LG Balakrishnan on track to achieve FY17 target

ET Intelligence Group: Coimbatore-based LG Balakrishnan & Bros, which supplies transmission chain to motorcycle makers, is likely to witness more certainty to its projected double-digit earnings growth for the next two years, thanks to improved outlook for motorcycle sales volume.

The motorcycle industry has clocked in a volume growth of 7% in the March quarter. This comes after posting negative growth for five consecutive quarters. In addition, if the Met forecast for monsoon comes true, it would bode well for LG Balakrishnan.

The company has given a guidance of 15% revenue growth for the current fiscal, which seems to be achievable after an improved outlook for the motorcycle volume growth. The company is a primary supplier of transmission chain to Bajaj Auto and Honda Motorcycle and a second supplier to Hero Moto, TVS Motor and Yamaha. Thus, it is best positioned to benefit from the improved volume growth outlook for motorcycles.

Analysts believe that the volume growth for motorcycles could be 5-7% this year. Many motorcycle makers are augmenting their capacity. To cater to the additional demand, LG Balakrishnan too, is setting up a new plant at Jalna, Maharashtra by investing nearly `150 crore. It expects the new plant to be operational in the current fiscal. The bulk of company’s investment is in transmission segment, which has a higher fixed asset turnover of 2-2.5 times.

This means, at full plant capacity, the new facility will have the potential to generate `300-350 crore of incremental revenues. It is also increasing its footprint in the market for spares. Typically, a motorcycle chain is replaced every 2-3 years and the aftermarket segment is a steadier revenue source. The stock is currently trading at 8x its FY18E earnings, and has the potential to attract investors’ attention.