CD Equisearch's research report on L.G.Balakrishnan and Brothers
According to a research report by imrac, the Indian two wheeler industry would get a fillip from rising urbanization, improving road infrastructure, higher fuel efficiency compared to four wheelers and lower carbon emissions. The firm expects the Indian two-wheeler market to revive from 2021 onwards and exhibit moderate growth during 2021-26. Yet challenges barely wane for increasing work from home practice has cut down work travel across the country. Besides, surging petrol prices could also constrain market growth. Much of the two wheeler demand in the country over the next few quarters would rest on severity of new Covid 19 infections and state of monsoons. By some count, the demand catalysts for the automobile industry - be it in the form of low interest rates or rising urbanization - would foster high single digit market growth. The newly announced scrappage policy would anything but diminish demand for four wheelers in the country.
The stock currently trades at 7.8x FY22e EPS of Rs 52.51 and 6.5x FY23e EPS of Rs 62.83. Valuation stress presumably stems from the uncertain state of recovery in the Indian automobile market - despite the company generating free cash flows of some Rs 200 crs. Bolstered by higher margins overall, earnings would rise by some 35% this fiscal, thus propelling return on capital. Weighing odds, we maintain our buy recommendation on the stock with revised target of Rs 565 (previous target: Rs 276) based on 9X FY23e earnings.
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