CD Equisearch's research report on L.G.Balakrishnan and Brothers
Festered by niche metal forming business, LGB reported nearly 12.9% drop in revenues last quarter to Rs 356.31 crs compared to Rs 408.85 crs in the same period a year ago. OPMs as a result shrunk to the lowest level in at least eight quarters - 9.6% Vs 10% in the same quarter a year ago. Wherefore operating profit declined by a 17% to Rs 34.10 crs. Both the transmission and metal forming businesses bore the brunt of near savage stress in volumes as they reported no smallish decline in margins - 5.1% Vs 5.9% for transmission; 3.9% Vs 7.3%. Yet its metal forming business managed to show higher margins (quarter on quarter) not least due to recognition of export sales reversed in Q3 and higher margins in tooling business.
Outlook
The stock currently trades at 56.6x FY21e EPS of Rs 3.62 and 8.9x FY22e EPS of Rs 22.97. Unprecedented stress in earnings awaits most autocomponent suppliers this fiscal not least due to record fall in their OEM dispatches. Yet companies like LGB who have modest financial leverage and would post no small free cash flow generation would weather the current shock. Earnings are estimated to rebound sharply next fiscal on modest return on capital. The stock merits a buy recommendation at the current valuation. On balance we set the price target of Rs 276 (previous target: Rs 397) based on 12x FY22 earnings over a period of 9-12 months.
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