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Target: ₹739
CMP: ₹673.75
L G Balakrishnan & Brothers Ltd (LGB) manufactures roller chains and undertakes metal forming, including warm and cold forging, fine blanking and machined parts.
Barely unaffected by slowdown in exports, particularly in the US markets, LGB’s revenues nearly flat-lined last quarter, while increases in employee costs and cost inflation precipitated 7.5 per cent drop in operating profit to ₹106.98 crore from ₹115.67 crore. Whence, OPM shriveled to 18.4 per cent from 20.2 per cent in Q3 of previous fiscal. Despite more than doubling of other income, PBT declined 1.8 per cent to ₹92.84 crore (₹94.62 crore), while post-tax earnings (consolidated) advanced 1.5 per cent.
With pass-through mechanisms in place — though sometimes with a lag — transmission business EBIT margin all but flat lined to 18.4 per cent in 9MFY23, at a time when its volumes grew just 8 per cent, thus underscoring improved pricing power. Despite pass-through mechanisms in place, LGB does not seem to have any competitive advantage in sourcing main raw materials like steel.
With total capex of ₹250 crore earmarked for the Nagpur project, LGB would probably spend ₹125 crore in this project next fiscal before commissioning the project in H2 next fiscal, though we have not capitalised the project next year.
The stock currently trades at 8.2x FY23e EPS of ₹81.67 and 7.3x FY24e EPS of ₹92.33. In view of lower revenue growth emanating from sluggish recovery in Indian two-wheeler industry, we cut our current fiscal’s earnings estimates by over 4 per cent. Weighing odds, we assign hold rating on the stock with revised target of ₹739 (previous target: ₹682) based on 8x FY24e earnings, over a period of six-nine months.
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