LG Balakrishnan & Bros Ltd. [ NSE : LGBBROSLTD ; BSE : 500250 ] announced its Q4FY12 (12'Months'FY12) results on 28 April, 2012.

Topline performance for the quarter as well as fiscal was inline with our estimates with disappointment on margins front which came quite below our estimates being marred by heavy power shortages faced in entire state of Tamil Nadu in the quarter. Post results, we maintain our view that the company is 'Grossly Undervalued' and is a Rare Investment Opportunity wherein all the required ingredients like -th

Reasonable Operating Scale ( INR 912 cr. ), Market Leadership Position in Operating Segment ( 60 % Marketshare ),
Track-Record of Outperforming Industry as well as Peers in terms of Growth Rate,

Concern towards Minority Shareholders' Wealth Creation ( which is evident from higher dividend payout in FY12 at 110 % despite marginally lower PAT )
-- are present and still the company is available at sharp discount to its smaller size peers. Presenting below the highlights of Q4FY12 as well as fiscal FY12 results as also our detailed analysis post the results :

(1) Consolidated Revenue for FY12 stood at INR 912.68 cr. which translates to a healthy YoY growth of 27.69 % over FY11. For Q4FY12, Consolidated Revenue stood at INR 227.69 cr. which translates to a YoY growth of 20.7 % but a marginal QoQ decline of 2.95 %. Quarterly gyrations are normal in the industry with Q2 and Q3 normally the best quarters.
(2) Consolidated EBITDA for FY12 stood at INR 103.6 cr. which translates to a YoY growth of 19.14 % over FY11. For Q4FY12, Consolidated EBITDA stood at INR 18.97 cr. which translates to a YoY decline of 8 % and a QoQ decline of 28.54 %. The sharp decline in EBITDA is attributable to severe power shortages faced by entire state of Tamil Nadu in Q4FY12 because of which company had to make arrangements for alternative power sources to keep its plants running so as to avoid any kind of disruptions of supply for its OEM clients. This resulted in sharp rise in production costs which resulted to decline in overall EBITDA. With power situation already improving since the beginning of Q1FY13 and significant improvement expected post June 2012 on commissioning of major power plants, EBITDA margins of the company are expected to be back to normal levels to some extent in Q1FY13 and completely by Q2FY13. (3) Consolidated PBT for FY12 stood at INR 58.91 cr. which translates to a YoY growth of 22.47 % over FY11. (4) Tax Expenditure for FY12 stood at INR 14.68 cr. which is a whooping 711 % increase over last fiscal, FY11. Although last fiscal included a tax credit worth INR 5.33 cr., but, even excluding such credit, the tax expenditure for current fiscal, FY12, on a like-to-like basis shows an increase of 105.6 % over previous fiscal. The higher tax expenditure is largely on account of company's major plants approaching end of full tax exemption period and going forward these plants are likely to enjoy partial tax exemption for coming 5 fiscals. (5) Because of higher tax expenditure incurred, PAT for fiscal FY12 stood at INR 44.22 cr. which is a marginal 4.47 % decline over previous fiscal. (6) Inspite of lower PAT, company has increased its dividend payout to 110 % i.e. Rs. 11 per share which signifies continued commitment of management of the company towards minority shareholders' wealth creation. (7) Now, to concentrate on segmentwise performance of the company, the core operating segment of the company viz., Chains/Sprockets which is reported under 'Transmission' Segment, recorded a robust 35.54 % growth in revenues for FY12 to stand at INR 625.84 cr.. This growth is to be seen in the

