LG Balakrishnan Bros Ltd. - Chain for your bike

Link to 14-Page Detailed Research Note on the company – http://www.scribd.com/doc/86996241

Views are invited on LG Balakrishnan & Bros Ltd. [ NSE a LGBBROSLTD ; BSE a 500250 ], India’s Largest Manufacturer of Chains/Sprockets enjoying 65 % Marketshare in OEM Market & 50 % Marketshare in Replacement Market and growing at 25 % + p.a. since last two years with a CAGR of past 20 Years at 16.12 % generating RoE of 26 % + & RoCE of 22 % +.

Strong Relationships with OEM clients like Honda Motorcycles ( 70 % requirement catered by the company ), Bajaj Auto ( 65 % requirement catered by the company ), TVS ( 60 % requirement catered by the company), Hero MotoCorp, Yamaha, Harley Davidson, BMW, Ashok Leyland, ZF & Eaton ; Past 2 Decades’ Track-Record of not only maintaining but infact enhancing Marketshare with strong focus on R&D ; Exceptional precedents in Minority Shareholders’ Wealth Creation with 4 Bonus Issues ( 76.6 % of present paid-up equity capital because of bonus issues ) and Consistent High Dividend Payment every year since last 30 Years; as also Compelling Valuations with MarketCap at just INR 243 cr.

v/s FY12e Revenues of INR 910 cr. and FY13e Revenues of INR 1055 cr. ; P/E multiple at 5.29 v/s historical average at 6.95 ; and Dividend Yield at 3.87 % on FY12e, are some of the factors necessitating a closer look at the company.

Included in the attached Research Note is detailed segmentation of Indian Chains/Sprockets Market, Expected Replacement Time for Two Wheeler Units sold in last 8 years from FY05 till 11’Months’FY12, Assessment of Company’s Sales Growth v/s Industry Growth over last 8 years as well as Assessment of Debt Profile of the Company over last 20 years.

Please feel free to share your candid views on the company and get back to me in case of any query.


Link to 14-Page Detailed Research Note on the company – http://www.scribd.com/doc/86996241

Contents of this Note :

Glimpse at Financial Parameters & Positioning of the Company

( LG Balakrishnan & Bros Ltd. - Mcap â 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 )

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 5-7

Page 7-7

Page 7-7

Page 8-8

Page 8-9

Page 9-9

Page 9-9

Page 10-10

Page 10-10

Page 11-11

Page 12-13

Page 13-14

Reproducing Important Sections of the Research Note in this and next post for quick reference of the members :

LG Balakrishnan & Bros Ltd.

BSE Code â 500250


Clients :

Honda Motorcycles

( 70 % Requirement Catered by the Company )

Bajaj Auto

( 65 % Requirement Catered by the Company )

TVS Motors

( 60 % Requirement Catered by the Company )

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 â Rs. 910 cr.



Rs. 83.3 cr.

FY12e EPS â

Rs. 63.2

FY13e Sales â Rs. 1055 cr.

Valuation Grading

Undervalued Till

(0.36xFY12e.Sales, 6.9xFY12e.EPS
0.23xFY13e.Sales, 6.1xFY13e.EPS)

Reasonably Valued @


(0.45xFY12e.Sales, 8.3xFY12e.EPS
0.39xFY13e.Sales, 7.4xFY13e.EPS)

Fairly Valued @


(0.50xFY12e.Sales, 9.2xFY12e.EPS
0.43xFY13e.Sales, 8.2xFY13e.EPS)

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 :

  1. 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 â 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 â 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.

  1. OEM segment i.e. Two wheeler industry is projected to grow at a CAGR of 10-12 % over next 5 years (source â March’2012 ICRA Report on Indian Auto Components Industry) and at a CAGR of 7 % over next 10 years (source â 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.

  2. 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.

  1. 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 Replacement Segment 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 to OEM Growth Rate

9'Months' FY12

12.55 %

39.5 %

[ Overall Growth including Replacement & Exports Sales ]


27 %

45.99 %

[ Pure OEM Sales & doesn't include Replacement & Exports Sales ]


25 %

31.68 %

[ Pure OEM Sales & doesn't include Replacement & Exports Sales ]


5 %

11 %

[ Pure OEM Sales & doesn't include Replacement & Exports Sales ]

FY04 to FY08

[ 5 Years' CAGR ]

8.8 %

29.7 %

[ Pure OEM Sales & doesn't include Replacement & Exports Sales ]

  1. 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/Sprocket sold in Exports markets) and pitched such growth rates against Two Wheeler industry growth rates.

Fiscal Year

Two Wheeler Industry Growth Rate

LGB's Growth in Sales to OEM

LGB's Growth in Sales to Replacement Market

LGB's Growth in Sales to Export Market

Overall LGB's Transmission (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 Capacity Constraints ]

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.

  1. 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 Overall Chains/Sprockets Sales Growth

LGB's Overall

Chains/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.

  1. 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.

  1. 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 'Silent Chains' 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.

  1. 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). Under this segment, LGB supplies two wheeler chassis components and engine components, four wheeler engine components, brake components and transmission parts.

  2. 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.

  3. 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 LGB has enjoyed with major Two Wheeler OEMs for supply of Automotive Chains.

  4. 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.

  5. 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.

  1. Now, after discussing regarding Operating Segments of LGB above, its time to turn our attention to most critical aspect of evaluating the company, viz., âManagement Quality & their Concern towards Minority Shareholders' Returnsâ. 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 Elgi Equipments, LG Sports, Super Speeds, etc.

  1. After adjudging the quality, now comes the crucial part i.e. âManagement's Concern towards Minority Shareholders' Returnsâ. 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 Distribution

as % 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 %

(on enhanced Capital after issuing 1:1 Bonus)

17.26 %

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.

  1. 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 at past 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 %


10.09 %

13.85 %

17.55 %


7.82 %

12.74 %

(-9.16 ) %

One thing to note in above debt figures is that in FY08, company demerged its forging business into a 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 %.

  1. Now comes the last and most crucial aspect, that of âValuationsâ 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 multiple of 7.0 by the financial community (source â Research Reports on TII of UBS & Nomura) as against the current 3.58 EV/EBITDA multiple commanded by LGB.

  2. **History shows that Reasonably Growing companies which are **Conservative in Equity Dilution while 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 well as 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 capital invested.

Hi Mahesh,

Great to see another very detailed report from you.

Have the foll doubts, will be glad to learn from you more.

  1. I can see the huge opportunity in replacement mkt. Since the com had faced production capacity constraints earlier, how will they address the same next few years? Any capex required? The capacity utilisation for chains as per AR was 60% for FY-11, still there was a shortage on capacity?

  2. Any idea on the replacement bus margin compared to OEM?

  3. Any idea on the size of the new contracts with Ahok Leyland and others? Four wheeler segment is another opportunity, but will they be able to take on the competition there and what would be the margins?

  4. There seems to be severe power shortage in TN where most of the plants are located, would that affect the production in this Quarter?

  5. There seem to be a big list of associate cos. Though the value of related party transactions are negligible, just wondering what is the requirement for so many cos in similar business.

  6. How would you compare LGB with Suprajit (which is also dependent on the 2 wheeler mkt)?

I think I have chewed your brains enough for now, thank you


Hi Vinod,

Please find my replies in Bold :

The Two Wheeler Automotive Chains market is growing so well that its players, being conservative on increasing capacity only when the visible future growth is there as also to manage its fund-resources well of not getting over-leveraged,need to increasecapacities at regular intervals to address the demand. One can gauge the market demand by the performance of LGB in this fiscal (FY12) itself wherein its Chains/Sprockets sales are again reaching optimal capcity utilisation this fiscal on back of 70 % capacity increase of last year.

Now, to address your specific query, if you observe closely, LGB has been incurring average 50 cr. p.a. CAPEXsince last 6 fiscals till FY11… In FY11 it incurred a CAPEX of 67 cr. to set-up 5 manufacturing plants – the results of which you are seeing in this fiscal…Now, with ~65 cr. net cash accruals in FY11 and more than that expected in FY12, I don’t think such steady CAPEX is going to be a problem for LGB… It will need to incur reasonable CAPEX regularly to improve production processes, increase capcities, acquire tecnology, etc. Except significant capacity increases as was done last year, and any partnership on four wheeler chains front, the CAPEX going forward should be much reasonable than we have seen over last many years.

The capacity utilisation at 60 % that you are seeing last fiscal is because of increase in capacities coming on stream this fiscal otherwise 70-75 % optimal utilisation one can expect mainly because of power shortages in the state.

OEM margins should be approximately 8.5-9 % while replacement margins should be ~12-13 % depending on the model of two wheeler catered to.

Ashok Leyland order – management is very tight lipped but sources put the potential of partnership to be a significant one for LGB especially in fine blanking space…Rgdg. competion in four wheelr chains, there is no significant domestic competition at present with LGB being the first organised bigger player started supplying to replacement market. Still four wheelr chains is at a nascent stage and let it evaluate then we can get a clearer picture rgdg. margins but margins should be in line with Two Wheeler segment.

Company’s plants are located across the country in line with OEM plant locations… Company has some power back-up arrangement but severe shortages do affect the prodution to an extent but thats part and parcel of business and nothing new.

Except Silent Chains, Rolon Fineblank & LGB Rolon, no other company is in a similar business as LGB. Even the said three companies must be for channelising technology they acquire or some other purpose… Promoters have interest in many other related auto fields like racing car development, setting infra for racing cars, etc. so other associates might be because of that… Renold Chain that you see is the JV with Renold for Industrial Chains in which LGB has 25 % stake… As far as transactions with associates are not significant, there should bot be any matter of concern and its part and parcel of business.

Both are in different product-lines but with similar financial profile with Suprajit scoring more on EBITDA front while LGB scoring more on revenue growth front… Replacement segment is another factor working in favour of LGB as Replacement segment contributes ~32 % to LGB’s Chains/Sprocket sales while for Suprajit this segment is contrbuting less than18 % with focus for Suprajit over last many years being OEM while LGB has been able to maintain a judicious balance over last many years between OEM and Replacement segment which is the reason why it is having 50 % marketshare inReplacement segment… Any moderation in demand in OEM will hurt Suprajit more than LGB as LGB is able to shift its product lines between clients and segments well than Suprajit because of 2000 strong dealers network that company enjoys across the country to cater to Replacement market.

On valuation front again LGB scores well above Suprajit with LGB quoting at:

~55 % discount onMcap/Sales basis (FY12e0.26 for LGB v/s FY12e0.58 for Suprajit)

**~30 % discount on P/E basis (FY12e 4.8 for LGB v/s FY12e 6.7 for Suprajit), **

~40 % discount on P/BV basis (FY12e 1.08 for LGB v/s FY12e 1.9 for Suprajit),

~30 % discount on EV/EBITDAbasis (FY12e3.58 for LGB v/s FY12e5.14 for Suprajit),

~35 % premium on TTM Dividend Yield Basis (FY11 3.27 % for LGB v/s FY11 2.4 % for Suprajit)

With a scale almost twice that of Suprajit and debt profile similar to Suprajit, its a signifiacnt discount at which LGB trades.

Feel free to get back to me in case of any query.


I request fellow members to talk to their spares dealers as well as service centres and mechanics catering to two wheeler segment rgdg. feedback for Rolon chains… I think most of the members ofvaluepickr must be owning a two wheeler so request to contribute to the research so that we can assess in the right way the potential market…

As far as South Mumbai goes, dealer feedback is extremely positive for Rolon chains only after which I have prepared the detailed research note.


Hi Manish,

Excellent piece of information.

can you please give the details of revenuebreakups from different segment of operation?


[quote="vishal, post:15, topic:360560987"] > Hi Manish, > > Excellent piece of information. > > can you please give the details of from different segment of operation? > > Regards,Vishal [/quote]


Hi Vishal,

There are three aspects to break-up of Revenues depending on main Operating Segments and sub-Operating Segment within main operating segment....

Main Operating Segments are 3 in no. viz.,

Transmission Segmentunder which company reports sales of Chains/Sprockets

Metal Forming Segmentunder which company reports sales of Fine Blanked Products, Sales of its dedicated Unit for Bosch and Rolled Steel Product revenues.

Othersunder which company reports sales of its other small divisions like Tata Motors dealership for LCVs and recent exclusive south-distributorship of Top1 Oil Products' premium lubricants.

Now, under main operating segments, especially, Transmission and Metal Forming there are sub-operating segments which are crucial for analysis of data....

If we break-up Transmission segment revenues then we have :

OEM Chainswhich includes sales of chains to OEM including OE Spares (i.e. Replacement catered by OEMs),

OEM Sprockets which includes sales of sprockets to OEM (including OE Spares),

Replacement Chainswhich includes sales of chains to Replacement market directly by the company,

Replacement Sprocketswhich includes sales of sprockets to Replcement market directly by the company,

Exportswhich includes sales of Chians/Sprockets to exports market,

Industrial Chainswhich includes sales of Industrial chains which was subsequently divested to a JV with Renold post FY09 in which now LGB holds 25 % stake,

Similarly, if we break-up Metal Forming segment revenues then we have :

Fine Blanked Productswhich includes sales of fine blanked products,

Boschwhich includes sales from the dedicated Unit for Bosch,

Rolled Steel Productswhich includes revenues of rolled steel products manufactured mostly for captive consumption.

