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
12 comments:
Good work! In addition to this, could you throw some light on the peer valuations (local/global)?
You're on the path of becoming a super analyst.
Cheers,
Viv.
Vivek
The company does nt have any comparable peers in domestic mkt. The ones which are listed have an insignificant mkt cap & mkt share compared with LMW. wud tried to do sm research on that front !! thnx for the advice
Great job!! its a good flow, and interesting way to preset the company
Regards
Pink Ocean
wow! Awesome feeling to read something like this. On top of it while scrawling down you find a familiar name -yes he is my senior.
Great Work Tanuj!
Seriously! looks a very professional research!
Keep going!
Cheers,
Anshul
to sups : thnx a ton!
to anshul : thnx!!still a lot of space for improvement; would try building a model for the next company
good work tanuj!!!!
I really feel its a nice report and a powerful presentation of your analysis.
hope to see some more works from your side and invest some money on your advice
bye
Anuj
dude...become my investment advisor...
Good stuff. Some points..
1. if i recall correctly from the article, materials is 16% of sales..are these bought in the spot market or some contract mechanism is in place?
2. what are the main cost items and what do ebitda margins look like?
3. considering ur thoughts that it has no comparable peers it wud be revealing to understand what the entry barriers to this industry are..also since its exporting most of what it makes it wud be appropriate to compare its ratios/margins with global peers..that would indicate whether it has an inherent cost advantage etc vis a vis its global comps..
4. textile is a stable but not very growth oriented industry..this being an ancillary sort.. prob a safe bet in these times..is there a plan to increase the foundry business or diversify? 5. whats the investment horizon for ur target price?
Thnx Rahul!!
I was waiting for sm good questions:
1. The company doesnt make a mention of any contract mechanism in its annual report; so I m nt very sure whether they hv any fwd contracts
2. The major cost items are- raw material(16%), components(42%) of which indigenous(31%) & import(11%),stores consumed(5%),power(1%) (its worth noting that the co has started producing its captive wind power with 30% of total power expenses),repair & maintenance(3%), employee cost(7%) & admin & selling expense(7%). the EBITDA margin comes out to be 22% after including othr income & 19.5%excluding it. 5-yr avg ebitda marin is 17%
3. export income is close to 6% of net revenues. Almost 120 cos in India manufacture textile m/c - of them besides LMW, Trumac(part of Trutzschler group, Germany), Kirloskar-toyota m/c & imports of m/c from Germany, italy & other countries. The space is getting competitve for LMW bcos of reduction in m/c import duty & technological supremacy of foreign manufacturers.But LMW's competitive prices(15-20% lower) have helped it score against competition.
4. The extension of Technology upgradation fund scheme(TUF) by 5 yrs till 2012 is a major booster for textile m/c manufacturers bcos it gives subsidy on capex plans of textile cos. According to conference call transcripts- managemnt expects a 15-20% growth in other divisions but that too seems "Doubtful" bcos of hi competition frm imports(in M/c sector). but going fwd, the company plans to increase share frm these divisions(plan to tie up with an institute for bettr design of cnc machines)
5. I must admit tht I have nt arrived at a tgt price. But considering tht the stock has historically traded in p/e band of 12-15x, even by the most conservative estimates of 8x & eps of 200(compared with 196 last yr); we get a TP of 1600.
Plz go ahead with any other clarifications/queries u hv
Regards
Tanuj
Hey Tanuj..some compliments from a novice investor ..fine analysis...
Very good analysis on LMW. I would like to contact you in private but can't find any contact info. I would really appreciate if you could provide one.
Regards,
striker
hey..why not get some credit cards on hand ... and spend thru them and save all the liquidity.. and then settle with the banks later..lot of ppl i know are resorting to this kind of tactic. don't you think atleast that way a salaried employee can save a lot more :)Inorder to settle previous loans, a salaried employee will waste so much effort and the money which he has no way of earning since the job is lost. The system created and kept alive by the supposedly ignited minds for the world is flawed as is evident. The market seems to be pretty volatile and you know that it will take a magician to change the perception and hence put the confidence back in the market.The system forces you to live on credit.There are so many important things that don't happen without credit. How is a decent ,hardworking and diligent citizen to escape this illusion and live completely independent of it. How is he to understand this sudden change in weather. For the authorities to blame the system is similar to making an excuse for being destructive without any reason. Your advice regarding savings has litlle depth.It is like saving to prolong your sufferings further.There is no way a man can live in today's world without credit.There is turmoil all over. The best is to follow lal bahdur shastri's advice and start fasting 3 days a week.This way you save money ,save food and keep inflated desires under control.The whole system of credit stinks.It is just a way to gain control over people by powerful institutions.It is just like allowing a man to make mistake to be taken advantage of. There is need for a reform ,a revolt and we should not simply be content even if the market bounces back to normalcy.The time has come where farsightedness needs to depended upon.Simple algorithm for savings will not alleviate the sufferings.Savings work only if there is hope in the future,there is faith in the system,there is guidance from the the people in the higher echelons.If you could throw some light on the system as a whole and pinpoint the gaps, and make attempts to understand what ,where ,how ,why and when of the system and its positive and negative effects by way of enlightening the blog readers,I think you would have made the difference then.In sum this recession has caused more mental and physical disorders than any mass pro-longed use of banned potent illegal drug. Lot of thoughts written above are only imaginary and not necessarily unreal since the governments all over the world are trying their best to control damage by way of controlling media.Probably a diseased and dying system can be kept alive like a dying man on ventillator for no good.I have been badly affected by this wreckage.I hated the credit system right from the beginning but had to given into it just like any other man who wanted to make a comfortable living in this world.This might not sound rational but there is a need to see things from a different perspective.Since your analysis of the subject seemed quite poignant and powerful,I thot of letting the other side of the human mind to be thrown in here for a broader perspective.The factors associated with economics may not be the only factors for economic success.GDP should be replaced with Gross happiness product!!!!
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