About the company:
Founded in 1962, now one of the leading manufacturers of textile machinery in India. 3 businesses:-
1. Textile machinery division:
- Oldest biz of the company; revenue generated in FY08- Rs. 2007 crores or 91% of total revenues.
- 60% market share in the domestic Textile Spinning Machinery Industry; India's leading exporter of textile machinery.
- Out of India’s total installation of 39 mn spindles, a significant 24 mn spindles have been supplied by LMW.
- According to mkt estimates;demand for textile machinery looks strong for next 6 years- consolidated demand of 28.9 mn for new spindles & 28 mn for replacement of old spindles. This makes a total of appx. 55 mn spindles over the next 6 years.
- witnessed high growth in last 3 years from 1134 cr in FY05 to 2007cr in FY08
2. Machine tool division:
- Relatively new biz. manufactures CNC lathe machines, vertical & horizontal machine centres.
- Revenues of just Rs 125 cr in FY08 or 5.7% of total revenues; sluggish growth in past 3 years.
- This segment is dominated by German & other European manufacturers
3. Foundry division
- manufacture wind mill & engine parts
- this is a high competiton space
- major clients are GE, Siemens & Armstrong
- together the foundry & machine division account for less than 10% of total sales; management doesn't foresee high growth in this biz at least for the next 2 years.
Investment Rationale:
- very impressive performance by the company in the past 5 years- from FY03 to FY 08. A few statistics are: (1) 5-yr CAGR revenue of 34% (2) 5-yr CAGR operating profit of 48 % (3) 5-yr CAGR Net Profit of 56% from Rs 26 crores in FY03 to Rs 242 crores in FY08 (4) Net profit excluding other income & extraordinary income/(loss) has increased at a CAGR of 34% in last 4 years.
- High dividend payout - company has paid out an average 30% of net profits in past 4 years. The latest annual dividend was Rs 45 which translates to a dividend yield of appx. 4.5%
- The company's profitability has been very good - Return on Assets of 13%, Return on Equity of 32% & Return on capital employed of 26% in FY08. This statement can be more simply explained by considering that out of every100 Rs of Shareholder's equity in the company, it has generated a Net profit of Rs 32. Average gross profit margins in last 6 years have been 28% & avg profit margins before tax- 11%
- Well, all the above rationales attributed to the past performance of the company; but one factor which makes it a good buy is the debt-free status & high cash surplus. I have tried to calculate the net cash & fixed deposits of the company as a %age of its current m-cap. The reason for this is a buy back scenario bcos the current market price has reduced by 75% from its peak of 4100. The public shareholding of this company is very high-75% & one relief taking into account the present market scenario is that FIIs dont have a significant stake in this co :) Now, just imagine - LMW has readily dispensible cash of Rs 570 crores !!!!!!!! This turns out to be a whooping 46% of its current market cap (This figure is a bit out dated, as on 30th March, 2008: but I dont have the latest info with me) . This, I think is a very important point- even if the company doesn't decide to buy back its shares, it still has a good opportunity in terms of strengthening its equity portfolio in today's scenario wherein valuations seem reasonable.
- backward P/E based on FY08 earnings comes out to be 5.1 , this seems very cheap compared with the fact that LMW has historically traded at P/Es much higher than this. i have not done a Discounted cash Flow valuation for this company; but even if we take a conservative 10% growth in EPS in FY09 compared to the past 4 yrs CAGR of 34% , we get a PEG ratio of 0.46 !!! This makes it a very valuable pick- PEG ratio below 1 justifies the P/E of a stock with the growth which the company is able to command in future.
- Now some insight on operational front- the company spent around 350 crores last year as raw material expenses on Steel, Copper, Aluminium , pig iron & metal scrap. This turns out to be appx. 16% of its revenues last yr. With the melt down in commodity prices in recent past by as much as 25 - 30% we can hope that the company posts better margins in coming quarters. Another factor is rupee depreciation- the textile industry has been suffering bcos of the rupee appreciation for quite some time bcos a major portion of their production is exported. The rupee depreciation comes in as a good news for the textile sector & good news for textile sector means good news for LMW.
- Out of the totaled installed capacity of 39mn spindles in india- LMW commands 24 mn!! This presents a very good opportunity in terms of replacement demand which is estimated to be 8mn next year & a consolidated 28mn over the next 6 years.
- The company enjoys significant tax & export subisidies which have helped increase its margins in the past & would help in maintaining those healthy margins going ahead.
Investment risks:
- Now that I have made you aware of most of the positive reasons for investing in this stock- there are some risks that you all must consider before you go ahead & buy. One of the major risks is the cyclical aspect of textile industry- its not in a very good shape right now; has grown by 4% in the past year. Although some third party estimates talk of a high growth of 110bn USD by 2012 from almost 60bn levels- I dont have any reason to believe that it would double in 4 years. Subdued growth or degrowth in textiles would mean lesser capex with would mean less biz for Lakshmi Machine works.
- A high cash position may mean lack of profitable biz. alternatives for the company - the company may not have been able to find profitable avenues to invest. Although their capex on machinery & buildings have been almost close to their surplus (= PAT + Depreciation - Dividends) in the past 3 years; they have parked 530 crores in bank fixed deposits. One counter argument is that it turns into some 36 crore interest income after tax for the company.
- while going thru the equity investments of the company which were close to 86 crores valued at cost; I tried to mark it to market according to the current share price of each equity held. It turned out to be a loss of 35 crores :( no big deal considering the recent market turmoil & major loss in JSW steel shares (appx 50%). Well, when I considered a hypothetical scenario taking 75% of each equity's 52-week high (which would have been the scenario some 8 months bk) the results calculation showed a profit of 2 crores. This isn't a very significant negative bcos the company earns dividneds on its equity holdings.
Conclusion:
No equity investment comes without risk- but I view this stock to be a value stock with all the positives I have listed here. May be it can go down further from present levels due to negative sentiments but that would not be for a long time. The average trading volumes are low ; reflecting that this counter has gone unnoticed ( or under noticed) after its drastic fall. When sentiments improve (yes, thats the key !!) this one is the stock price to look forward to.
Analysis methodology & notes:
- no detailed DCF valuation; I have compiled an excel with past 5 years financial statements
- growth & major profit margins in past 5 years
- Reuters consensus estimate for FY09 EPS is 224 & consensus target price of 1930
- ICICI Direct consensus estimate for Fy09 EPS is 274
- qualitative & info on operations & details of financial statements from Annual report & company website
- All calculations are done at a share price of Rs 1000 which was the level close to which the stock was trading on 16th Sept'08
Material Disclosure:
The author of this article owns shares of Lakshmi Machine Works & looks forward to increase his holding by month end ; when his salary gets credited into his account :-)
I am open to any suggestions/ comments by you guys & regret for any formatting/editting errors due to my laziness in cross reading this article & my lack of expertise with MS tools.
Happy Investing !!
Tanuj Goyal
