the model of two wheeler catered to.
*
----------------------------
3) Any idea on the size of the new contracts with Ahok Leyland and others? Four wheeler segment is another opportunity, but will they be able to take on the competition there and what would be the margins?
---------------------------------
Ashok Leyland order -- management is very tight lipped but sources put the potential of partnership to be a significant one for LGB especially in fine blanking space.......Rgdg. competion in four wheelr chains, there is no significant domestic competition at present with LGB being the first organised bigger player started supplying to replacement market. Still four wheelr chains is at a nascent stage and let it evaluate then we can get a clearer picture rgdg. margins but margins should be in line with Two Wheeler segment.
*
-----------------------------
4) There seems to be severe power shortage in TN where most of the plants are located, would that affect the production in this Quarter?
----------------------------------
Company's plants are located across the country in line with OEM plant locations... Company has some power back-up arrangement but severe shortages do affect the prodution to an extent but thats part and parcel of business and nothing new.
*
-------------------------------------------
5) There seem to be a big list of associate cos. Though the value of related party transactions are negligible, just wondering what is the requirement for so many cos in similar business.
------------------------------------------
Except Silent Chains, Rolon Fineblank & LGB Rolon, no other company is in a similar business as LGB. Even the said three companies must be for channelising technology they acquire or some other purpose.... Promoters have interest in many other related auto fields like racing car development, setting infra for racing cars, etc. so other associates might be because of that.... Renold Chain that you see is the JV with Renold for Industrial Chains in which LGB has 25 % stake..... As far as transactions with associates are not significant, there should bot be any matter of concern and its part and parcel of business.
*
*
--------------------------------------------
6) How would you compare LGB with Suprajit (which is also dependent on the 2 wheeler mkt)?
---------------------------------
Both are in different product-lines but with similar financial profile with Suprajit scoring more on EBITDA front while LGB scoring more on revenue growth front.... Replacement segment is another factor working in favour of LGB as Replacement segment contributes ~32 % to LGB's Chains/Sprocket sales while for Suprajit this segment is contrbuting less than*18 % with focus for Suprajit over last many years being OEM while LGB has been able to maintain a judicious balance over last many years between OEM and Replacement segment which is the reason why it is having 50 % marketshare in*Replacement segment...... Any moderation in demand in OEM will hurt Suprajit more than LGB as LGB is able to shift its product lines between clients and segments well than Suprajit because of 2000 strong dealers network that company enjoys across the country to cater to Replacement market.
On valuation front again LGB scores well above Suprajit with LGB quoting at*:
~55 % discount on*Mcap/Sales basis (FY12e*0.26 for LGB v/s FY12e*0.58 for Suprajit)
~30 % discount on P/E basis (FY12e 4.8 for LGB v/s FY12e 6.7 for Suprajit),
~40 % discount on P/BV basis (FY12e 1.08 for LGB v/s FY12e 1.9 for Suprajit),
~30 % discount on EV/EBITDA*basis (FY12e*3.58 for LGB v/s FY12e*5.14 for Suprajit),
~35 % premium on TTM Dividend Yield Basis (FY11 3.27 % for LGB v/s FY11 2.4 % for Suprajit)
*
With a scale almost twice that of Suprajit and debt profile similar to Suprajit, its a signifiacnt discount at which LGB trades.
*
Feel free to get back to me in case of any query.
Rgds.

 

[maheshi]

Re: LG Balakrishnan Bros Ltd. -- 900 cr. Scale -- Compelling Valuations -- Views Invi

Hi,

You can provide me your mailid I will be more than happy to send you the pdf of entire 14 page Research Note.

Now, rgdg. your queries asto entry barriers and competitive advantage --

(1) LGB was the first company to develop Automotive Chains in India way back in 1966 in association with John Winklehofer of Germany. Since then till now, it has had a strong focus on R&D coupled with close association with global technology innovators like IWIS & Rexnord of Germany, Diado & Nichidoi of Japan and Gelb of USA.

(2) Company's manufacturing operations are vertically integrated right from procurement of raw materials to the finished products ; coupled with largest Indian fine blanking facilities under its belt which helps in delivery of quality products at right time.

(3) All of LGB's facilities enjoy ISO9001 certification by Underwriters Lab, USA which gives great credibility as far as OEM and exports markets are concerned.

(4) Over last many years, the company has built a strong ground network of more than 2000 dealers & 120 + salesman covering the entire country to cater tto the replacement market. Company's network is the largest amongst its peers which ensures timely and customised delivery of company's products to the replacement market.

