Capitaline

Analyst Meet / AGM 08-Jan-10

Analyst Meet

L G Balakrishnan & Bros

The company expects sales of Rs 550 core in FY 2010 on the back of good demand from Bajaj Auto, Hero Honda as well as TVS

Key highlights of the conversation with Mr N.Rengaraj, CFO, L G Balakrishnan & Bros:

Within the Transmission chain segment, OEM's constitute about 60% of total sales and the rest are from replacement market. The market share in OEM's within transmission chain industry will be more than 55% and in replacement market will be around 50%.

OEM client includes all two wheelers namely Bajaj Auto, Hero Honda, TVS and others. Within the OEM clients for the transmission chain business Bajaj Auto constitutes about 40% of turnover. Hero Honda is catching up fast followed by TVS. Normally OEM's share their yearly plans and depending upon the demand of two wheelers share out the monthly and weekly plans of transmission chain off take.

Brand ROLON in transmission chain industry is very strong and command a premium via a vis others specially in replacement market. Company has more than 1000 dealers in replacement market. Within the transmission chain segment the company has one strong domestic competitor named Diamond chain. There are no international competition and no competition from Chinese space as well. Chinese tried couple of years back, but failed in terms of quality and after sales service.

In 2008-09 apart from the general slowdown, high cost raw material inventory hit the company. For transmission chain segment, major raw material is steel strips. Company normally caries inventory of about 45-50 days. But the way raw material prices came down; it was difficult for the company to adjust itself. Things got stabilized from Q4 FY'09 onwards i.e. from Mar'09 onwards. Since then it has been a smooth flow of raw material prices, although they have started to increase, the pace is very much within the reach. Normally, for OEM's it takes about 3-4 months time frame to pass on the high cost of raw material prices and vise versa in case of fall in raw material prices. In replacement market the timeframe is about 1 month. Within transmission chain segment, the company expects around 14% operating margins as benchmark in normal circumstances.

The company sold its industrial chain segment to Renold chain, UK based company which is strong global player in industrial chain segment. Although LG B had more than 1000 variants of products, it did not have necessary technology to upgrade itself nor to stand to increased competition. Renold had strong technology and was looking for an existing base in India. The company never wanted to sell the unit, but will not be able to stand in front of the technology of Renold. Hence the company decided to sell off and take 25% stake, though they had asked for higher stake. The OP margin prior to the hive off of this unit was about 11% which after the hive off and technology and newer products of Renold have reached to about 14%. Renold group has a target of about 20% operating margin in future.

Metal forming division works as a dedicated vendor for many OEM's. Broadly it has three units namely; Fine products, Bosch unit and Rolled steel products unit. Fine products unit constitute around 65% of total sales of this unit where it supplies to players like Rane, TVS, Brake India, L&T subsidiaries etc. Bosch unit is dedicated to Bosch company where it supplies product named Flange used in making machines. It constitutes around 18-20% of metal forming segment turnover. The rolled steel unit largely caters to many unorganized players. There are no after sales or replacement market sale from this unit neither there are any intra segment sale. Steel bars are major raw material for metal forming division.

The company is an authorized dealer for TATA ACE vehicle of Tata Motors in Coimbatore, Nilgiri and Erode regions. It also became dedicated dealer for Tirupur region in this month. The sales, which were about 150 units in June'09, have reached to about 200 units in Dec'09. These sales are shown in the others segment. The company expects more dealership in coming years.

Exports constitute around 12% of total sales. If one excludes the industrial chain segment in FY'09 the company exported about Rs 20 crore of transmission chains. For FY'10 the company expects 50% growth ie around Rs 30 crore of sales. The company is a dedicated vendor to one of the major passenger car and two-wheeler players in US to whom it will supply about Rs 18-20 crore of its targeted Rs 30 crore sales. The rest of the sales come from migrated players in EU and US.

The company has long-term debt of about Rs 100 crore and working capital including CC and Bank credit of about Rs 100 crore. Average interest cost is about 11%. The surplus money of about Rs 30 crore from sale of industrial chain unit is parked in FD at attractive rates. Nearly 90% of other income is from the interest income from FD.

The company is seeing strong growth and orders flowing. For meeting the targets of OEM's and replacement market for FY'11, the company will incur a capex of about Rs 25-30 crore before Mar'10. The entire capex is brown field expansion, largely new and upgraded machines and will be incurred through internal accruals and for existing line of products only and for existing customers. About Rs 17 crore will be spent in Transmission chain segment and about Rs 10 crore for metal forming segment. For FY'12 growth, the company had planned a green field expansion but final decision will be made only around June'10 looking at the pace of orders and market condition. The company has sufficient land and would require about Rs 20 crore for green field expansion, which would be largely for transmission segment.

The company wants to consolidate their shares back from face value of Re 1 each to face value of Rs 10 largely to save cost and reduce number of shareholders. Presently the company has base of more than 24000 shareholders many having smaller quantity of shares.

There are no plans on equity dilution and M&A as of now. However in future depending upon growth, the company will look into that matter at right time.

To start with the year the company had targeted net sales of about Rs 530 crore, but looking at the current scenario, the company will easily surpass this and will try to reach near Rs 550 core.

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