LG Balakrishnan & Bros. Ltd (LGBB) is a small-cap auto ancillary company whose shares have doubled in value in 1-year. The share price has risen from Rs 293.95 to Rs 614 in the last year, representing a 108.88% return. HDFC Securities has given this multibagger stock a buy recommendation with a target price of Rs 720 and a target timeframe of two quarters.
Key investment rationale
According to HDFC Securities "LGBB has long-standing presence and established relationships with reputed OEMs like Bajaj Auto, TVS Motor, Yamaha, Royal Enfield and HMSI with whom the company enjoys high market share. LGBB has installed 22 number of windmills with a total rated capacity of 7.16 MW. Also the Company has installed 3 number of ON GRID ground mounted solar power plants for a rated capacity of 100 KW each. Further LGBB has installed Roof Top Solar system at one of Coimbatore plant with capacity of 1.45 MW and Gudalur plant with capacity of 0.8 MW & Jalna plant with capacity of 0.83 MW."
The brokerage has said "The company has been allotted land for new project at Butibori Industrial Area, Nagpur. It had applied for the allotment of Leasehold Land admeasuring 60000 sq.mtr. in additional Butibori Industrial Area - Nagpur for setting up of manufacturing plant. The company has plans to diversify its products by reentering into industrial chains with ending of a non-compete clause with an erstwhile JV partner. It has plans for Rs 225cr capex in FY22/FY23 for capacity enhancement through additions and debottlenecking, product diversification and maintenance. Further, LGBB has been declared as a successful applicant of the corporate insolvency process of RSAL Steel and Private Limited and acquisition of this company would widen the company's product portfolio."
"Revenues of the company increased by 15% YoY to Rs 574cr driven by 16% growth in Transmission segment. Metal Forming segment grew by 10% YoY. On a sequential basis revenue growth was flat. EBITDA grew by 26% YoY to Rs 116cr and EBITDA margin expanded 182bps to 20.2% as operating leverage kicked in with higher capacity utilisation. PAT increased by ~32% to Rs 71cr and PAT margin expanded 158bps to 12.4%," said the brokerage.
Valuation & Recommendation
HDFC Securities has claimed "Due to its established presence in the transmission products for 2W in India, its replacement sales will keep growing given the large base of 2W and offset some concerns due to the imminent threat of EV in 2W that use minimal transmission products. This also results in rise in margins (as replacement sales carry higher margins) aided by cost optimisation efforts. We expect LGBB's revenue/EBITDA/PAT to grow at 19/24//31% CAGR over FY21-FY24, led by revival in the 2W market. We believe investors can buy the stock in the band of Rs 595-605 and add on dips to Rs 525-535 band (5.5x FY24E EPS) for a base case fair value of Rs 672 (7x FY24E EPS) and bull case fair value of Rs 720 (7.5x FY24E EPS) over the next 2 quarters."
The stock has been picked from the brokerage report of HDFC Securities. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.