LGB has 3 Divisions :
i.) Transmission (Chains)
ii.) Metal Forming (Fine Blanking)
iii.) Tata Motors Dealerships + Distributorship of Top1 Lubricants + Windmills.
1.) Sales Breakup : Transmission
i.) Transmission (Chains)
ii.) Metal Forming (Fine Blanking)
iii.) Tata Motors Dealerships + Distributorship of Top1 Lubricants + Windmills.
1.) Sales Breakup : Transmission
OEM (including replacement sales) = 80%
Replacement Market = 20%
2.) Industry Structure : Transmission
Unorganized Sector - 15% (caters exclusively to replacement market)
Imports - 5%
Organised Sector - 80% (LGB, Tube Investments & Rockman)
Market Share of LGB = 50%
3.) Import Duty on Chains = 28%
4.) A few promoter group cos. are also involved in the same line of business as LGB.
Ex.: Rolon Fine Blank Ltd., LGB Rolon Chain Ltd., Silent Chain India Pvt. Ltd.
5.) Margins : OPM
FY10 = 14%
FY11 = 12.8%
FY12 = 11.8%
LGB is unable to pass on the increase in input prices to its customers. The company has no pricing power. This might be due to client concentration.
A great company is one which increases prices when input costs go up but does not reduces its prices when input costs go down. Therefore, by this yardstick LGB is not a great co.
The co. has increased prices by 5% in the replacement market in April. Bajaj has also accepted a price revision. Negotiations are on with Hero & TVS.
6.) Power Costs :
The co. is being adversely affected by the hike in power prices in Tamil Nadu by more than 33%. The co. is unable to pass on the same. The co. faced a hit of Rs.2Cr. in Q1FY13 on account of the increased power costs.
Moreover, the govt. of TN has imposed a tax duty of 10% on electricity generated through private gensets!
Moreover, the management is extremely concerned with the business climate in TN and complained of political interference.
LGB has 5 manufacturing facilities in TN. The co. is shifting some of its capacity to Aurangabad (Maharashtra) by year end. This additional "transportation cost" was one of the reasons for the contraction of margins.
7.) LGB is the sole supplier to a few models of Hero Motocorp & Kawasaki. In old days, an OEM used to use the same chain in all his bikes but now, each model has a dedicated custom made chain. Hence the involvement of LGB with OEM's has increased.
8.) The management want to double sales in 5 years which is a CAGR of 15%.
9.) Effective Tax Rate :
FY11 = 15.5%
FY12 = 27%
FY13 - 16 = 27%
FY17 onwards = 33%
Also the effective rate of Excise Duty paid by the co. will, raise to 12.6% from FY17 onwards from 8% now. This is due to the fact that the Pantnagar plant of the co. will complete 10 years in FY16 & the tax holiday will expire.
10.) During the year, LGB will merge with itself its wholly owned subsidiary - BCW V Tech India Pvt. Ltd.
11.) During FY12, the co. had to dispatch certain parts to the OEM's by air freight as some of its sub contractors could not supply it on time. This cost the co. around Rs.3Cr.
12.) Dividend Payout Ratio = 20-25%
13.) The bank guarantee of Rs.84Cr. to LGB Forge is expected to be revoked this year.
14.) FY13E Exports = Rs.100Cr.
15.) Capex = Rs.125Cr. spread over 2 years (including the US acquisition) will increase the overall capacity by a third.
16.) US acquisition of Precision Stamped Metal Parts co. will cost $6-6.5 million.
17.) The RoCE of "Metal Forming Division" which is in single digits, will increase from FY14 onwards when the capacity utilization improves. The co. wants to do value addition and is not accepting low end work. This division has recently received orders from Daimler India.
18.) Capital Employed in Tata Motors Dealership = Rs.15Cr.
19.) FY13E Revenue from Top1 Lubricants = Rs.5Cr.
20.) Only 40% of the Total Assets of LGB are employed in "Transmission" Segment but this division accounts for around 70% of sales & 80% of profits.
If FY14 onwards, the "Metal Forming" division starts performing as per expectations of the management, then the overall RoCE can improve significantly.
21.) Capital Allocation :
FY07 :
The co. divested its wholly owned subsidiary LGB Textiles for Rs.19.5Cr.
Raised $5million from IFC @ Rs.398/- per share.
FY08 :
Demerger of LGB Forge
FY09 :
Sale of Industrial Chain Division to JV (25:75 :: LGB : Renolds Chains UK.) for Rs.57Cr.
Hence, over the years, the co. has divested its non core businesses, repaid debts & increased dividends.
22.) Valuations : CMP = Rs.275/-
At less than 5x earnings & 1 times book with 20% RoE & 4% yield, even with 0.5x D/E, LGB looks like a bargain but I am not overweight.
23.) Portfolio Weightage = 2%
