CD Equisearch

LG Balakrishnan Brothers (Buy)

CMP: ₹213.35

Target: ₹276

In the light of faltering consumer demand, LGB drastically slashed its capex last fiscal to ₹84 crore from ₹193 crore a year before. Larger free cash flows coupled with increased liquidity generated from land sale and sale of its investment in Renold Chain India helped it to retire consolidated debt of nearly ₹100 crore. Expected working capital savings coupled with stodgy capex outlay would doubtlessly catalyse free cash flow generation in current fiscal despite stress in earnings.

No meagre stress would betray itself in margins of niche metal forming business for it is estimated to report loss — the first such showing (annual) in several years.

The stock currently trades at 56.6x FY21e EPS of ₹3.62 and 8.9x FY22e EPS of ₹22.97. Acute stress in automobile industry in current fiscal would betray itself in dreadful decline in post tax earnings. Yet increased cost efficiencies coupled with LGB’s large market share in transmission business would help foster a faster rebound next fiscal.

ROE (return on equity) would leapfrog as a result to nearly 10 per cent — though still way off from sustainable level of some 15 per cent. Reduced and minuscule leverage would lend LGB a lot of redundancies from intensification of external stresses. Investors have a great edge at the current valuation. .

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