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CD Equisearch Pvt Ltd Apr 16,2015

Equities Derivatives Commodities Distribution of Mutual Funds Distribution of Life Insurance

L.G.Balakrishnan&Bros Ltd

No. of shares (crore) 1.57

Mkt cap (Rs crs) 785

Current price (15/04/2015) 500

Price target (Rs)

645

52 week H/L (Rs.) 764/208

Book Value (Rs.) (fv:10) 224

P/BV (FY15e/16e/17e)

2.4/1.9/1.6

P/E (FY15e/16e/17e) 12.2/9.5/7.8

EPS growth (FY15e/16e/17e) 19.2/16.9/22.9

ROE (FY15e/FY16e/FY17e) 21.8/21.3/22.0

Beta 0.8

Daily volume (avg. weekly) 11942

BSE Code 500250

NSE Code LGBBROSLTD

Bloomberg LGBB IN

Shareholding pattern % Promoters 46.5

MFs / Banks / FIs 11.4

Foreign 0.6

Govt. Holding 0.0

Non-Promoter Corp. 2.1

Public & others 39.4

Total 100.0

As on Mar 31, 2015

Recommendation

BUY

Analyst

KISHAN GUPTA, CFA, FRM

Phone: + 91 (33) 4488 0043

E- mail: [email protected]

Figures (Rs crs) FY13 FY14 FY15e FY16e FY17e

Net revenues 956.19 1108.56 1200.60 1378.73 1590.75

Other Income 3.83 4.60 7.85 1.29 1.35

EBITDA (other income included) 93.17 130.74 151.45 164.19 193.78

Net Profit after EO item 30.86 59.14 70.47 82.39 101.27

EPS (Rs) 19.65 37.67 44.88 52.48 64.50

EPS growth (%) -30.2 91.7 19.2 16.9 22.9

Company Brief L G Balakrishnan (LGB) manufactures roller chains and undertakes metal

forming, which includes warm & cold forging, fine blanking and precision-

machined parts. Its step subsidiary, GFM LLC, deals in precision stamped

metal parts which are used in automobiles.

Highlights

� Buoyed by softening interest rates and swingeing cut in crude oil

prices, SIAM has set higher growth targets for domestic car and two

wheeler industries. It expects the domestic car industry to grow by 6-

8% in current year driven by government’s increased infrastructure

outlay, while the motorcycles volumes to advance by 6-7% triggered by

government's recent decision to increase contribution to rural welfare

schemes. LGB with its focus on two wheeler and passenger vehicle

industries would profit from resultant demand for auto components,

fine blanking and precision machined parts.

� LGB has managed to keep tight leash on costs not least due to vertical

integration - steel rolling unit churns out cold-rolled steel strips, wires

and strips with profiles; tooling division, which caters to tool needs for

all chains forgings & fine blanking division, handles precision and

complicated machining. Such integration would help eschew volatility

in earnings resulting from increasing competition in OEM space.

� To prop up its transmission & fine blanking businesses, LGB plans to

commence a greenfield project with capex of Rs 155-160 crs in Jalna

(Aurangabad) by first quarter of next fiscal year. The plant would

mainly execute orders for Bajaj Auto and the replacement market. To

add spin to its global footprint, it also plans to acquire firms in Europe,

US and elsewhere, after having successfully acquired and integrated

GFM Corporation, USA.

� The stock currently trades at 9.5x FY16e EPS of Rs 52.48 and 7.8x FY17e

EPS of Rs 64.50. Weighing risk to earnings (resulting from likely

sclerosis in automobile demand and loosening pricing power) against

strong growth potential (annul growth pegged at 20%), we recommend

a buy on the stock with target of Rs 645 (peg ratio of 0.5) based on

10xFY17e earnings over a period of 9-12 months.

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Company Profile

L G Balakrishnan does metal forming, which includes warm & cold forging, fine blanking and precision-machined parts. It also

manufactures roller chains under the 'Rolon' brand for both automobile and industry in general - motorcycle and moped chains;

heavy duty chains; timing chains; automotive kits.

It supplies industrial chains to wide array of industries including cement, fertilizers, railways and sugar , while the fine

blanking and forging products are produced for firms in automobile and auto ancillary sectors like Bajaj Auto, Hero Honda,

Kinetic Engineering, TVS Motors, Kalyani Brakes, Brakes India, LML, Mico, Sona Steering, Lucas TVS, Delphi, Denso and

Aditya Auto.

LGB has two subsidiaries – BCW V Tech India (fully owned) and LGB USA Inc (74.2% stake). The former supplies machined

components for export markets, while the latter's step down subsidiary, GFM LLC, manufactures precision stamped metal parts

which are used in automobiles. LGB also deals with businesses in Australia, France, Germany, Greece, Hong Kong, Italy, US,

UK, Turkey, Japan, Singapore and South Africa, among others.

Business Segments

Transmission

This segment which produces automotive chain, sprockets, tensioners, belts and brake shoe, caters mainly to OEMs and

replacement market for two –wheelers.

Automobile chain

Manufactures several types of automobile chains such as motorcycle & moped drive chains, timing chains/engine mechanism

chains and automotive kits.

Sprockets

Most of LGB's sprocket production is used in motorcycle drive system. LGB supplies sprockets for motorcycle and mopeds in

kit form for OEMs and after market.

Tensioners

It prevents chain whipping and back lash by improving the operation of chain drives by keeping the tension constant, thus

eliminating frequent manual adjustments that would obstruct the machine operation.

Belts

Supplies different kinds of belts namely timing belts, cogged belts and poly v belts. LGB's cogged belts are used in diverse

automotive application like mopeds, LCV/s, cars/jeeps, 3-wheelers, trucks and tractors.

Brake shoe

Made of high grade aluminium alloys for pressure die casting, brake shoe finds application in mopeds, scooters and motor

cycles. Apart from brake shoes, LGB also supplies other friction products under the Rolon brand - clutch plates, brake pads, and

clutch shoes.

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Metal forming

LGB handles production of hot, warm and cold forging, blanking, fine blanking and precision-machined parts for clients

such as Bajaj Auto, Brakes India, Hero Honda, Kalyani Brakes, Larsen & Toubro, Bosch and TVS Motors.

Fine blanking

Fine blanking ensures manufacturing of high quality components with good properties - better flatness, surface finish and

dimensional tolerances. When combined with cold forming, it helps design solution like bending, semi-piercing,

countersinking and deep drawing.

Forging

Handles production of steering suspension linkage parts such as ball rods, ball pins, ball sockets etc, by cold forging process

in vertical / mechanical and hydraulic presses. Also manufactures close tolerance press forgings that are used in critical

application products in auto electricals and transmission parts of two and four wheelers.

Wire drawing

Majority is used in-house; the balance is supplied to other chain manufacturing plants, spring steel suppliers, umbrella

manufacturers etc

Investment Thesis

Auto industry – yet to take off

Helped by modest economic recovery, Indian passenger vehicle industry grew by 3.9%, the fastest pace in at least four

years, led by 5% growth in domestic car sales - 1.87 m units vs 1.79 m units. After having fallen for two consecutive years,

domestic car industry managed to buck the trend buoyed by improved consumer sentiment. Expansion of distribution

network and roll out of new models helped Maruti Suzuki, the market leader, to post an industry beating 11.1% growth in

domestic sales. Though SIAM expects the domestic car and utility vehicle industries to grow by 6-8% in current year driven

by government’s increased infrastructure outlay, some players remain skeptical.

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In the domestic motorcycle market, Honda Motorcycle continues to

win market share - 16% in 2014-15 from just 7% five years back - at

the expense of Bajaj Auto and Hero Motocorp. Bajaj Auto's market

share plummeted to some 16% last year (27% in 2010-11) and Hero

Motocorp has lost 2% share in last five years; TVS Motors has more

or less maintained its share (6.2% vs 7% in 2010-11). Runaway

success of Royal Enfield bikes has helped Eicher Motors gain 2.4%

market share in last five years – 3% in 2014-15 compared to just

0.6% in 2010-11.

For Hyundai Motor, challenging macroeconomic situation and low consumer sentiment post headwinds. General Motors

chides banks for failing to pass on cuts in repo rates to consumers, which has held up the recovery. Ford India foresees

that consumers would defer their discretionary spends until at least economic growth picks up and interest rates start to

fall.

Two wheeler industry put up a better show with domestic volumes advancing by 8.1% - the highest since 2011-12. Scooter

demand continues to rise remarkably - 0.9 m units were added in 2014-15 compared to average addition of 0.5m in the

previous three years. Motorcycle off take though remained patchy - up 2.5% - not least because of moderate demand from

rural markets, where low rainfall played spoilsport.

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But revival hopes abound. SIAM expects motorcycle sales to rise by 6-7% this year and scooter sales by 25%, pinned by

government's recent decision to increase contribution to rural welfare schemes. Hero Motocorp estimates scooter

penetration to increase to 32-33% from the current 27% driven by higher penetration in urban markets. Reflecting that, it

plans to increase its monthly scooter capacity to 1.5 lakh units (from 1 lakh units), besides launching couple of new models

in the next few months. Bajaj Auto hopes to gain some lost domestic market share with new launches and estimates

annual industry growth of 7-8% over the next few years.

Vertical integration

To control costs and maintain product quality, LGB manufactures

critical components in-house. It has set up a steel rolling unit to

churn out cold-rolled steel strips, wires and strips with profiles. Its

tooling division, which caters to all tool needs for all chains

forgings & fine blanking divisions, is equipped with CNC wire

cutting, spark erosion and Mikron CNC Boring machines for

precision and complicated machining. Its application engineering

cell helps design, manufacture and supply chains for special

applications.

Acquisition

LGB would continue to look overseas for potential acquisitions in

auto components space after it successfully acquired GFM

Corporation, USA (now GFM Acquisition LLC), a manufacturer of

precision metal stampings, in 2012 for a consideration of $5.5 m to

expand its presence in select geographies. This acquisition has

helped it boost production of in-house products and upgradation

of marketing and sales functions. More such deals are on the anvil

as LGB has earmarked Rs 50-100 crs for acquiring firms in Europe,

US and elsewhere.

Capex

To push forward its transmission & fine blanking businesses, LGB plans to commence a greenfield project in Jalna

(Aurangabad) by first quarter of next fiscal year. Set up with an investment of Rs 155-160 crs, the plant would mainly

execute orders for Bajaj Auto and the replacement market. Though the project is still several months away from start, the

company has infused bulk of the total investments (~Rs 110 crs) till date to order machineries and critical equipments and

other civil work; regulatory approvals are yet to be obtained. LGB would invest close of Rs 100 crs in current year evenly

split between the Jalna project and foreign acquisitions in US, Europe and elsewhere.

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Financials & valuation

LGB's fortunes to a large extent would rest on the recovery in Indian automobile industry, which has been plagued by high

interest rates and slowdown in economy. Though a grand recovery is not expected, the industry has penned higher growth

estimates for the current year. SIAM expects the domestic car and utility vehicle industry to grow by 6-8% (3.9% in 2014-15)

and motorcycle’s by 6-7% (2.5%).

LGB's revenues would advance by 15% on average (2014-15 to 2016-17) propelled by the transmission business. It would

get a leg up from the proposed expansion at Jalna, which would go on stream by first quarter of next fiscal. Margins though

would remain stable not least due to increasing cost pressures and marginal benefits of operating leverage; this business

would still account for three-fourths of total allocable profit (read EBIT).