(5) Company adopts a policy of following OEM clients' expansion plans wherein as per the OEM manufacturing plant, it establishes its own manufacturing plant -- because of this company has more than 15 Chain Manufacturing facilities across India as on date which is the largest in India.

(6) Over last many years, company has achieved a great automation as far as production processes goes by adopting the latest global technologies which has enabled the company to reduce its cost of production per unit to a considerable extent thereby ability to supply products to OEM at best competitive price which is hard to match by any new peer.

Now, having mentioned above points, let me address your queries – to continue enjoying 65 % + marketshare in OEM segment and 50 % + marketshare in Replacement segment even after 40 years of existence itself speaks highly of the inability of any peer to penetrate the market of LGB. And that too who is the peer – the strong US$ 3.8 bn. Murugappa group co. Tube Investments of India --- which is striving it hard to grab higher marketshare since last decade and still has grown by only 26 % vis-a-vis 39.5 % growth aheived by LGB in 9'Months'FY12.

To speak in simple terms, its hard for any new peer to enter the market with huge manufacturing facilities that LGB and TIDC already have and still grab marketshare out of them.... For that to happen, strong long-term relationships with OEM have to be in place as otherwise OEMs will not risk outsourcing the requirement to that company as it will risk its production and thereby marketshare in Two Wheeler Industry. Why OEM will go to any of the peer when already existent players LGB and TIDC are able to supply the required quantity at most competitive price... Talking specifically of LGB, as said before, its following OEMs and therefore enjoys supply-relationship with each and every Two Wheeler OEM operating in India be it Hero, Bajaj, Honda, TVS, Yamaha or Harley Davidson. Even Hero Motocorp, which has its group company Rockman supplying chains to it, still procures some of its requirement from LGB.

Now talking about Replacement market, as said before, LGB enjoys the largest dealer network in India which is spread over entire country. Its peers which are two in numbers viz., TIDC and Rockman are even not somewhere near to LGB as far as network goes. Rockman supplies most of its produce to Hero and therefore the only formidable peer left is TIDC and imported and unorganised sector. As far as imported chains are concerned, they are commanding much higher price than LGB's Rolon brand of chains while offering almost similar or slightly superior quality as compared to Rolon. As far as chinese threat goes, they flooded the market between FY07-FY09 but eventually failed because of their low quality which called for early replacement and other vehicle issues. As far as unorganised segment goes, there is minimal threat because of the low scale of operations of unorganised segment.

Also, its worth mentioning here a very recent example of Replacement market and LGB's response to its requirement and will and dedication of LGB's R&D team. I am talking about the chain for premium bike Ninja which was in short supply as Ninja Bikes' Chain EOL has just recently approached.... There was a requirement from a customer for Ninja chain and placed an order with LGB (Rolon) for the same.... Within a short time LGB's R&D team came developed Ninja's chain and delivered to the respective location. However, what was interesting to note was the R&D team's strict instruction to the local company officers to be present during chain installation and take minute detailed notes of its installation, problems faced during installation and its performance post that. Based on this instruction, Rolon Asst Manager and Regional Manager came down with new chain and spent close to 3.5 hours observing whether the chain fitting was proper or not. They took copious notes filling at least 3-4 full scape pages to submit as a feedback to their R & D department. To customer's surprise, although the chains being just developed as trial for Ninja by Rolon, the chain was a straight fit. This chain was X ring chain whose Rolon MRP was Rs.1880/-. For comparison, stock chain costs Rs.6800/-.

This above example was mentioned to enable you to gauge the reason why LGB enjoys a strong reputation and 50 % + marketshare in Replacement market even after short supply of its products for few years because of capacity constraints – such reputaion itself acts as a sufficient entry barrier which is hard to beat by any new peer.

Feel free to get back to me in case of any query.

 

[maheshi]

Re: LG Balakrishnan Bros Ltd. -- 900 cr. Scale -- Compelling Valuations -- Views Invi

My Q4FY12 as well as FY12 estimates for LG Balakrishnan & Bros Ltd :



( fig. In ` cr. )
Q4FY12

Q4FY11




Revenue


Transmission
( Chains/Sprockets )

Metal Forming

Others
150 - 155


36 - 38

26 - 28
122.1


36.9

29.5

Total
212 - 221
188.5



EBIT


Transmission
( Chains/Sprockets )

Metal Forming

Others
13.5 – 14.5


2.8 – 3.2

0.35 – 0.50
11.5


2.38

0.32

Total
16.6 – 18.2
14.2


























( fig. In ` cr. )
FY12e

FY11

Revenue




Transmission
( Chains/Sprockets )


