lgb_researchnote_28march2012

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Contents of this Note :

Glimpse at Financial Parameters & Positioning of the Company( LG Balakrishnan & Bros Ltd. - Mcap – Rs. 243.04 cr. with FY12e Revenues of Rs. 910 cr. ) Page 3-3

Why it Deserves to be a Part of One's Core Portfolio :

Indian Chains/Sprockets Market -- OEM & Replacement

( Exponential Growth in Replacement Market because

End-of-Life approaching for Chains )

Two Wheeler Units Sold in Last 8 Fiscals &

Their Expected Replacement Time

( Data Given from FY05 till 11'Months'FY12 )

Positioning of LGB in OEM Market

( ~65 % Marketshare )

OEM Sales Growth v/s LGB's Sales Growth since last 8 Years

( Comparision provided from FY04 till 9'Months'FY12 )

Positioning of LGB in Replacement Market

( ~50 % Marketshare )

Industry Sales Growth v/s LGB's Replacement & Exports Growth

Peer Sales Growth v/s LGB's Sales Growth

Fine Blanking Segment

( Largest in India )

Page 5-7

Page 7-7

Page 7-7

Page 8-8

Page 8-9

Page 9-9

Page 9-9

0-10



Recent Significant Order-wins in Fine Blanking Segment

( Ashok Leyland, Daimler, ZF & Eaton )

Minority Shareholders' Wealth Creation Assessment

( 4 Bonus Issues

& Consistent High Dividend Payment since last 30 Years )

Debt Profile Assessment of Past 20 Years

( CAGR of Debt v/s Revenue & EBITDA for past 20 Years,

10 Years & 3 Years )

Valuation Commanded by Peer & LGB

Page 10-10

Page 11-11

Page 12-13

Page 13-14

Page Intentionally Left BlankResearch Note Starts from Next Page



LG Balakrishnan & Bros Ltd.

BSE Code – 500250 NSE Code - LGBBROSLTDClients :

Honda Motorcycles

( 70 % Requirement Catered by the Company )

Bajaj Auto


TVS Motors


Hero Motocorp, Yamaha, BMW, Harley Davidson,

Ashok Leyland, Daimler, ZF, Eaton, Bosch

Operating Segments :

Automotive Chains/Sprockets

( Largest in India

Commanding ~60 % Marketshare )

Fine Blanking

( Largest in India )

Passenger Vehicles' Chains

( First in India to Develop & Supply

Silent Chains )

Valuation Parameters

RoE = 26.16 %

RoCE = 21.90 %

Dividend Yield = 3.2 %

Price-to-BookValue ( P/BV ) = 1.24

EV/Sales = 0.49

MCap/Sales = 0.34

EV / EBITDA = 3.58

P / E = 5.29

Debt-to-Equity ( D / E ) = 0.6

Promoters' Holding :- 51.84 % [ Nil Pledge ]

( 45.7 % + 6.14 % via LGB Educational Foundation )

Current Mcap :- Rs. 243.04 cr.

FY11 Sales : Rs. 714.74 cr. (FY10 - 553 cr.)

FY11 EBITDA : Rs. 63.46 cr.

FY11 EPS : Rs. 58.98

FY12e Sales – Rs. 910 cr.

FY12e EBITDA – Rs. 83.3 cr.

FY12e EPS – Rs. 63.2

FY13e Sales – Rs. 1055 cr.

Valuation Grading

Undervalued Till 440

(0.36xFY12e.Sales, 6.9xFY12e.EPS

0.23xFY13e.Sales, 6.1xFY13e.EPS)

Reasonably Valued @ 440-530



Fairly Valued @ 585





Why LG Balakrishnan & Bros Ltd. deserves to be a part of one's core portfolio ? :

(1) When we evaluate any company for investment, there are many factors that we need to take into

account, like :

✔ Operating Segment Growth Prospects,

✔ Company's Positioning in Operating Segment and whether such positioning is challengeable or not

by any of the peer,

✔ Scale of Operations of the Company

✔ Management Quality & Credibility,

✔ Past track-record of Management in their concern towards Minority Shareholders' Wealth Creation,

✔ Effectiveness of Business Model of the Company,

✔ Valuations at which the company is available, whether it offers scope for decent capital appreciation

while at the same time providing reasonable amount of safety as far as Capital Preservation is

concerned.

If all of the above-stated factors turn in favour of a company and still its available at a valuation

that can only be termed as 'Gross Undervaluation' then its a Rare Investment Opportunity and shrewd

markets might not let it remain the one for too long. Let's briefly state below the factors present in LG

Balakrishnan & Bros Ltd. (LGB) which make it a deserving candidate for inclusion in any prudent fund

managers' core portfolio :

➢ Operating Segment on verge of an Exponential Growth because of moderate OEM Growth

projected in coming decade and Exponential Replacement Segment Growth imminent from the

back-dated OEM Growth and the life of critical components (supplied by LGB) coming to

an end (EOL) thereby requiring replacement ,

➢ Concentrated nature of Operating Segment with only 3 major Domestic Manufacturers,

➢ Market Leadership position of the company in this concentrated Operating Segment with more

than 60 % Marketshare with an established, more than 20 years' old, brand 'Rolon' in its kitty,

➢ Company's track-record of over last 2 decades of not only maintaining market-leadership position

but, infact, enhancing the marketshare vis-a-vis its competition,

➢ Reasonable Scale of Operations with FY12e Revenues at INR 910 cr.,

➢ Good & Credible Management with almost Spotless image as far as Corporate Governance

Standards are concerned,

➢ Track-record of management's Utmost concern towards Minority Shareholders' Wealth Creation

with issuance of Bonus Shares four times in company's 55 Years' history and consistent

high Dividend Payment (~20 % of PAT) every year since last 30 Years.

➢ Unique & proven business model with successful past track-record of 2 decades with :



Reasonable Debt-funded expansion ------ Cash Generation arising out of Expansion ---

--- Payback of Debt from Cash Generation.

By following this model in a cyclical way (4-5 Years' Cycle), company has been able to grow its

topline at a CAGR of 16.12 % over last 20 Years and at 13.12 % CAGR over last 10

Years. If we focus on EBITDA, then, company has grown its EBITDA at a CAGR of 13.85 %

over last 20 Years and at a CAGR of 10.09 % over last 10 Years .

➢ Least Equity-Issuance is done for achieving the exceptional growth as also funding any CAPEX over

last 20 Years which is evident from the fact that out of entire present equity capital of 7.84 cr. (0.784

mn. shares), 76.6 % equity is because of bonus issues,

➢ Inspite of all the positive factors as also a healthy dividend yield of 3.2 % on TTM basis and 3.8 %

on FY12e basis , the company is available at historically low valuations as also at a significant

discount to its only listed peer Tube Investment of India Ltd.- TII (even after considering TII's only

Metal Formed division, viz. TIDC India's valuations)

Starting from now, we will discuss each of the factor in slight detail as follows :

(2) The first and foremost factor working in favour of LG Balakrishnan & Bros Ltd. (LGB) is its core

operating segment viz., Two Wheeler Automotive Chains/Sprockets (reported in financials as

'Transmission' segment). Just to give a brief background, Chain/Sprocket set is the critical

component of almost all two wheeler units which enables power transmission in the vehicle.

Normal life of Chain/Sprocket set is 3 years or a vehicle run of 30,000 kms.. However, because of

Indian environmental conditions which promote dust, muddy and slushy roads, Chain/Sprocket in

Indian two wheelers near their EOL (end of life) in just 2.5 years or after a run of just 25,000 kms.

Before going further, its necessary to understand the segmentation of Automotive

Chains/Sprockets market in India. Indian Automotive Chains/Sprockets market is catered to in two

ways :

(a) OEM Segment – which includes sales to direct two wheeler manufacturing OEMs (Original

Equipment Manufacturers) like Bajaj Auto, Hero Motocorp, Honda Motorcycle, TVS,

Yamaha, Suzuki, etc. as they require Chain/Sprocket set for every two wheeler they

manufacture and such requirement is completely outsourced i.e. they procure

Chain/Sprocket set from LGB, TIDC & Rockman the only three major quality-certified

Chain/Sprocket manufacturers of India.

(b) Replacement Segment – which includes the requirement because of end of life (EOL) of

Chain/Sprocket set (usually 3 years/30,000 kms.) of two wheeler units already sold by

OEMs. Replacement segment is catered in two ways, first,

via OEM ( called OE Spares ) wherein OEM directly supplies Chain/Sprocket sets to

Replacement segment for its brand of two wheelers,

and second,

via direct own dealer/distributor network of Chain/Sprocket manufacturing

companies like LGB and TIDC. This also includes sales of imported chains as well as sales

from unorganised segment.

60 % of the Replacement segment is catered to by OEMs wherein they

themselves supply components (after buying directly from Chain/Sprocket manufacturing



companies like LGB & TIDC) for their brands of two wheelers sold while the

remaining 40 % replacement segment is catered directly by Chain/Sprocket

manufacturing companies as also by imported chains and unorganised

manufacturers.

(3) OEM segment i.e. Two wheeler industry is projected to grow at a CAGR of 10-12 % over next 5

years (source – March'2012 ICRA Report on Indian Auto Components Industry) and at a CAGR of

7 % over next 10 years (source – January'2012 Kotak Theme Report on Automobiles titled 'Sixth

Gear'). Factors like low penetration of two wheelers in India as compared to other emerging

countries, demographic profile of India which favour two wheeler as the most convenient

transportation vehicle, low but rising income levels, traffic congestion in cities and large proportion

of young population in India are likely to see these projected growth rate getting exceeded in times

to come while providing least downside risk.

(4) Replacement segment is sitting on verge of a very healthy growth because of the huge 25 % and 27

% growth achieved by two wheeler industry in FY10 and FY11 respectively. This is because, even if

we assume the normal lifespan of Chain/Sprockets at 3 years / 30,000 kms., then also from FY13

onwards we are going to atleast experience a 25 % growth rate in replacement

segment for next two years. This growth rate has not considered the already huge total two

wheeler units sold between FY05-FY08 at 3 cr. + which if gets included in the calculation, calls for

an exponential jump in replacement segment going forward.



(5) Let us first consider here the positioning of LG balakrishnan & Bros Ltd. w.r.t. OEM segment to

assess whether it is in a position to capitalise and outperform the projected growth rate of OEM

segment (i.e. Two Wheeler industry) over next decade. LGB is a critical supplier to each and every

two wheeler OEM of India enjoying a comfortable ~65 % marketshare in OEM segment (which

includes OE Spares i.e. Replacement segment catered by OEM). This is the reason why LGB has

consistently outperformed the industry growth rate except one or two fiscals when it was restricted

by capacity constraints. Also, such a diverse customer base with a presence across all industry OEMs

has enabled the company to benefit out of adjusting client-mix well thereby catering to high growth

customer more than low growth customer in case of any moderation in demand. An apt example to

this fact is the current year outperformance of LGB's transmission segment (Chains/Sprockets)wherein for 9'Months'FY12, the segment has grown by 39.5 % vis-a-vis industry growth

rate of 12.5 %. This outperformance is most probably because of higher contribution from briskly

growing Honda Motorcycles (HMSI) as also higher contribution from replacement segment.

Let's enumerate here LGB's pure OEM sales growth i.e. growth in sales of Chains/Sprockets to

OEMs (excluding Replacement Segment Sales & Export Sales) to assess in a more proper way

whether LGB is in a position to outperform the industry growth rate or not. The data is available

from FY04 onwards wherein we have given a CAGR of OEM growth (i.e. Industry growth) vis-a-vis

CAGR of LGB's OEM sales growth for five fiscals from FY04 till FY08 and from FY09 onwards we have

given separate growth rates each year. For the current 9'Months'FY12 pure OEM sales of LGB is

unavailable and so entire transmission segment revenue growth rate (including ReplacementSegment Sales and Exports Sales) is given for 9'Months'FY12.



Fiscal Year OEM Sales Growth

[ i.e. Two Wheeler Industry Growth Rate ]

LGB's Chains/Sprockets Sales toOEM Growth Rate

9'Months' FY 12 12.55 % 39.5 %

[ Overall Growth including Replacement &Exports Sales ]

FY 11 27 % 45.99 %

[ Pure OEM Sales & doesn't include

Replacement & Exports Sales ]

FY 10 25 % 31.68 %

[ Pure OEM Sales & doesn't includeReplacement & Exports Sales ]

FY 09 5 % 11 %



FY 04 to FY 08[

5Years

'CAGR ]

8.8 % 29.7 %



(6) Replacement segment, which is on verge of an exponential growth going forward, is going to be the

real growth driver for LGB in the years ahead. LGB caters to the replacement segment under its

'Rolon' brand of Chains as well as Chain/Sprocket kits. LGB is having a ~50 % marketshare of

Replacement Segment as on date and has a strong distributor/dealer network across the entire

country with strongest network in South India. The marketshare would have been even higher

had the company not reduced its supply to replacement market between FY08 to FY10 because of rising demands of OEM and limited capacities to cater to entire demand . The reason for LGB

maintaining as also enhancing its marketshare in Replacement Segment inspite of restrained supply

in some years is because of its proven quality as well long durability of its products which is evident

from the fact that many bike owners as well as bike service centres prefer LGB's 'Rolon' brand of

chains as replacement over imported as well OEM stock chains.

Enumerated below is past two fiscals' LGB's overall transmission segment (which includes

Chain/Sprocket sales to OEM, Replacement & Exports segments) revenue growth rates as also

separate break-up of growth rates of LGB's transmission segment revenues w.r.t. OEM Sales

Growth (Chain/Sprocket sold directly to OEMs), Replacement Segment Sales Growth

(Chain/Sprocket sold directly to Replacement segment) and Exports Sales Growth (Chain/Sprocketsold in Exports markets) and pitched such growth rates against Two Wheeler industry growth rates.



Fiscal Year Two WheelerIndustry

Growth Rate

LGB's Growth inSales to OEM

LGB's Growth inSales to

ReplacementMarket

LGB's Growth inSales to Export

Market

Overall LGB'sTransmission

(Chains/Sprockets)Segment

Growth Rate

9' Months' FY12 12.55 % - - - 39.5 %

FY 11 27 % 45.99 % 26.29 % (- 42.7 %) 32.21 %

FY 10 25 % 31.68 % 7.03 % (- 40.9 %) 16.8 %

[ Growth was Lower

due to Divestment of

Industrial Chains

Division in FY09 as

also CapacityConstraints ]

Three important things need to be noted from above

– first, Company intentionally limited supplies to Replacement Segment between FY07 to

FY10 because of limited capacities and increasing OEM demand

– second, on similar lines, Company took its focus totally away from exports markets to

channelise all its capacities towards rising domestic demand, and

– third, in FY09, Company sold its Industrial Chains division to Renold, UK and that is the

reason why the overall growth rate of FY10 looks muted. LGB is still present in Industrial

Chains segment via its JV with Renold, UK wherein LGB holds a 25 % stake.

(7) It is worthwhile to compare here the growth rate of LGB's only listed peer viz., Tube Investments

of India Ltd.'s Auotomotive Chain segment (catered via its division TIDC India) with that of LGB.

Since the separate data of TIDC's Automotive Chain segment growth is available only for fiscal FY11

as also 9'Months'FY12 so have given those comparative growth rates only :

Fiscal Year TIDC India's OverallChains/Sprockets Sales Growth

LGB's OverallChains/Sprockets Sales Growth

9' Months' FY 12 26 % 39.5 %

FY 11 27.4 % 32.21 %

From above, it is evident that LGB has outperformed TIDC in last fiscal as well as this fiscal which

signifies LGB's maintenance of marketshare as also enhancement of the same.



(8) Since we are talking here about the only formidable peer of LGB viz., TIDC, it is worthwhile to take

into account the expansion plans of it in Automotive Chains segment. TIDC is expanding its

Automotive Chains capacities by 20 % in this fiscal (FY12) and by 50 % in next fiscal which signifies

the robust demand scenario likely in coming fiscals for the segment.

(9) Apart from Two Wheeler automotive chains, the recent project undertaken by LGB is the chains for

Passenger Vehicles (PV) segment. Almost all of today's modern cars have started employing 'SilentChains' in their construction instead of 'belt drives'. LGB has already developed Silent Chains this

fiscal and has started supplying them to Replacement Market for testing potential of the product.

The response has been good and soon company expects to forge partnerships with domestic car

manufacturers and start supplying to them. This is the high potential area and if LGB succeeds in

the same then it could catapult it into big league very fast.

(10) After discussing regarding 'Transmission' segment (i.e. Sales of Chain/Sprockets), let us turn our

attention towards the other operating segment of LGB viz., 'Metal Forming' Division under which

company manufactures Fine Blanked components as also has a dedicated Unit for supplying

components to Bosch. Company is having the largest Fine Blanking capacities in India with its

closest peer being IFB Industries and again TIDC India (Tube Investment of India's Division). Underthis segment, LGB supplies two wheeler chassis components and engine components, four wheeler

engine components, brake components and transmission parts.

(11) Metal Forming division, which has grown its topline at a CAGR of 13.19 % over last 5 years, is on

verge of registering a robust growth in the years to come because of the recent significant order

wins from Ashok Leyland, ZF , Eaton and Daimler to supply transmission parts for their

vehicles.

(12) Company has reportedly entered into a long term agreement with Ashok Leyland for supply of

transmission parts, the supply of which is likely to start from FY13 onwards. This relationship is

tipped to have the potential to turn out very big on the lines of historical relationships that LGBhas enjoyed with major Two Wheeler OEMs for supply of Automotive Chains.

(13) In March 2012, LGB has signed a Letter of Intent to acquire majority stake in a USA-based

company manufacturing precision stamped parts. This acquisition, which is likely to conclude by

July 2012, could throw open a lot of synergies with already existing largest domestic Fine Blanking

operations of the company and open up the huge untapped USA market for LGB for its fine blanked

products considering the fact that US Auto market has seen a significant revival in recent past.

(14) The third minor operating segment of the company is the authorised dealership of Tata Motors Ltd.

for Tata LCVs under which it operates at 10 locations in Tamilnadu with 3-S (Sales, Service, Spares

under one roof) facilities at 3 locations out of 10. The financials of this division are reported under'Others' segment. Starting from Q4FY12, the 'Others' segment will also include the financials arising

out of exclusive south distributorship of Top1 Oil Products (a USA based Lubricant Manufacturer)

under which LGB will sell Top1 Oil's premium lubricants exclusively in South India (rights for Rest of

India given to Lucas-TVS). These partnerships (Tata Motors & Top1 Oil) are formed to enable steady

cash generation by fully utilising the already strong network LGB enjoys in South India.

(15) Now, after discussing regarding Operating Segments of LGB above, its time to turn our attention to

most critical aspect of evaluating the company, viz., “Management Quality & their Concern

towards Minority Shareholders' Returns”. As far as management quality is concerned, its headed

by core technocrats with promoter/MD Mr. B. Vijayakumar being a Science Graduate by Education

and an Automobile Engineer by Profession and his son, Mr. V. Rajvirdhan, the Executive Director of LGB, being an Engineering Graduate with Specialisation in Industrial Management. LGB is headed by

CEO and Deputy Managing Director Mr. P. Prabakaran who himself is B.E. and has had a long



association with LGB.

Promoters enjoy a very respectable name in South India with MD Mr. B. Vijayakumar being

responsible for single handedly developing 'Kari Motor Speedway' in Chettipalayam, Coimbatore in

2003 in the memory of Indian Motorsport legend S. Karivardhan and Mr. B Vijayakumar's father,

Late L G Balakrishnan (the grandson of well known scientist GD Naidu) instrumental in creating and

developing the brand image of ELGI group with other successful companies of the group being ElgiEquipments, LG Sports, Super Speeds, etc.

(16) After adjudging the quality, now comes the crucial part i.e. “Management's Concern towards

Minority Shareholders' Returns”. In this, LGB promoters get a perfect 100 % score as their track-

record of concern towards Minority Shareholders' Returns is indisputable. Four Bonus Issues in

company's 55 years history and consistent high dividend payment (~20 % of PAT) each year

since last more than 30 years speak highly of promoters willingness as well as concern

towards creating company's Minority Shareholders' wealth. Let's first enumerate below the history

of bonus issues and provide a glimpse of past decade's dividend payment track-record before going

any further on this :

Bonus Issue Ratio Fiscal Year

1 : 1 FY 04

1 : 4 FY 94

1 : 2 FY 82

1 : 1 FY 78

Fiscal Year Actual Dividend % Dividend Distributionas % of PAT

FY 11 100 % 16.9 %

FY 10 65 % 20.93 %

FY 09 60 % 12 %(PAT was higher because of Extraordinary Items)

FY 08 35 % 18.43 %

FY 07 50 % 18.2 %

FY 06 30 % 17.29 %

FY 05 30 % 38.08 %

(Special Interim Dividend was Paid for 50th Year)

FY 04 30 % 17.26 %



(on enhanced Capital after issuing 1:1 Bonus)

FY 03 55 % 22.64 %

FY 02 40 % 24.04 %

FY 01 35 % 21.07 %

From above, its evident that management has not skipped the dividend (and that too at a higher

%) even in lean fiscals like FY08 and FY09 when industry suffered heavily because of degrowth.

With a promoter holding of 51.8 %, such clean and shareholder-friendly attitude can be found in

only select few Indian Top-Notch companies (like Infosys Technologies) and its rare to find such

attitude in any mid-cap company management like LGB and that too with only 51.8 % promoter

holding.

Its not only dividend payment track-record thats satisfying but also regular rewards in the form of

issue of Bonus Shares that is heartening to see which is the reason why 76.6 % of present paid-up

equity capital of the company is because of bonus issues.

(17) There has been least fresh equity issuances for fund-raising purpose in last 20 years except one

minor rights issue (worth INR 5.62 cr.) in FY95 and dilution of 7 % equity to International Finance

Corporation (for a consideration of INR 22 cr. at Rs. 398 per share) in FY07. Even with such low

fund-raising via fresh equity issuance, company has been able to increase its scale of operations

from INR 35.93 cr. in FY91 to INR 714.74 cr. in FY11 to current FY12e INR 910 cr..Similarly, company has been able to increase its EBITDA from INR 4.74 cr. in FY91 to INR 63.46 cr. in

FY11 to current FY12e INR 83 cr..

Even if we assess company's debt profile to check whether company has been able to achieve the

said growth in last 20 years by burdening the balance sheet with debt, the eyes again meet with a

pleasant picture of reasonable debt on books at just INR 116.60 cr. in FY11 which is very small as

compared to its present scale of operations at FY12e INR 910 cr. as also FY13e INR 83 cr. EBITDA.

Infact, if we calculate here past 20 years' adjusted CAGR in Debt just for comparision

purpose as also to assess how the management has been able to achieve and handle growth, we

find that Debt of the company has shown a CAGR of 12.74 % over past 20 years as compared to

Revenue CAGR of 16.12 % & EBITDA CAGR of 13.85 % over the same period. Similarly, if we look atpast 10 years , then Debt of the company has shown a CAGR of 7.82 % as against Revenue CAGR

of 13.12 % & EBITDA CAGR of 10.09 %. To continue, if we look here at recent past and consider

past 3 fiscals whose financials are comparable on like-to-like basis (as before FY09, the financials

included the figures of Industrial Chains and Forging businesses which were subsequently divested

till FY09) then, over last 3 fiscals, Debt of the companty has shown a negative CAGR of 9.16 % as

compared to positive CAGR in Revenue of 12.08 % & EBITDA of 17.55 %

10 Years 20 Years 3 Years

Revenue CAGR 13.12 % 16.12 % 12.08 %



EBITDA CAGR 10.09 % 13.85 % 17.55 %

Debt CAGR 7.82 % 12.74 % (-9.16 ) %

One thing to note in above debt figures is that in FY08, company demerged its forging business intoa separate listed entity viz., 'LGB Forge Ltd.' and because of said demerger, debt worth INR 80 cr.

went off books of LG Blakarishnan & Bros Ltd. in FY08. However, such INR 80 cr. odd debt is still

guaranteed by LG Balakrishnan & Bros Ltd. and is shown in books under 'Contingent Liabilities'. LGB

Forge Ltd. was reeling under losses till FY11 because of interest payments and with recent Rights

Issue, its expected to show turnaround in operations starting next fiscal onwards. Till LGB Forge

becomes profitable and self-independent, LG Balakrishnan & Bros Ltd. is likely to continue

guaranteeing the said INR 80 cr. odd loans. However, evenif we include the INR 80 cr. odd debt

figure of LGB Forge onto LG Balakrishnan & Bros Ltd.'s debt calculations then also Debt of the

company over last 3 fiscals has shown a CAGR of positive 9.06 % which is well below past 3

fiscals' Revenue CAGR of 12.08 % and EBITDA CAGR of 17.55 %.

(18) Now comes the last and most crucial aspect, that of “Valuations” without which no investment

decision can be arrived at. Before going into detail regarding LG Balakrishnan & Bros Ltd. (LGB)'s

independent valuations, lets first have a brief overview of the valuations commanded by LGB's

only listed peer viz., Tube Investments of India Ltd.(TII). Although TII is present into varied

businesses like Bicycles/Escooters, Metal Formed Products, Engineering and Finance, the division of

our concern is 'Metal Formed Products' run under the umbrella of TIDC India which deals in

manufacturing of Automotive & Industrial Chains and Fine Blanking Components. Scale of

operations of Automotive Chains/Sprockets as well Fine Blaking operations of TIDC India is much

smaller at ~60 % the size of LGB's Automotive Chains/Sprockets & Fine Blanking operations. Still,

while arriving at SOTP valuations for TII, its Metal Formed division is valued at a EV/EBITDA multipleof 7.0 by the financial community (source – Research Reports on TII of UBS & Nomura) as against

the current 3.58 EV/EBITDA multiple commanded by LGB.

(19) History shows that Reasonably Growing companies which are Conservative in Equity Dilutionwhile at the same time having Credible Management & good Track-Record of Shareholders' Wealth

Creation, command a significant premium because of under-ownership and no seeming

ownership-avenue because of least fresh equity issuances. In contrast to this, what we actually have

is LG Balakrishnan & Bros Ltd. quoting at :

• EV/Sales of 0.49 ,

• EV/EBITDA of 3.58 ,

• Price/Book-Value of 1.24 on TTM basis and

1.08 on FY12e basis

• Price-to-Earnings (P/E) of 5.29 on TTM basis and

4.9 on FY12e basis,

• Mcap-to-Sales of 0.34

on TTM basis and

0.26 on FY12e basis,



• Dividend Yield of 3.22 % on TTM basis and

3.87 % on FY12e basis.

Inspite of :

✔ Core Operating Segment (Chains/Sprockets) on verge of an Exponential Growth on back of huge

Replacement Demand,

✔ Sub-Operating Segment (Fine Blanking) on verge of Registering Robust Growth on back of

significant order-wins from Ashok Leyland, Daimler, ZF & Eaton,

✔ thereby giving a minimum 15 % CAGR Revenue Growth visibility for the company till FY15 over

current scale of FY12e INR 910 cr.,

✔ Domestic leadership in core Operating Segment (Chains) with ~60 % Marketshare and Largest in

India in sub-Operating Segment (Fine Blanking),

✔ Track-record of Outperforming the only formidable peer TIDC India and still TIDC commanding

premium to the company on the bourses,

✔ Exceptional Track-Record of Minority Shareholders' Wealth Creation with 4 Bonus Issues and

consistent high-dividend payment over past 30 Years,

✔ thereby giving a dividend yield of 3.2 % on TTM basis and 3.8 % on FY12e basis thus, offering a

great amount of downside safety as far as Capital Preservation is concerned.

Its an anomaly that factors like operating segment leadership, portfolio of established brand as wellas under-ownership coupled with least equity dilution (for fund-raising) track-record of past 20 Years,

which should otherwise enable the company to command a premium on the bourses are actually

available at a gross discount . Such anomaly can't remain for long and has to correct sooner rather than

later to reach atleast a reasonable valuation of Rs 440 per share at which rate LGB will trade at a price-to-

earning (P/E) multiple of just 6.95 and a mcap-to-sales of just 0.36 on FY12e which are the average

valuation multiples at which the company has traded since last 8 Years post the issue of Bonus Shares in

FY04 (we have not included here the overshoot factors wherein LGB has traded at much higher valuations in

many fiscals).

To conclude, LG Balakrishnan & Bros Ltd. is a rare combination in current uncertain markets which

provides ample scope for capital appreciation while at the same time providing utmost safety for capitalinvested.

lgb_researchnote_28march2012

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