Buy This Small Cap Auto Ancillaries Stock, Revenue Grew By Robust 34%YoY, Says Geojit

The recent report on L G Balakrishnan & Bros Ltd. (LGB) by Geojit published, suggests 'buy' the stock of the company for a target price of Rs 848/share. Considering the given target price if investors buy the stock at the current market price they would get a potential gain of 22% in 12 months of investment period. LGB is India's leading Manufactures in 2Wchain transmission (Drive chains) and sprockets with a domestic market share of 75% and around 50% in replacement market. It is a small cap Auto Ancillaries sector company having a market cap of Rs 2,183.19 crore.

Stock Outlook

The stock of LGB on Friday last traded at Rs 695.45/share after falling 0.64% compared to the previous close of Rs 699.95/share on NSE. Its 52 week low level is Rs 507.05/share, which was recorded on 20 June 2022 and its 52 week high level is Rs 805/share, which was recorded on 16 September 2022, respectively.

The share has fallen 7.82% in the past 3 months, whereas, in the past 1 week and 1 month it fell by 2.59% and 3.28%, respectively. Over the last 1 year, it has given 32.27% positive returns. In 3 years it has given 178.01% multibagger returns. And in 5 years it has given 50.44% positive returns.

Revival in premium bikes to support overall growth

Revenue grew by robust 34%YoY H1FY23, due to strong demand from key customers and superior product mix. The chain transmission segment grew by 13%YoY while the metal forming by 8%YoY for the same period. EBITDA margin stands above 17%, due to cost optimization and superior product mix. As a result, PAT grew by 23%YoY. We expect the replacement brand "Rolon" to regain strength despite the lower demand from the OEM. We believe the urban demand to reach its pre-covid level in the later half of the year as the consumer sentiment is likely to improve for premium vehicle. Shift toward premium bikes in the urban sector owing to technological up gradation (like Bajaj, Enfield) has given higher value and revenue visibility during the pre-covid time. We expect the growth momentum in Transmission to pick up owing new to launches from 2W OEMs and demand stability expected during H2FY23.

Margin to show resilience at current level

LGB has excellent relationship with OEM's like Bajaj Auto, HMSI, TVS Motors, Eicher Motors and Hero Motor to prop up its transmission & fine blanking businesses. Lower metal price to support margin and support operating leverage. Meanwhile. replacement segment would augur impeccably well as it is a marginaccretive business. Additionally, US business is garnering adequate amount of traction from sport utility vehicle segment. Debt on books is negligible and also company has generated a free cash flow of Rs152cr. for FY22.

 

Transmission sale to grow at double digit

LGB to benefit from the new capacity addition and its strong client base. We expect the revenue from Transmission and Metal forming to grow by 11% & 9% and factor 11% revenue growth for FY24E. The company continue to focus on creating new products as well as expanding uses of existing offerings that are tailored to the different needs of their global customers. LGB is setting up a new plant in Nagpur to manufacture Industrial Chains, Conveyor Chains, Automotive components and assemblies. The plant is expected to commence production in Quarter 1 of the Financial Year 2024.

Valuations

Geojit said, "We expect the earnings to grow at a CAGR of 15% for FY24E, on the back of pick up in domestic 2-Wheeler market and capacity additions. Fundamentally, LGB as a strong balance sheet comparing to its peers. The stock is currently trading at 10xand 8x over FY23E and FY24E EPS, which is lower to its historical average. We marginally lower our revenue estimate by 3% factoring demand slowdown in the OEM export market, while maintain our valuation at 10x on FY24E EPS and recommend Buy rating with a target price of Rs.848 at CMP."

Disclaimer

The stock has been picked from the brokerage report of Geojit. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.