Fitch Ratings has today affirmed LG Balakrishnan & Bros Ltd’s (LGB) National Long-term Issuer Rating at ‘A(ind)’. At the same time, the agency has affirmed the National Long-term rating of ‘A(ind)’ to LGB’s INR1 billion long-term optionally convertible debenture programme. The Long-term rating of ‘A(ind)’ of the Indian Rupee denominated long-term debt programme of up to USD15 million has been simultaneously affirmed and withdrawn as LGB has not raised any amount under the programme. The Outlook on the ratings is Stable.

The rating affirmations reflect LGB’s leading market position in the transmission chains business in both the original equipment manufacturer (OEM) market and the aftermarket. The ratings also take into account LGB’s established relationships with auto OEMs and its tier 1 suppliers and its strong brand – Rolon – and the firm’s long history of strong growth and stable operating margins. Fitch notes that LGB remains exposed to lower realisations from OEMs due to softening in demand especially from the two wheeler industry, which coupled with the strength in steel prices, would continue to exert margin pressures on the company. The risk is mitigated, to an extent, by its exposure to the replacement market which constitutes a third of its revenues. However, despite the margin pressures and with the bulk of the existing capex to be completed by end-March 2008, Fitch expects LGB to generate positive free cash flows from FY09, which would result in continuous delevering of its balance sheet.

Fitch also notes that LGB has recently announced a scheme for demerging the forging business with effect from April 1, 2008. The transaction is expected to be cash neutral; however, Fitch expects LGB would continue to support the debt obligations of the new entity, and has hence taken a consolidated view of the two entities while reaffirming the rating.

Fitch notes that a higher than anticipated drop in margins and/or additional capital expenditure at LGB or the new entity which impacts the extent of deleveraging could act as a potential negative trigger for the rating.

The Elgi group was founded in 1937 and has the following companies under its fold – LGB, Elgi Equipments Limited, Elgi Tyre & Tread Limited and Super Spinning Mills Limited. LGB is a well-established auto component manufacturer in India, with manufacturing facilities spread over the State of Tamil Nadu and Karnataka and more recently, in Uttaranchal. LGB is currently implementing a capex plan amounting to INR1.45bn with the bulk of it (INR1.32bn) to be completed by 31 March 2008. During FY07, LGB’s net revenues, EBITDA and net income were INR4756m, INR739m and INR230m, respectively. In the nine months ended 31 December 2007, the company earned a net income of INR108m on revenues of INR3937m. At end-FY07, net debt/equity ratio was 1.5 and net debt/EBITDA ratio was 2.7. Interest coverage was 2.6.

Sourced From: Sampark Public Relations Pvt Ltd

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