CD Equisearch
LG Balakrishnan & Bros (Buy)
CMP: ₹265.75
Target: ₹397
Relentless slowdown in Indian automobile sector, which started last fiscal and intensified in current fiscal, has impacted automobile industry’s full year growth performance, reckons ICRA, an Indian credit rating agency. It expects Indian passenger vehicle industry to report 4-7 per cent in sales, while the CV industry is estimated to report a flat growth in the current fiscal. Regarding two wheelers, the agency posits that the growth would be contingent upon introduction of BS VI across all models from April 1, 2020, which would lead to price increases across the country.
The stock currently trades at around 10.5x FY20 e EPS of ₹24.48 and 7.8x FY21e EPS of ₹33.08. Grave tepidity in automobile sales has triggered sharp cuts in current fiscal earnings (by some 37 per cent) on lower revenues and margins, thus provoking surge in equity risk premiums. Capacity enhancement plans have been put on hold (capex confined to just maintenance) to help preserve the scantier capital. Yet chance of dreadful deterioration from here on looks low. Recovery in volumes is anticipated sometime in next couple of quarters, which would prop up revenues next fiscal — revenues estimated to surge 35 per cent next fiscal on higher margins. Given modest valuation (compared to historic trends) we advise buy the stock at current levels with revised target of ₹397.