Its metal forming business surprised investors by recording 14% growth in revenues in 9mFY15. Led by fine blanking

business, this segment would continue to post growth in mid-teens for next couple of years. Margins would get some

support from its vertically integrated operations: tooling division, which caters to all tool needs for all chains forgings &

fine blanking divisions, handles precision and complicated machining.

Although earnings is estimated to leapfrog (20% average annual growth), risks abound. Projections have built in a gradual

recovery in volumes and operating margins at multi-year high. No delay in proposed capex at Jalna has been factored.

Overseas subsidiary is also expected to continue its good run. Yet with tight leash on costs, the company would mitigate

the growing pressure of input costs.

Bounce back in earnings would spur both free cash flows and return on capital ratios. ROE would ascend to 21.7%

(average) and RoCE 18.4%, greater than recent levels, due to jump in net profit margins. Fixed asset turnover ratio would

decline in 2016-17 as an investment of Rs 160 crs related to Jalna project gets capitalized, which would also dramatically

push up depreciation costs.

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Cross Sectional Analysis

Company Equity* CMP Mcap* Sales* PAT* OPM NPM

Int

Cov. ROEa

Mcap

/sales P/BV P/E EV/EBITDA

Gabriel 14 87 1253 1430 59 7.7 4.1 13.9 20.3 0.9 3.8 21.1 10.9

LG Bala 16 500 785 1042 57 12.2 5.5 5.5 18.9 0.8 2.2 13.7 6.8

Minda Corp 42 92 1923 1936 101 9.0 5.2 4.0 26.8 1.0 4.5 19.1 11.0

Munjal Showa 8 199 797 1661 71 7.5 4.3 70.8 19.5 0.5 1.9 11.3 5.9

TTM P/E; * Figures in Rs crs;

Companies in the exhibit not exactly comparable as their product portfolios are dissimilar.

The stock currently trades at 9.5x FY16e EPS of Rs 52.48 and 7.8x FY17e EPS of Rs 64.50. Flush of foreign liquidity in last few

months and expectations of mellowing interest rates have pushed its valuation to record highs. Notwithstanding sound

prospects, risks to earnings stem from sclerosis in automobile demand and loosening pricing power. Weighing such risks, the

odds still favour a buy rating on the stock. We therefore assign a target of Rs 645 (peg ratio 0.5) based on 10x FY17e earnings

over a period of 9-12 months.

Risks & Concerns

Downturn in automobile sector

Since bulk of LGB's revenue is accounted by the automobile sector, the persistence of current economic sclerosis could impact its

volumes. High interest rates would further jeopardize the recovery in automobile sales.

Margin pressures

Plethora of factors imperil margins including rising raw material costs, acute power shortages, pricing pressure by clients (read

OEMs) and import of auto components from low cost locations. LGB plans to counter such threats through cost rationalization

and increased product customization.

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Financials

Standalone Quarterly Results Figures in Rs crs

Q3FY15 Q3FY14 % chg. 9MFY15 9MFY14 % chg.

Income from operations 264.01 254.48 3.7 781.02 727.44 7.4

Other Income 0.55 3.48 -84.2 8.74 4.32 102.3

Total Income 264.56 257.96 2.6 789.76 731.76 7.9

Total Expenditure 232.66 224.37 3.7 682.50 643.79 6.0

PBIDT (other income included) 31.90 33.59 -5.0 107.26 87.97 21.9

Interest 3.93 3.91 0.5 12.40 12.97 -4.4

Depreciation 8.72 7.88 10.7 28.27 23.19 21.9

PBT 19.25 21.80 -11.7 66.59 51.81 28.5

Tax 4.78 4.78 0.0 15.29 11.25 35.9

PAT 14.47 17.02 -15.0 51.30 40.56 26.5

Extraordinary Item - - - 4.93 - -

Adjusted Net Profit 14.47 17.02 -15.0 46.37 40.56 14.3 EPS (F.V. 10) 9.22 10.84 -15.0 29.54 25.84 14.3

Equity 15.70 7.85 100.0 15.70 7.85 100.0

Segment Results Figures in Rs crs

Q3FY15 Q3FY14 % chg. 9MFY15 9MFY14 % chg.