backdrop of moderation in growth rate faced by main consuming segment i.e. Two Wheeler industry which recorded a 14.2 % growth in sales for FY12. It is worthwhile to also take into account here the growth rate achieved by Automotive Chains segment of LGB's only formidable peer viz., TIDC India (a division of Tube Investment of India Ltd.) for FY12 wherein it reported only 16 % growth in revenues to stand at ~INR 300 cr.. (8) LGB continues to consistently outperform the industry as well as its peers in terms of revenue growth which augurs very well for the cash generation of the company for FY13 and FY14 when the one-off margin-hit which has occurred in FY12 due to significant power shortages in its operating state gets corrected. This outperformance also depicts the obvious fact that LGB is gaining significant ground in terms of its already highest marketshare in its core operating segment viz. Chains/Sprockets and such a high marketshare will itself act as a significant entry barrier for its peers to penetrate deeply into the market. (9) Company's next significant operating segment viz., Metal Forming (which covers its Fine Blanking Operations, Rolled Steel Products as well as sales done by dedicated Unit for Bosch) turned out a stable growth for FY12 in terms of revenues which stood at INR 157.86 cr. which translates into a YoY growth of 7.94 %. However, the most significant thing to take note of with regards to LGB's Metal Forming segment is the fact that company has built a strong foundation for its considerable scale ramp-up in the years to come by bagging significant orders from Ashok Leyland, Daimler, Eaton and ZF, deliveries of which are expected to start in FY13. Company has also signed a LOI to acquire majority stake in a USA-based company engaged in Precision Stamping which is expected to add significant technological advantage to LGB's already strong and India's Largest Fine Blanking operations as also open-up the vast US market for its products. (10) Metal Forming division is expected to see significant growth in revenues starting 2HFY13 which is expected to boost company's cash generation to a considerable extent in FY14. (11) Company's last non-core operating segment viz., Dealership of Tata Motors LCVs as also exclusive distributorship of Top1 Oil Products' premium Lubricants in South India is reported under 'Others' segment. This division turned out an impressive 20.8 % YoY growth in revenues to INR 128.97 cr. in FY12 backed by addition of Top1 Oil Products' distribution this fiscal as also some pre-budget buying of LCVs turning in company's favour. However, this division is expected to remain a non-core area of LGB which is continued just to improve brand visibility of the company in the marketplace as also to fully utilise the already strong ground distribution network that the company enjoys.

View Post Q4FY12 (12'Months'FY12) Results :

Before going any further, it will be worthwhile to enumerate here certain key facts that need to be noted in FY12 (Q4FY12) results which are otherwise not apparently visible but are obvious on detailed interpretation of the reported results : The reason why LGB enjoys extremely healthy relationship with each of the Indian Two Wheeler OEMs and therefore enjoys more than 65 % marketshare with OEMs is apparent on detailed interpretaion of the just declared results. Q4FY12 marked one of the worst quarters in company's history as far operating work environment is concerned because of the severe power shortages faced by its resident state Tamil Nadu. Majority of its manufacturing plants located in the state faced a power-cut for upto 10 hours a day for most of the Q4FY12. Still, company made alternative arrangements of power to keep the plants running so that the supply to its clients, which include almost all Indian Two Wheeler OEMs, doesn't get affected even a single bit. If we contrast this with the strategy adopted by its only formidable peer in the segment viz., TIDC (a division of Tube Investment of India) then its interesting to note that for most of the 2HFY12, TIDC's Automotive Chain Units worked at 98-100 % capacity utilisation and, its only when its existing Units reached almost peak utilisation levels, the plans for next capacity increases were drawn thereby fresh orders of their existing clients remaining unserved. TIDC's new capacities are

likely to be operational only in 2HFY13 and therefore, in 1HFY13 again, TIDC will loose on the opportunity to serve fresh orders of its OEM clients. From above, its evident that because of the uncertainty in likely growth of main consuming segment viz. Two Wheelers, whereas TIDC decided to play safe by first letting its existing capacities run out thereby loosing on the opportunity to serve any fresh orders till 2HFY13 ; on the other hand, LGB decided to expand in FY11 ahead of expected uncertain market demand and even served the demand in extremely tough work environment without any interruption thereby giving utmost respect to its OEM clients' manufacturing plans. OEM clients prefer to work with such vendors which ensure timely supply irrespective of operating conditions and this is the reason why LGB enjoys a critical vendor status with almost all Indian Two Wheeler OEMs and therefore enjoys more than 65 % marketshare in their Chains/Sprocket supplies. Second most interesting aspect to note from the just declared results is the consistent outperformance of LGB vis-a-vis industry as well as its only formidable peer, TIDC. It will be interesting here to look at CAGR of LGB's Chain/Sprocket sales revenue and pitch it against Industry i.e. Two Wheeler CAGR as also against Chain/Sprocket sales revenue CAGR of TIDC. Since CAGR data for TIDC is available only for 2 years, so, we will consider here only 2 years' CAGR of LGB, Industry and TIDC. It is worthwhile to note here that LGB's growth is coming on a higher scale which is almost double than that of TIDC.