Metal Forming


Others
620 - 625


156 - 158


116 - 118

461.7


146.2


106.76

Total


892 - 901

714.7




EBITDA


108 - 110

86.95




Net Profit


49.5 - 52

46.29




EPS ( in ` )


63.1 – 66.3

58.98

 

[maheshi]

Re: LG Balakrishnan Bros Ltd. -- 900 cr. Scale -- Compelling Valuations -- Views Invi

LG Balakrishnan & Bros Ltd has informed BSE that a Meeting of the Board of Directors of the Company will be held on April 28, 2012 to consider the audited financial results for the quarter / year ended March 31, 2012 and to recommend the payment of dividend for the financial year 2011-2012

 

[iyerboi]

Re: LG Balakrishnan Bros Ltd. -- 900 cr. Scale -- Compelling Valuations -- Views Invi

maheshi, good to see a fundamentals guy out here do u prepare these analysis? if tat is the case, must say im impressed with ur eyd for detail

 

[maheshi]

Re: LG Balakrishnan Bros Ltd. -- 900 cr. Scale -- Compelling Valuations -- Views Invi

maheshi, good to see a fundamentals guy out here do u prepare these analysis? if tat is the case, must say im impressed with ur eyd for detail

Thanks iyerboi.....

Rgds.

 

[maheshi]

Re: LG Balakrishnan Bros Ltd. -- 900 cr. Scale -- Compelling Valuations -- Views Invi

LG Balakrishnan Q4FY12 and FY12 results announced...... Let's have a glimpse of it and pitch it against our estimates.....

Q4FY12 :

Revenue :

Transmission Segment -- 152.10 cr. (v/s our estimate of 150-155 cr.)

Metal Forming Segment -- 36.94 cr. (v/s our estimate of 36-38 cr.)

Others -- 38.63 cr. (v/s our estimate of 26-28 cr.)


Total -- 227.69 cr. (v/s our estimate of 212-221 cr.)


EBIT :

Transmission Segment -- 8.91 cr. (v/s our estimate of 13.5-14.5 cr.)

Metal Forming Segment -- 3.31 cr. (v/s our estimate of 2.8-3.2 cr.)

Others -- -0.069 cr. (v/s our estimate of +0.35-0.50 cr.)


Total -- 12.16 cr. (v/s our estimate of 16.6-18.2 cr.)



FY12 Numbers :

Revenue --

Transmission Segment -- 625.84 cr. (v/s our estimate of 620-625 cr.)

Metal Forming Segment -- 157.86 cr. (v/s our estimate of 156-158 cr.)

Others -- 128.97 cr. (v/s our estimate of 116-118 cr.)


Total -- 912.68 cr. (v/s our estimate of 892-901 cr.)



EBITDA Total -- 103.6 cr. (v/s our estimate of 108-110 cr.)

PAT -- 44.22 cr. (v/s our estimate of 49.50-52 cr.)

EPS -- Rs. 56.36 (v/s our estimate of 63.1-66.3 cr.)


------------
Prima-facie Conclusion :

While topline performance for the qrtr. as well Fy12 was in line with our estimates, the main culprit seems to be operating margins, especially of transmission segment which are at historical lows being lowest in last 16 qrtrs. We are trying to find out the reasons for the same but it should definetly be one-off and might be related to power-cut issues prevalent in TN...

Heartning thing is robust 35.5 % growth in transmission segment (Chains/Sprockets) vis-a-vis Two Wheeler Industry growth rate of 14.2 % and, while, the main peer's numbers are awaited, LGB seems to have oputperformed industry as well as peers by quite a wide margin. This augurs very well for the future of the company as margins are a temporary issue which, when gets corrected in FY13, could very well enable robust cash generation for the company.

Metal Forming division has grown satisfactorily although its main growth is going to get reflected in FY13 when delivery of booked orders start.

Others segment growth has beaten the estimates as expected, especially on topline front, as contribution from Top1 Oil Lubricants distributorship must have started as also pre-budget buying of LCVs should have got reflected.

PAT pf the company was lower marginally on a YoY basis and much lower than our estimates because of highest tax expenditure incurred by the company in FY12.

Inspite of lower PAT, a higher dividend of 110 % i.e., Rs. 11 per share has been declared which translates to a dividend yield of 3.6 % at current rate.

There seems to be a lot of build up of inventories ahead of new launches expected by OEMs in May-June......Q1FY12 should hopefuly correct the margin scenario and bring it back to historical levels.....

Ground feedback is extremely positive for company's products and critical monitorable events should be acquisition details in June, company's AR2012 and Q1FY12 numbers..... We maintain our view that from current rate the downsides are limited as all these negatives are already discounted in the price while positives are yet to get reflected.

Rgds.