Segment Revenue

Transmission 205.48 190.93 7.6 596.28 530.34 12.4

Metal forming 43.71 41.93 4.3 136.47 119.86 13.9

Others 14.82 21.62 -31.4 48.28 77.23 -37.5

Total 264.01 254.48 3.7 781.02 727.44 7.4

Segment EBIT

Transmission 20.19 19.58 3.1 59.81 56.87 5.2

Metal forming 6.24 4.79 30.3 17.04 12.81 33.1

Others -3.25 1.34 -343.6 -4.47 -4.91 -9.0

Total 23.18 25.71 -9.8 72.39 64.77 11.8

Interest 3.93 3.91 0.5 12.40 12.97 -4.4

Extra-ordinary income - - - 6.61 - -

PBT 19.25 21.80 -11.7 66.59 51.81 28.5

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Consolidated Income Statement Figures in Rs crs

FY13 FY14 FY15e FY16e FY17e

Income from operations 956.19 1108.56 1200.60 1378.73 1590.75

Growth (%) 4.8 15.9 8.3 14.8 15.4

Other Income 3.83 4.60 7.85 1.29 1.35

Total Income 960.02 1113.16 1208.46 1380.03 1592.09

Total Expenditure 866.85 982.42 1057.01 1215.84 1398.31

EBITDA (other income included) 93.17 130.74 151.45 164.19 193.78

Interest 22.94 17.90 19.77 21.78 19.31

EBDT 70.23 112.84 131.67 142.41 174.47

Depreciation 29.89 32.79 35.86 36.68 44.83

Tax 7.70 14.90 18.20 21.15 25.93

Net profit 32.64 65.15 77.61 84.58 103.71

Minority interest -0.09 3.24 1.79 2.19 2.44

Net profit after MI 32.73 61.91 75.82 82.39 101.27

Extraordinary item 1.87 2.77 5.35 - -

Adjusted Net Profit 30.86 59.14 70.47 82.39 101.27

EPS (Rs.) 19.65 37.67 44.88 52.48 64.50

Segment Results Figures in Rs crs


Segment Revenue

Transmission 630.81 729.50 819.34 942.24 1083.58

Metal forming 157.18 165.95 186.24 214.17 257.01

Others 168.19 213.11 195.03 222.32 250.16

Net sales 956.19 1108.56 1200.60 1378.73 1590.75

Segment EBIT

Transmission 56.74 73.93 81.89 96.58 111.07

Metal forming 5.37 15.32 23.27 24.63 29.56

Others 1.17 8.70 17.04 6.30 8.33

Sub Total 63.28 97.94 122.20 127.51 148.95

Interest 22.94 17.90 19.77 21.78 19.31

PBT 40.34 80.04 102.42 105.73 129.64

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Balance Sheet Figures in Rs crs


