L G Balakrishnan & Bros – Review and Recommendation

L G Balakrishnan & Bros (LGBL), the flagship company of ELGI Group, is a leading supplier of transmission chains to the automobile industry under the brand, Rolon. Transmission chains are also known as automotive chains. LGBL has a around 70% market share in the OEM chain segment and around 50% market share in the replacement segment. The technology is the entry barrier in this business as chains are precision components. As vehicles become sleeker and powerful, the chain quality has to improve.

The transmission segment mainly caters to OEMs and replacement market for two-wheelers. OEMs constitute about 60% of total sales and include clients such as Bajaj Auto, Hero Honda, and TVS. All have good growth prospects. Similarly, the replacement market is also doing well as the base of two-wheelers in use has increased in the past few years.

LGBL has the advantage of vertical integration of all its product lines. To maintain control over quality, the company manufactures critical equipment in-house. The steel rolling division produces cold-rolled steel strips, wires and strips with profiles.

We expect LGBL to register net sales of Rs 984.58 crore and PAT of Rs 52.80 crore in the fiscal ending March 2014 (FY 2014). We expect the company to register net sales of Rs 1073.19 crore and PAT of Rs 63.46 crore in FY 2015. This gives an EPS of Rs 67.3 for FY 2014 and Rs 80.8 for FY 2015. At the current market price of Rs 337, the share trades four times the expected FY 2015 earning. Investors can look for appreciation in the medium term. HOLD and BUY on Declines.