LGB's Chain/Sprockets Sales 2 Years' CAGR

TIDC India Chain/Sprockets Sales 2 Years' CAGR

Two Wheeler Industry (OEM) 2 Years' CAGR

33.87

25.65

19.74 %

Two important things need to be noted in above : (a) (b) Scale of LGB's Chain/Sprocket sales is more than double at INR 625.84 cr. than that of TIDC at INR 300 cr. TIDC was constrained by capacity in FY12 wherein, for most of the 2HFY12, its plants operated at 98-100 % capacity utilisation. It has drawn up plans for almost 50 % increase in its existing capacities of Automotive Chains but such additional capacities will get operational only in 2HFY13, so, even for FY13, TIDC is expected to remain a significant underperformer vis-a-vis LGB.

We think it proper to mention here the Nationwide ground Auto Spare Dealers / Service Centers / Workshops feedback that we have collected for Rolon (LGB's brand) and its competing brands. The feedback for Rolon has been very positive with no dealer denying the fact that Rolon enjoys more than 50 % marketshare in replacement market. The strength of the brand can be gauged by citing an example of two of the biggest spares dealer-checks of J&K (North India) who claim that Rolon enjoys more than 70 % marketshare in aftermarket there. To have such a strong presence in remote North India too, speaks very well of the brand and its undefeatable position in the market. To continue with the ground feedback, aftermarket in India is now maturing with lots of company workshops opening up who prefer standard OEM (i.e. company) chains/sprockets only as replacement. This means an ascending consumption trend towards OE Spares (i.e. replacement market catered by OEM) where again LGB is a market leader. There is a presence of lots of chinese and unorganised products too but their use is limited to hardly 6-7 % of the total consumption as their quality is far

inferior and their use actually creates many other vehicle issues. Also, consumers are preferring replacing the chain/sprocket instead of repairing it as the repair-work only extends the life by 350-400 kms. after which again the repair-work needs to be done before finally replacing it after 3-5 repair sessions.

Now, to continue with our discussion on observatory aspects -- another interesting aspect which needs to be observed is, the LGB management's thinking ahead of time, which is not only evident from the steps it has taken over last 3 decades to maintain and grow its leadership position in Chains/Sprocket business, but, also to invest ahead of time in Fine Blanking operations which is now catching up fast and is emerging as the next growth area in Auto Ancillary segment. Already, LGB has built a strong foundation in this segment by setting-up India's largest Fine Blanking Infrastructure and now, to acquire technological edge as also to tap the high-potential Western Markets, company has recently signed a LOI to acquire a precision stamping company in USA. Peers are only now waking up to this space as is evident from the recent management commentary of TIDC India wherein it plans to invest heavily in its Fine Blanking Operations going forward as they see tremendous potential in this segment because of many four wheeler OEMs setting up shop here. The fourth and most crucial point to observe in just declared results of LGB is the declaration of 110 % dividend i.e. Rs. 11 per share inspite of marginally lower PAT of FY12. Higher dividend payout highlights two aspects : first, Management's Concern towards rewarding its shareholders thereby giving priority to Minority Shareholders' Wealth Creation aspect. -second, Management's Confidence of continued internal Cash Generation as otherwise it would have conserved resources for its core business.

To conclude, continuing with our first IC Report on LG Balakrishnan & Bros. Ltd. (LGB) dated 28th March 2012, we feel nothing has changed except the fact that because of dismal profitability in Q4FY12 due to one-off tough operating conditions of severe power-cuts in its operating state, the company's share price has corrected ~8 % from our IC rate of INR 310. Even at the IC rate of INR 310, no positives were priced-in so we see no reason for the recent correction on the back of one-off dismal Q4FY12 performance on profitability front. One crucial thing to note here is the fact that, at the current mcap of INR 224 cr., company is trading at just 2.1 times its FY12 reported EBITDA of INR 103.6 cr.. which is very low for a company having a scale of operations at INR 912 cr. and one of the lowest in entire Auto Ancillary basket with similar scale. Such low valuations are prevalent inspite of the fact that company has good prospects of growth atleast for next 3 years based on only Replacement Segment Demand and such low valuations are just an anomaly because of low IRinitiatives of the company which can't remain for long. We maintain our view that stock has to correct to atleast INR 440 levels sooner rather than later to reflect a reasonable valuation as compared to its peers.