SOURCES OF FUNDS

Share Capital 7.85 7.85 15.70 15.70 15.70

Reserves 250.60 301.07 353.72 419.29 500.93

Total Shareholders Funds 258.45 308.92 369.42 434.99 516.63

Minority Interest 5.47 9.66 11.45 13.64 16.08

Long term debt 86.07 65.99 80.00 120.00 85.00

Total Liabilities 349.99 384.57 460.87 568.63 617.72

APPLICATION OF FUNDS

Gross Block 427.76 486.13 480.13 530.13 689.17

Less: Accumulated Depreciation 200.03 231.41 263.61 300.29 345.12

Net Block 227.73 254.72 216.52 229.84 344.05

Capital Work in Progress 3.49 9.04 109.04 159.04 30

Investments 18.68 18.22 18.22 18.22 18.22

Current Assets, Loans & Advances

Inventory 196.01 207.52 224.12 257.74 296.40

Sundry Debtors 124.15 146.10 160.71 181.60 207.03

Cash and Bank 10.28 6.50 15.11 10.64 16.81

Other Assets 19.81 13.80 14.53 14.98 15.51

Total CA & LA 350.25 373.92 414.47 464.95 535.75

Current liabilities 252.15 282.08 306.98 313.42 320.57

Provisions 1.84 6.43 9.35 10.28 12.15

Total Current Liabilities 253.99 288.51 316.33 323.70 332.72

Net Current Assets 96.26 85.41 98.15 141.25 203.03

Net Deferred Tax (net of liability) -17.85 -16.99 -14.99 -14.99 -14.99

Other Assets (Net of liabilities) 21.68 34.17 33.93 35.27 37.40

Total Assets 349.99 384.57 460.87 568.63 617.72

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Cash Flow Statement Figures in Rs crs


Net Income (a) 32.64 65.15 77.61 84.58 103.71

Non cash exp. & others (b) 26.16 27.44 26.13 35.51 43.61

Depreciation 29.89 32.79 35.86 36.68 44.83

Profit / loss on sale of assets -2.31 -3.40 -6.61 0.00 0.00

Others -1.41 -1.95 -3.12 -1.17 -1.22

(Increase) / decrease in NWC (c) -11.66 -14.68 -7.06 -29.86 -29.46

Inventory -2.99 -11.51 -16.60 -33.62 -38.66

Debtors -15.11 -22.97 -14.61 -20.89 -25.42

long term loans & advances -8.51 -12.52 0.24 -1.34 -2.14

trade payables & others 14.95 32.32 23.91 25.99 36.76

Operating cash flow (a+b+c) 47.14 77.91 96.68 90.24 117.87

Proceeds on sale of assets 2.67 4.79 8.95 0.00 0.00

Purchase of fixed assets -61.69 -66.87 -100.00 -100.00 -30.00

Investments -5.07 0.46 0.00 0.00 0.00

Others 1.21 1.38 1.12 1.17 1.22

Investing cash flow (d) -62.89 -60.24 -89.93 -98.83 -28.78

Net borrowings 29.80 -14.27 14.27 20.01 -65.15

Dividends paid -15.05 -6.43 -12.40 -15.89 -17.76

Issue of shares 5.53 -0.48 0.00 0.00 0.00

Financing cash flow (e) 20.28 -21.18 1.87 4.12 -82.91

Net change (a+b+c+d+e) 4.53 -3.51 8.61 -4.48 6.18

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Key Financial Ratios


Growth Ratios

Revenue (%) 4.8 15.9 8.3 14.8 15.4

EBIDTA (%) -13.7 40.2 13.7 13.4 18.0

Net Profit (%) -30.2 91.7 19.2 16.9 22.9

EPS (%) -30.2 91.7 19.2 16.9 22.9

Margins

Operating Profit Margin (%) 9.3 11.4 12.0 11.8 12.1

Gross Profit Margin (%) 7.1 9.9 10.4 10.3 11.0

Net Profit Margin (%) 3.2 5.6 6.0 6.1 6.5

Return

ROCE (%) 12.6 17.7 18.0 17.8 19.0

RONW (%) 13.0 22.0 21.8 21.3 22.0

Valuations

Market Cap / Sales 0.1 0.3 0.7 0.6 0.5

EV/EBIDTA 3.3 3.6 7.0 5.7 4.8

P/E 4.6 5.4 12.2 9.5 7.8

P/BV 0.6 1.1 2.4 1.9 1.6

Other Ratios

Interest Coverage 2.7 5.3 5.5 5.9 7.7

Debt-Equity Ratio 0.7 0.5 0.5 0.4 0.2

Current Ratio 1.4 1.3 1.3 1.4 1.6

Turnover Ratios

Fixed Asset Turnover 4.6 4.8 5.4 6.6 5.8

Total Asset Turnover 3.0 3.1 2.9 2.7 2.7

Debtors Turnover 8.2 8.2 7.8 8.1 8.2

Inventory Turnover 4.5 4.9 4.9 5.0 5.0

Creditors Turnover 7.5 7.4 6.7 6.8 6.9

WC Ratios

Debtor Days 44.5 44.5 46.6 45.3 44.6

Inventory Days 81.9 75.0 74.5 72.3 72.3

Creditor Days 48.7 49.3 54.3 53.6 52.9

Cash Conversion Cycle 77.7 70.1 66.8 64.1 64.0

Cash Flows (Rs crs)

Operating Cash Flow 47.1 77.9 96.7 90.2 117.9

FCFF 0.3 30.2 20.6 6.7 102.6

FCFE 14.1 3.4 21.0 11.4 23.9

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Recommendation

LGB's transmission business banks in the medium term on increasing penetration of two wheelers to gobble its upcoming

capacity at Jalna. It has managed to form narrow economic moat by creating a niche in automotive chain market and branding

its wares (Rolon brand) - 70% market share in OEM segment and 50% in the replacement market. With changing trends in

automotive industry, it plans to launch sturdy chains - its chains with super surface treatment have been well received.

High double digit growth in sales is some time away for a full blown recovery in both two and four wheeler industries is not

in sight; SIAM expects a mere 6-8% growth in domestic car sales (5% in 2014-15) and 6-7% in motorcycle dispatches (2.5% in

2014-15) this year. In this layout, LBG's transmission business could at best grow in mid teens for next couple of years, for its

exports growth potential is limited.

In the long term, LGB's metal forming business would benefit from higher penetration of four wheelers and exports of

machined products. India's emergence as a low cost car manufacturing hub would unveil unprecedented opportunities for its

fine blanking business. Needless to mention Indian auto OEMs growing thrust on localization of auto components and the vast

potential of the replacement market. Margins get some support from its vertically integrated operations: tooling division

handles precision and complicated machining.

To plan for growth in transmission & fine blanking businesses, LGB is setting up a greenfield project in Jalna (Aurangabad)

which would commission by first quarter of next fiscal year. Set up with an investment of Rs 155-160 crs, the plant would

mainly execute orders for Bajaj Auto and the replacement market. LGB would also invest close of Rs 100 crs in current year

evenly split between the Jalna project and foreign acquisitions in US, Europe and elsewhere.

Although earnings is estimated to leapfrog (20% average annual growth), risks abound. Projections have built in a gradual

recovery in volumes and operating margins at multi-year high. No delay in proposed capex at Jalna has been factored.

Overseas subsidiary is also expected to continue its good run. Yet with tight leash on costs, the company would mitigate the

growing pressure of input costs.

The stock currently trades at 9.5x FY16e EPS of Rs 52.48 and 7.8x FY17e EPS of Rs 64.50. The stock merits a re-rating not least

because of strong earnings growth, low financial leverage and high return on capital ratios. Yet cyclicality of the auto -

component industry somewhat undermine that. Volatility in margins underscores the acute competitive challenges.

Nonetheless, odds stack up in favour of investors. We, therefore assign a buy rating with target of Rs 645 (peg ratio: 0.5) based

on 10x FY17e earnings over a period of 9-12 months.

Disclaimer

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recipient, and we are not soliciting any action based upon it. This report is not to be construed as an offer to sell or the solicitation of an

offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. The material is based upon information that

we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such. Neither CD Equisearch

Pvt. Ltd., nor any person connected with it, accepts any liability arising from the use of this document. The recipient of this material should

rely on their own investigations and take their own professional advice. Opinions expressed are our current opinions as of the date

appearing on this material only. While we endeavor to update on a reasonable basis the information discussed in this material, there may be

regulatory, compliance, or other reasons that prevent us from doing so. Prospective investors and others are cautioned that any forward-

looking statements are not predictions and may be subject to change without notice. If you have any questions about this report please get in

touch with CD Equisearch Pvt. Ltd.

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