Given below are all the three break-ups for last 3 fiscals :

Revenue Break-up of Main Operating Segments

( fig. in INR cr. )











Metal Forming















Revenue Break-up ofTransmission Segment

( fig. in INR cr. )





OEM Chains

(Including OE Spares)





OEM Sprockets





Replacement Chains





Replacement Sprockets










Industrial Chains















Revenue Break-up ofMetal FormingSegment

( fig. in INR cr. )





Fine Blanking Products






(Dedicated Unit)





Rolled Steel Products

(for Captive Consumption)










Reply to my Query rgdg. narrow-band of valuations and historical valuations commanded by LGB


Entire Auto Ancillary sector, especially small players, have always traditionally traded at single digit P/Es.... and thats where the real opportunity is there asto with LGB now on verge of crossing 1000 cr. Revenue mark next fiscal, its still traded at valuations applied to smaller auto ancillary players... This is gross anomaly which has to get corrected sooner rather than later......

Second and most important reason of LGB trading at low valuations is its extremely low IR initiatives with management totally focussed on business and they don't know how to handle financial fraternity guys..... Its peer Tube Investments regularly hosts concalls/analyst meets and you can just see its valuations inspite of its metal formed division's chain and fine blaked revenues much lower than LGB......

Also, your observation asto narrow price-band is right to an extent if you just look at FY11 and FY12 otherwise in all preceding years after last issue of bonus (FY04), it has traded in a wide band .... I am providing you below the P/BV, P/E and Mcap/Sales multiples of each fiscal since FY05 and including both TTM and forward multiples :

Fiscal Year













FY 11

1.13 â 1.98

0.94 â 1.6

0.29 â 0.58

0.25 â 0.45

6.8 â 12.95


FY 10

0.60 â 1.51

0.55 â 1.33

0.20 â 0.41

0.18 â 0.38

7.9 â 25


FY 09

0.51 â 1.6

0.48 â 1.64

0.16 â 0.39

0.16 â 0.43

4.4 â 15.21


FY 08

1.18 â 2.98

1.01 â 2.57

0.31 â 0.74

0.26 â 0.64

6.1 â 16.3


FY 07

1.69 â 3.84

1.25 â 2.84

0.42 â 0.87

0.38 â 0.76

10.98 â 26.58


FY 06

2.74 â 4.57

2.41 â 4.02

0.55 â 0.88

0.48 â 0.77

12.3 â 21.9


FY 05

1.21 â 4.07

1.10 â 3.56

0.31 â 0.94

0.24 â 0.69

6.4 â 20.8


From above you can make out the fact that, except FY09 which was a tough year for the industry, LGB has traded at much higher valuations than current ones.... At present market rate LGB is trading at :

1.22 TTM (FY11) P/BV and 1.08 forward (FY12e) P/BV

0.33 TTMMcap/Sales and 0.26 forward Mcap/Sales

5.17 TTM P/E and 4.8 forward P/E

and these forward FY12e valuation will become TTM valuations from next week as we enter FY13.... Hence, actually it means that LGB is currently trading at historical low valuations thereby limiting downside considerably.... Now, what is left is FY13 and FY14 earnings visibility and if one is convinced rgdg. even moderate growth in earnings of LGB in coming two fiscals then he can easily make out that current rate could surely become a history very soon now whether it will be beacuse of any bonus issue or any business development that we don't know but it surely has to happen....These are my assumptions based on the study of history and I can be wrong.


1 Like

Query Rgdg. Competitive Advantage & Entry Barriers



You can provide me your mailid I will be more than happy to send you the pdf of entire 14 page Research Note.

Now, rgdg. your queries asto entry barriers and competitive advantage –

(1) LGB was the first company to develop Automotive Chains in India way back in 1966 in association with John Winklehofer of Germany. Since then till now, it has had a strong focus on R&D coupled with close association with global technology innovators like IWIS & Rexnord of Germany, Diado & Nichidoi of Japan and Gelb of USA.

(2) Company’s manufacturing operations are vertically integrated right from procurement of raw materials to the finished products ; coupled with largest Indian fine blanking facilities under its belt which helps in delivery of quality products at right time.

(3) All of LGB’s facilities enjoy ISO9001 certification by Underwriters Lab, USA which gives great credibility as far as OEM and exports markets are concerned.

(4) Over last many years, the company has built a strong ground network of more than 2000 dealers & 120 + salesman covering the entire country to cater tto the replacement market. Company’s network is the largest amongst its peers which ensures timely and customised delivery of company’s products to the replacement market.

(5) Company adopts a policy of following OEM clients’ expansion plans wherein as per the OEM manufacturing plant, it establishes its own manufacturing plant – because of this company has more than 15 Chain Manufacturing facilities across India as on date which is the largest in India.

(6) Over last many years, company has achieved a great automation as far as production processes goes by adopting the latest global technologies which has enabled the company to reduce its cost of production per unit to a considerable extent thereby ability to supply products to OEM at best competitive price which is hard to match by any new peer.

Now, having mentioned above points, let me address your queries â to continue enjoying 65 % + marketshare in OEM segment and 50 % + marketshare in Replacement segment even after 40 years of existence itself speaks highly of the inability of any peer to penetrate the market of LGB. And that too who is the peer â the strong US$ 3.8 bn. Murugappa group co. Tube Investments of India — which is striving it hard to grab higher marketshare since last decade and still has grown by only 26 % vis-a-vis 39.5 % growth aheived by LGB in 9’Months’FY12.

To speak in simple terms, its hard for any new peer to enter the market with huge manufacturing facilities that LGB and TIDC already have and still grab marketshare out of them… For that to happen, strong long-term relationships with OEM have to be in place as otherwise OEMs will not risk outsourcing the requirement to that company as it will risk its production and thereby marketshare in Two Wheeler Industry. Why OEM will go to any of the peer when already existent players LGB and TIDC are able to supply the required quantity at most competitive price… Talking specifically of LGB, as said before, its following OEMs and therefore enjoys supply-relationship with each and every Two Wheeler OEM operating in India be it Hero, Bajaj, Honda, TVS, Yamaha or Harley Davidson. Even Hero Motocorp, which has its group company Rockman supplying chains to it, still procures some of its requirement from LGB.

Now talking about Replacement market, as said before, LGB enjoys the largest dealer network in India which is spread over entire country. Its peers which are two in numbers viz., TIDC and Rockman are even not somewhere near to LGB as far as network goes. Rockman supplies most of its produce to Hero and therefore the only formidable peer left is TIDC and imported and unorganised sector. As far as imported chains are concerned, they are commanding much higher price than LGB’s Rolon brand of chains while offering almost similar or slightly superior quality as compared to Rolon. As far as chinese threat goes, they flooded the market between FY07-FY09 but eventually failed because of their low quality which called for early replacement and other vehicle issues. As far as unorganised segment goes, there is minimal threat because of the low scale of operations of unorganised segment.

Also, its worth mentioning here a very recent example of Replacement market and LGB’s response to its requirement and will and dedication of LGB’s R&D team. I am talking about the chain for premium bike Ninja which was in short supply as Ninja Bikes’ Chain EOL has just recently approached… There was a requirement from a customer for Ninja chain and placed an order with LGB (Rolon) for the same… Within a short time LGB’s R&D team came developed Ninja’s chain and delivered to the respective location. However, what was interesting to note was the R&D team’s strict instruction to the local company officers to be present during chain installation and take minute detailed notes of its installation, problems faced during installation and its performance post that. Based on this instruction, Rolon Asst Manager and Regional Manager came down with new chain and spent close to 3.5 hours observing whether the chain fitting was proper or not. They took copious notes filling at least 3-4 full scape pages to submit as a feedback to their R & D department. To customer’s surprise, although the chains being just developed as trial for Ninja by Rolon, the chain was a straight fit. This chain was X ring chain whose Rolon MRP was Rs.1880/-. For comparison, stock chain costs Rs.6800/-.

This above example was mentioned to enable you to gauge the reason why LGB enjoys a strong reputation and 50 % + marketshare in Replacement market even after short supply of its products for few years because of capacity constraints â such reputaion itself acts as a sufficient entry barrier which is hard to beat by any new peer.

Feel free to get back to me in case of any query.

My Q4FY12 as well as FY12 estimates forLG Balakrishnan & BrosLtd. :

( fig. In ` cr. )





( Chains/Sprockets )

Metal Forming


150 - 155

36 - 38

26 - 28





212 - 221




( Chains/Sprockets )

Metal Forming


13.5 â 14.5

2.8 â 3.2

0.35 â 0.50





16.6 â 18.2


( fig. In ` cr. )





( Chains/Sprockets )

Metal Forming


620 - 625

156 - 158

116 - 118





892 - 901



108 - 110


Net Profit

49.5 - 52


EPS ( in ` )

63.1 â 66.3


LG Balakrishnan & Bros Ltd has informed BSE that a Meeting of the Board of Directors of the Company will be held on April 28, 2012 to consider the audited financial results for the quarter / year ended March 31, 2012 and to recommend the payment of dividend for the financial year 2011-2012