Lakshmi Machine Works (LMW) is the third largest textile machinery company in world with a India marketshare of 55%. LMW has three business divisions -
- Textile machinery (end-to-end solutions, 89% of FY07 net sales)
- Machine tools (CNC machines, 7% of FY07 net sales)
- Casting/Foundry division (production mostly used for internal consumption, 4% of FY07 net sales)
Revenues:
FY06 : Rs. 1,344 crores
FY07 : Rs. 1,941 crores
FY08E: Rs. 2,460 crores
Net Profits:
FY06 : Rs. 144 crores
FY07 : Rs. 206 crores
FY08E: Rs. 291 crores
Trailing 12-month P/E: 18
RoCE:
FY06: 38%
FY07: 39%
Investment Rationale:
- Investing in textile companies like Alok or Welspun is generally considered as rewarding as shooting oneself in the foot. They face tremendous margin pressures, dilute equity at whim and have to deal with competition from Bangladesh, Pakistan and China. Though textile industry will grow thanks to quota abolition, finding a right textile company to ride the growth will be difficult. Enter LMW - the company that helps these textile companies increase capacities.
- 95% of LMW's revenues are from India. Currency risk is non-existent.
- Current order book of Rs. 5,500 crores.
- Generating Rs. 210 crores PAT is not a joke, especially for a Rs. 3,300 crore market cap company. Companies in the capital goods space like ABB (MCap of Rs. 24,000 crores) generated a net profit of just Rs. 340 crores in CY06. Praj industries' net profit is around Rs. 85 crores.
- LMW is a debt free company.
- According to CRISIL report, Indian textile industry will invest Rs. 55,000 crores across its value chain by 2012. India's global marketshare will increase from 4% to 7%.
- Govt of India's TUF (Technology Upgradation Fund) has been extended till 2012. Under this scheme, textile companies will get a 5% interest subsidy from the Govt.
Key Risks:
- Eventhough LMW is insulated from currency risks, its customers are not. A further fall in the Rupee will affect the capex plans of textile companies.
- LMW depends too much on the textile industy. Any slowdown in this industry will affect its stock price.
- Cheap imports from other countries, especially if Govt reduces import duties, can affect LMW.
Risk Mitigation:
- Government of India cannot afford to let the textile companies bleed because of currency appreciation. The textile industry is the second largest employer in India (35 million) after agriculture. It will offer sops to the textile industry so that their growth path is not affected.
- The machine tool division grew by 22% in FY07. The company is increasing investments in R&D.
- Currently, exports constitute very small percentage of the overall sales because of massive local demand. If there is a fall in demand in India because of currency risks, the company can get back to addressing the export markets.
- Nobody understands the Indian market as much as LMW. It offers customized solutions with good tech support, which imports might not offer.
Information Sources: Annual Report, LMW website & brokerage reports
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