LG Balakrishnan & Bros (LGBBL) reported a slightly better-than-expected standalone topline
and bottom-line growth for 2QFY2016. The Transmission segment, which contributed
~79% to the company’s total standalone revenue, reported a growth of 11% yoy, while the
Others segment reported a decline on the sales front. On the bottom-line (standalone) front, the
company unperformed due to subdued sales growth and poor operating performance.
Top-line grew by ~6% yoy: The standalone top-line grew by ~6% yoy to ~Rs282cr, which is
higher than our estimate of ~Rs267cr. The Transmission segment revenue was up
~11% yoy; the segment accounted for ~79% of the standalone revenue of the company.
The Others segment reported a decline in sales.
Poor operating performance and lower other income mar profitability: The company
reported an operating profit of ~Rs36cr, which is down 0.2% yoy. The operating margin
contracted by by 74bp yoy to 12.8%, primarily on account of higher employee costs and
other expenditure. The reported standalone net profit declined by ~19% yoy to ~Rs17cr, but
is higher than our estimate of ~Rs16cr. However, on adjusting for the one-time exceptional
gain incurred in 2QFY2015, the PAT during 2QFY2016 actually grew by 5% yoy.
Outlook and valuation: LGBBL is a market leader in two-wheeler automotive chains with
~70% market share in the OEM segment. The company has been reporting lower growth
in earnings since the last three quarters, which is mainly due to overall slowdown in the
two-wheeler industry. The two-wheeler industry has been impacted mainly due to the rural
slowdown. However, sales are expected to rebound in 2HFY2016 on expectations of a
normal monsoon which will boost crop output, thus leading to revival in rural demand. The
company’s volume growth in the automotive chains segment is expected to improve over
FY2015-17E with its key clients like HMCL, HMSI, Yamaha, TVS Motor and others having
plans of capacity expansion and with they launching new models. We have a Neutral rating
on the stock.

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