LG Balakrishnan & Brothers Ltd.

“Very conservative management, making chains for last 70 years” – this is how a friend introduced me to LG Balakrishnan & Brothers Ltd. (LGBBL).  Manufacturing chains sound ridiculously simple business, exactly the kind of business I like to invest my hard earned money in. No technology can replace chain - a basic tool for of linked metal rings used for pulling loads or moving multiple parts together.   

Background:

LGBBL was founded in 1937 as a transport company and has evolved as a major manufacturer of chains, sprockets and metal formed parts of automotive applications. LGBBL operates in 3 segments:

Transmission: This segment includes chains, sprockets, tensioners, belts & break  shoe.

Metal Forming: This segment includes Fine blanking for precision sheet, metal parts, machined components and wire drawing products for internal use as well as for other chain manufacturing plants, spring steel suppliers, and umbrella manufacturers.

Other segments: LGBBL is also involved in trading of goods.    

LGBBL’s products are marketed under Rolon brand. LGBBL has ~70% market share in OEM segment and ~50% market share in replacement market.

Transmission segment contributed 79% to overall sales and profit of the company in 9M-2016 period.  Export contributes around 10% to overall revenue. Major clients of LGBBL include Hero MotoCorp, Honda Motorcycle & Scooters India, Yamaha and TVS Motor.

LGBBL has 17 plants spread across Coimbatore, Mysore, Dindigul, Aurangabad, Karur, Gurgaon, Pune, Pantnagar, and Bangalore. The plants are currently working at 80-90% capacity. LGBBL has opened a new plant in Jalna to execute orders for Bajaj Auto and replacement market. Company had previously installed 5 new plants in 2011 which led to 28% increase in sales numbers.

Subsidiary / Associate: 

LGBBL has 2 subsidiaries – BCW V Tech India Pvt Ltd. and LGB USA Inc. LGB USA acquired 100% stake in GFM Corporation USA. GFM specializes in manufacturing of Precision Metal Stampings. Company seems to be open to inorganic growth to develop capabilities and diversify revenue stream.

LGBBL formed JV with Renold plc, a UK based company, to manufacture Industrial related chains with equity capital of Rs. 25.0 Cr in ratio of 75:25 by Renold and LGBBL respectively. LGBBL transferred its Industrial Chain Division along with plant at Dindigul District to the JV - Renold India Chain India Pvt. Ltd. for at consideration of Rs. 57.6 Cr in 2009.

Two Wheeler industry in India:

LGBBL’s performance is closely linked to the two wheeler market in India. Two Wheelers sales registered growth of 8.09% in FY2015 over FY2014. Within the Two Wheelers segment, Scooters, Motorcycles and Mopeds grew by 25.06%, 2.50% and 4.51% respectively.

Refer below graph for correlation between two wheeler production, LGBBL sales and profit. FY2013 was particularly challenging for 2 wheeler market. The two wheeler production as well as LGBBL sales was flat for the year. LGBBL’s operating margin reduced from 6.4% in 2012 to 4.5% in 2013.  

While LBGGL performed badly in FY2013 – a difficult year for 2 wheeler market, company tends to perform exceedingly well during better ones. During 2010-2015 period, LGBBL sales growth is slightly above two wheeler production growth but the operating profit growth was ahead by ~9 percentage points. Company benefits due to kick-in of operating leverage during good years.  

	2010	2011	2012	2013	2014	2015	CAGR 2010-2015
LGBBL Sales (in Cr)	552.38	709.52	905.13	936.62	987.92	1048.26	13.7%
LGBBL Net Profit (in mn)	24.83	45.81	43.52	33.68	54.34	64.4	21%
2 Wheeler Production (in 10,000)	1051	1335	1543	1574	1688	1849	12%

Two wheeler production is expected to remain flat in FY2016 given slowdown in rural demand. LGBBL’s 9M-2016 sales increased by meager 4% and profit reduced by 19%. This subdued performance is reminiscent of FY2013.  

Management Analysis:

Mr.  B. Vijayakumar is MD & CEO and is ably supported by Joint MD - Mr. P. Prabhakaran.

The remuneration during period 2010-2015 increased by 23% compared 21% increase in profit during the same period. Mr. B. Vijayakumar’s remuneration increased by 16% in FY2015 against 18.6% increase in net profit over previous year. The percentage increase in the median remuneration of employees was 12%.

In Rs. million	2010	2011	2012	2013	2014	2015	CAGR
B. Vijyakumar (Chairman & MD)*	8.14	14.4	17.3	14.2	19.7	23.3	23.4%
P. Prabakaran (Deputy MD)#	2.13	2.34	4.9	4.6	5.4	5.8	22.2%

* incl 2% of profit as commission

# inc 0.3% profit as commission

Analysis of Profit And Loss Statement (P&L):

While the Sales of the company have grown at a rather tepid rate of 11% CAGR over last 10 years, Net Profit has grown at 19% CAGR. The profit margins came under duress in 2008 and 2013, which were troubled years for Indian Two wheeler industry.

(INR Cr.)	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	CAGR 2006-2015
Sales	416.1	475.6	549.9	507.6	552.4	709.5	905.1	936.6	987.9	1048.3	10.8%
Operating profit	22.1	31.2	18.1	45.0	36.7	47.3	58.2	42.2	68.5	84.8	16.1%
OPM %	5.3%	6.6%	3.3%	8.9%	6.7%	6.7%	6.4%	4.5%	6.9%	8.1%
PAT	13.6	22.9	14.8	39.1	24.8	45.8	43.5	33.7	54.3	64.4	18.9%
PAT %	3.3%	4.8%	2.7%	7.7%	4.5%	6.5%	4.8%	3.6%	5.5%	6.1%

Operating Parameters:

Overall operating parameters of LGBBL are satisfactory. The net fixed assets have increased only by 4.9% against increase in sales at 10.8%. Hence, LGBBL has the ability to increase production without incurring much Capex. This is also reflected in comfortable debt position of the company.

	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	CAGR 2006-2015
Fixed Asset Turnover		2.5	2.5	2.7	3.7	4.2	4.8	4.8	4.7	4.2
Receivables Days		59.1	62.9	65.2	50.9	42.0	38.3	41.9	43.5	43.6
Net Fixed Assets	177.8	203.9	228.6	153.8	147.6	187.2	190.8	203.0	221.1	273.6	4.9%
Inventory Turnover	4.5	3.9	4.2	4.7	4.5	4.6	4.7	5.1	5.1	4.8

Debt position:

LGBBL leverage position is comfortable indicating that company has been able to generate sufficient CFO to support Capex and operations.

	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015
Total Debt	183.8	307.7	236.6	151.5	106.9	116.6	136.8	148.4	123.1	145.6
Total equity	93.2	133.3	143.1	140.3	158.7	195.4	229.2	256.0	299.4	349.6
D/E	2.0	2.3	1.7	1.1	0.7	0.6	0.6	0.6	0.4	0.4

Analysis of Cash Flow Statement:

LGBBL is generating sufficient cash flows from operations which comfortably support the ongoing business. LGBBL has generated FCF of 265 Cr over last 10 years indicating company has strong cash flow from operations and require limited capex for increase in production.     

High FCF for 2009 is an anomaly, LGBBL has sold its industrial chain manufacturing unit to the JV created with Renold plc.

	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	Total
CFO	29.29	27.87	48.09	93.99	50.87	81.42	36.27	82.33	99.52	107.34	656.99
CFI	(63.99)	(52.42)	(43.56)	51.38	(13.16)	(69.86)	(28.72)	(55.93)	(51.36)	(99.62)	(427.24)
CFF	33.68	121.04	(105.9)	(113.0)	(70.7)	(11.5)	(6.34)	(26.0)	(48.6)	(7.1)	(234.4)
PAT	13.59	22.96	14.86	39.14	24.83	45.81	43.52	33.68	54.34	64.4	357.13
CFO	29.29	27.87	48.09	93.99	50.87	81.42	36.27	82.33	99.52	107.34	656.99
Capex		62.78	42.9	(62.78)	14.81	66.19*	30.83	41.55	54.93	111.47	362.68
FCF		(34.91)	5.19	156.77	36.06	15.23	5.44	40.78	44.59	(4.13)	265.02

R&D expenditure:

LGBBL invest small portion of their turnover in R&D. The proportion has though increased to 0.36% in 2015 from 0.21% in 2009.

	2009	2010	2011	2012	2013	2014	2015
As %ge of Turnover	0.21%	0.17%	0.29%	0.29%	0.39%	0.37%	0.36%

Dividend Yield:

Management has rewarded shareholders with increase in dividend payout in line with increase in net profit.

(INR Cr.)	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	CAGR 2005-2014
Net profit	13.59	22.96	14.86	39.14	24.83	45.81	43.52	33.68	54.34	64.4	18.9%
Dividend payout	2.36	4.21	2.75	4.71	5.10	7.85	8.63	5.89	9.42	10.99	18.6%

 















Future plans:

LGBBL is looking to grow inorganically by acquiring overseas entities (budgeted Rs. 70-80 cr) with capabilities in gear manufacturing. Company intends to diversify by developing products for non-two wheeler categories.

Conclusion:

LGBBL is a classic business which has been doing the same thing for last so many years and now looking to explore to new horizons in a calculated way. We can, at best, only guess if management will be able to repeat the previous performance.

Disclaimer:

All data has been taken from public resources. I'm not currently invested in LGBBL. I may or may not invest in future. An investor should do her own analysis before making an investment decision. The views expressed are personal and doesn't represent that of my employer's. 

This article is just a collection of my thoughts on the company.

I am not registered with SEBI under SEBI (Research Analysts) Regulations, 2014. As per the clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations