Lakshmi Machine Works Results beat estimate, growth priced in :: Emkay

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Lakshmi Machine Works

Results beat estimate, growth priced in

HOLD

CMP: Rs2766                                        Target Price: Rs2660

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n     Q2FY11 PAT of Rs459mn ahead of estimates led by better than expected revenue growth and higher other income

n     Strong demand for yarn continues to attract capex resulting in LMW’s order book rising to Rs36bn

n     Upgrade EPS estimates by 6% /12% to Rs122 /Rs142 for FY11E /12E respectively

n     Valuations at 22.4x /19.2x EPS of Rs123.5 /143.9 for FY11/12E fully factor growth. Retain HOLD rating with target Rs2660

Q2FY11 results beat estimates on better revenue show

LMW reported Q2FY11 profits of Rs459mn, ahead of our estimate of Rs351mn led by

better than expected revenue show. