3QFY2012 Result Update | Capital Goods

January 31, 2012

Lakshmi Machine Works

Performance highlights
Y/E March (` cr) Net sales EBITDA OPM (%) PAT
Source: Company, Angel Research

BUY
CMP Target Price
% chg (yoy) 9.6 (9.1) (263)bp (13.5)

`1,594 `2,214
12 Months

3QFY2012 2QFY2012 % chg (qoq) 3QFY2011 538 69 12.8 40 581 89 15.3 49 (7.4) (22.6) (251)bp (19.5) 491 76 15.4 46

Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code

Capital Goods 1,797 0.6 2565 / 1426 2,769 10 17,194 5,199 LKMC.BO LMW@IN

Lakshmi Machine Works (LMW) posted top-line growth of 9.6% yoy to `538cr (`491cr) during 3QFY2012. However, OPM fell by 263bp yoy to 12.8%, lower than our estimates, mainly due to higher raw-material cost and other expenditure. PAT declined by 13.5% yoy to `40cr. We maintain our Buy rating on the stock. Mediocre top-line growth with order book at `4,500cr: LMW registered mediocre top-line growth of 9.6% yoy to `538cr. The textile machinery division posted sales growth of 11.0% yoy to `471cr (`425cr). The others division also reported growth during the quarter, up 3.1% to `72cr. OPM contracted by 263bp to 12.8% due to higher raw-material cost. PAT came in at `40cr, down 13.5% yoy. PAT margin contracted by only 197bp yoy. The company recorded a decline in its high order inflow during the quarter, reflecting the current weak demand scenario from textile machinery manufacturers. The companys order backlog now stands at `4,500cr, while total order inflow during 3QFY2012 stands at ~`150cr. Outlook and valuation: We remain positive on LMWs outlook, given a strong order book of `4,500cr. Although yarn prices have shown signs of correction in the recent past, overall demand, as reflected in the order inflow, is still robust. We have revised our estimates downwards, taking into consideration the weak sentiments in the textile industry. At the CMP, the stock is trading at 11.4x and 8.6x its FY2012E and FY2013E EPS, respectively, which we believe is attractive. We continue to maintain our Buy rating on the stock with a revised target price of `2,214 (`2,780 earlier).

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 28.3 39.7 6.8 25.2

Abs.(%) Sensex LMW

3m (2.9)

1yr (6.2)

3yr 89.6 217

(17.4) (26.3)

Key financials (Consolidated)

Y/E March (` cr) Net sales % chg Net profit % chg EBITDA margin (%) FDEPS (`) P/E (x) P/BV (x) RoE (%) RoACE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

FY2010 1,131 (15.5) 100 (6.6) 14.2 80.7 19.7 2.1 11.3 7.0 1.1 7.7

FY2011 1,794 58.7 153 53.6 12.4 136.2 11.7 2.2 17.7 13.2 0.6 4.7

FY2012E 2,230 24.3 157 2.4 12.6 139.4 11.4 2.0 18.2 19.1 0.4 3.1

FY2013E 2,663 19.4 208 32.4 12.8 184.5 8.6 1.7 21.1 21.9 0.2 1.9

Sharan Lillaney
022-3935 7800 Ext: 6811 [email protected]

Please refer to important disclosures at the end of this report

Lakshmi Machine Works | 3QFY2012 Result Update

Exhibit 1: 3QFY2012 performance

Y/E March (` cr) Net Sales Consumption of RM (% of Sales) Staff Costs (% of Sales) Other Expenses (% of Sales) Total Expenditure Operating Profit OPM Interest Depreciation Other Income PBT (excl. Extr. Items) Extr. Income/(Expense) PBT (incl. Extr. Items) (% of Sales) Provision for Taxation (% of PBT) Reported PAT PATM Equity shares (cr) EPS (`) Adjusted PAT 3QFY2012 2QFY2012 538.3 339.2 63.0 41.4 7.7 89.0 16.5 469.5 68.7 12.8 30.0 19.9 58.7 58.7 10.9 19.0 32.4 39.7 7.4 1.1 35.2 39.7 581.4 347.6 59.8 48.7 8.4 96.2 16.5 492.5 88.9 15.3 28.0 11.4 72.2 72.2 12.4 23.0 31.8 49.2 8.5 1.1 43.7 49.2 (19.5) (19.5) (19.5) (110)bp (17.4) (18.8) 7.0 74.4 (18.8) (4.7) (22.6) (251)bp (7.5) (15.1) % chg (qoq) 3QFY2011 (7.4) (2.4) 490.9 285.7 58.2 39.5 8.1 90.1 18.3 415.3 75.6 15.4 26.3 17.5 66.8 66.8 13.6 21.0 31.4 45.8 9.3 1.2 37.1 45.8 (5.0) (13.5) (13.5) (197)bp (9.5) (12.2) 13.8 13.3 (12.2) 13.1 (9.1) (263)bp (1.2) 4.7 % chg (yoy) 9.6 18.7

Source: Company, Angel Research

Segment-wise performance
The textile machinery division posted sales growth of 11.0% yoy to `471cr during 3QFY2012. However, EBIT margin of the division declined by 320bp yoy to 7.5%. Sales were driven by volumes as well as price hike, which was carried out in June. The others division posted growth of 3.1% yoy to `72cr during the quarter. EBIT margin of the division declined by 153bp yoy to 7.6%.

January 31, 2012

Lakshmi Machine Works | 3QFY2012 Result Update

Exhibit 2: Segment-wise performance

Y/E March (` cr) Total Revenue A) Textile Machinery B) Others Total Less: Inter-Segmental Rev. Net Sales EBIT Margin (%) A) Textile Machinery B) Others
Source: Company, Angel Research

3QFY2012 2QFY2012 3QFY2011 % chg (qoq) % chg (yoy) 471 72 543 5 538 7.5 7.6 495 88 583 2 581 11.1 9.4 425 70 494 3 491 10.7 9.1 (4.8) (18.8) (6.9) 139.6 (7.4) (363) (179) 11.0 3.1 9.9 39.7 9.7 (320) (153)

Sales growth momentum remains strong

LMW has consistently posted strong sales growth over the past eight quarters, after emerging from the lows of the global economic crisis. This trend was maintained in 3QFY2012 as well, with the company posting 9.6% yoy growth in its sales. Going ahead, we expect sales to remain high, although the rate of growth is expected to remain at current level.

Exhibit 3: Sales trend

600 580 560 540
(` cr)

581

60 50

539 511 491

538

40
(%)

520 500 480 460

3QFY11 4QFY11

30 20 10

1QFY12

2QFY12

Sales (LHS)
Source: Company, Angel Research

yoy Growth (RHS)

OPM declines yoy

LMW reported a dip in its OPM during 3QFY2012 to 12.8%, as compared to 15.4% in 3QFY2011. During the quarter, the company witnessed margin pressure despite hiking its product prices in June, as the rise in commodities prices was more than the price hike taken by the company. We do not expect any further price hikes by the company and expect margins to remain similar to 3QFY2012 levels going ahead.

January 31, 2012

3QFY12

440

Lakshmi Machine Works | 3QFY2012 Result Update

Exhibit 4: OPM trend

100 90 80 70 60 50 40 30 20 10 0 15.4 12.8 13.9 15.3 12.8 18 16 14 12 8 6 4 2 0 10

(` cr)

3QFY11

4QFY11

1QFY12

2QFY12

EBITDA (LHS)
Source: Company, Angel Research

OPM (RHS)

PAT declines by 13.5% yoy

PAT during the quarter declined by 13.5% yoy to `40cr, on back of margin compression during the quarter. PAT margin declined by 197bp yoy to 7.4%.

Exhibit 5: PAT trend

60 50 40 46 49 44 41 40

(` cr)

30 20 10

3QFY11

4QFY11

1QFY12

2QFY12

Source: Company, Angel Research

January 31, 2012

3QFY12

3QFY12

(%)

Lakshmi Machine Works | 3QFY2012 Result Update

Investment arguments
Ability to defend market share: LMW is one of the largest players in the world and one of the only three players globally that manufactures the entire range of spinning machinery. In India, the company has a high market share of around 70% in yarn spinning and preparatory machines. The company has been able to sustain this market share on the back of strong after-sales service coupled with providing the worlds best technology to customers at the cheapest rates. LMW has service centers at all textile hubs across the country, which gives it a strong advantage over its European peers, who at the most have service centers in only 34 cities. LMW also enjoys an edge over competition as it caters to 1,300 domestic textile players, out of the total universe of around 1,600. The company has been innovating on technology for the past 15 years. In terms of prices, LMWs products are at least 10% cheaper than its European peers, who have a manufacturing base in India. Strong order book to translate into robust sales growth: LMW has a strong order book of `4,500cr. The upturn in the spinning industry has lent a boost to LMWs order inflow. This indicates that there is a low probability of order deferments and the companys robust order book is expected to result in strong growth.

Outlook and valuation

We remain positive on LMWs outlook, given its strong order book of `4,500cr. The companys order inflow has remained firm, with the total order inflow for FY2011 coming in at ~`3,000cr. Although yarn prices have shown signs of correction in the recent past, overall demand, as reflected in the order inflow, is still robust. The announcement on the TUFS scheme is another positive for the textile industry, which would further benefit LMW. We have revised our estimates downwards, taking into consideration weak sentiments in the textile industry. At the CMP, the stock is trading at 11.4x and 8.6x its FY2012E and FY2013E EPS, respectively, which we believe is attractive. At the end of 1HFY2012, LMW had net cash worth `642cr and investments worth `154cr. The combined value of cash and investment works out to `707/share. We continue to maintain our Buy recommendation on the stock with a revised target price of `2,214 (`2,780 earlier).

January 31, 2012

Lakshmi Machine Works | 3QFY2012 Result Update

Exhibit 6: One-year forward P/E band

4,500 4,000 3,500

Share Price (`)

3,000 2,500 2,000 1,500 1,000 500 0

Oct-07

Oct-08

Oct-09

Oct-10

Oct-11

Jan-08

Jan-09

Jan-10

Jan-11

Apr-07

Apr-08

Apr-09

Apr-10

Apr-11

Price

8x

10x

13x

16x

20x

Source: Company, Bloomberg, Angel Research

January 31, 2012

Jan-12

Jul-07

Jul-08

Jul-09

Jul-10

Jul-11

Lakshmi Machine Works | 3QFY2012 Result Update

Profit and loss statement (consolidated)

Y/E March (` cr) Gross sales Less: Excise duty Net Sales Other operating income Total operating income % chg Total Expenditure Net Raw Materials Other Mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation& Amortisation EBIT % chg (% of Net Sales) Interest & other Charges Other Income (% of PBT) Share in profit of Associates Recurring PBT % chg Extraordinary Expense/(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) Add: Share of earnings of associate Less: Minority interest (MI) Prior period items PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (Rs) Fully Diluted EPS (Rs) % chg FY10 1,224 94 1,131 1,131 (15.5) 970 657 112 118 83 161 (13.1) 14.2 96 65 (4.3) 5.7 1 82 56.3 146 (5.5) 146 46 31.5 100 3 100 97 (9.3) 8.6 80.7 80.7 (6.6) FY11 1,948 154 1,794 1,794 58.7 1,571 1,084 171 176 140 223 38.7 12.4 105 118 82.6 6.6 109 47.9 227 55.5 227 73 32.3 153 153 153 58.3 8.6 136.2 136.2 68.7 FY12E 2,420 190 2,230 2,230 24.3 1,948 1,359 213 205 171 282 26.3 12.6 112 170 43.9 7.6 4 71 30.0 236 4.3 236 79 33.6 157 157 157 2.4 7.0 139.4 139.4 2.4 FY13E 2,888 225 2,663 2,663 19.4 2,322 1,620 255 244 203 341 20.9 12.8 120 221 30.1 8.3 5 94 30.4 310 31.2 310 102 33.0 208 208 208 32.4 7.8 184.5 184.5 32.4

January 31, 2012

Lakshmi Machine Works | 3QFY2012 Result Update

Balance sheet (consolidated)

Y/E March (` cr) SOURCES OF FUNDS Equity Share Capital Preference Capital Reserves& Surplus Shareholders Funds Minority Interest Total Loans Deferred Tax Liability (Net) Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Current Assets Cash Loans & Advances Inventories Debtors Other Current liabilities Net Current Assets Mis. Exp. not written off Total Assets 1,371 922 449 3 104 1,037 732 104 119 58 24 640 397 954 1,465 1,025 442 77 1,330 756 163 291 84 35 1,012 318 836 1,565 1,136 428 8 77 1,535 914 267 239 72 44 1,108 427 940 1,670 1,254 416 10 77 1,894 1,135 318 288 101 52 1,315 579 1,082 33 954 28 836 28 940 28 1,082 12 908 920 11 798 809 11 902 913 11 1,043 1,055 FY10 FY11 FY12E FY13E

January 31, 2012

Lakshmi Machine Works | 3QFY2012 Result Update

Cash flow statement (consolidated)

Y/E March (` cr) Profit before tax Depreciation (Inc.)/ Dec. in Working Capital Less: Other income Direct taxes paid Cash Flow from Operations (Inc.)/ Dec. in Fixed Assets (Inc.)/ Dec. in Investments (Inc.)/ Dec. in loans and advances Other income Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY10 146 96 (173) 82 46 (59) (19) (0) 138 82 201 22 (15) (37) 105 627 732 FY11 227 105 163 109 73 313 (91) 27 (59) 109 (14) 40 (235) (275) 24 732 756 FY12E 236 112 152 71 79 350 (108) (103) 71 (141) 53 1 (51) 158 756 914 FY13E 310 120 120 94 102 353 (107) (51) 94 (64) 66 (2) (68) 221 914 1,135

January 31, 2012

Lakshmi Machine Works | 3QFY2012 Result Update

Key ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/E (on basic, reported EPS) P/CEPS P/BV Dividend yield (%) Market cap. / Sales EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value ROE Decomposition (%) EBIT margin Tax retention ratio Asset turnover (x) ROCE (Post Tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC ROE Turnover ratios (x) Asset Turnover (Gross Block) Asset Turnover (Net Block) Operating Income / Invested Capital Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Gross debt to equity Net debt to equity Net debt to EBITDA Interest Coverage (EBIT / Interest) 0.8 2.3 2.0 32 18 225 (6) 1.3 4.0 3.6 42 14 184 (7) 1.5 5.1 4.4 43 13 189 (2) 1.6 6.3 4.7 36 12 181 8 7.0 7.8 11.3 13.2 16.0 17.7 19.1 22.5 18.2 21.9 26.7 21.1 5.7 68.5 2.0 7.7 7.7 6.6 67.7 3.6 15.9 15.9 7.6 66.4 4.4 22.3 22.3 8.3 67.0 4.7 26.2 26.2 80.7 80.7 158.5 15.0 744.2 136.2 136.2 229.4 30.0 717.9 139.4 139.4 238.7 40.0 810.2 184.5 184.5 290.7 50.0 936.2 19.7 19.7 10.1 2.1 0.9 1.7 1.1 7.7 1.3 11.7 11.7 6.9 2.2 1.9 1.0 0.6 4.7 1.2 11.4 11.4 6.7 2.0 2.5 0.8 0.4 3.1 0.9 8.6 8.6 5.5 1.7 3.1 0.7 0.2 1.9 0.6 FY10 FY11 FY12E FY13E

January 31, 2012

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Lakshmi Machine Works | 3QFY2012 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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Disclosure of Interest Statement Lakshmi Machine Works 1. Analyst ownership of the stock No 2. Angel and its Group companies ownership of the stock No 3. Angel and its Group companies' Directors ownership of the stock No 4. Broking relationship with company covered No Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

January 31, 2012

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