LG Balakrishnan and Brother is a leader in the auto ancillary primarily catering to the two wheeler motorcycle manufacturers. It is the largest manufacturer of motorcycle transmission parts (chain/sprocket) in India (55% Market share) which forms a bulk of its revenue. It's main customers are Bajaj Auto, Hero Honda, TVS, etc.

Why LG Balakrishnan?

Excellent growth environment

A growth in the company’s transmission parts revenue through expected urban and rural pickup in motorcycle sales (Expected to grow at a CAGR of 10.2% over FY17E, FY18E, Fy19E and FY20E) driven by

• Low-interest rate environment, availability of easy financing schemes
• Consumption boost like 7^th Pay Commission and OROP.
• Replacement market potential is high due to strong motorcycle production in past years, expected to grow by 11.5% in the current year.

Dominant Position in the two-wheeler market

• The company is the largest manufacturer of motorcycle chains/sprockets in India with a 55% market share.
• It supplies parts to leading two wheeler companies like Bajaj Auto, Hero Honda, and TVS.
• The company has a 50% market share in the replacement chain market under the brand name Rolon.

 Strong Financials

• The company performance  is not cyclical,  despite the fact that it caters to a largely cyclical demand environment, due to its strong presence in the replacement market.
• The company has shown a declining trend in its debt despite consistent capacity addition.
• The company’s cash conversion cycle has seen a gradual improvement from 70days  in FY13 to 52days in FY16. 
• It has managed to consistently pay dividends since 1996.

Recommendation

We believe that the company will  benefit from the improved demand for  two wheelers from the rural market after an improved monsoon in 2016 following two years of drought. The company is also well positioned to cash in on the expected spike in replacement demand from reasonable two-wheeler sales in previous years. Low input prices and rising capacity utilization levels are expected to help margins. 

However, in the near term, we expect FY17E Q3 & Q4 to be weak after the demonetization scheme introduced by the government, which is expected to impact two-wheeler sales volume. But, we expect revenue to see a strong uptick in FY18E due to the earlier mentioned points and pent up demand from deferred buying.

LG Balakrishnan and Brothers at a CMP of Rs.554/share is trading at 15.61x, 10.58x, times PE for FY17E, FY18E, respectively, which is undervalue based on our assessment and in comparison to peers.

This insight is part of Smartkarma. For more follow this link.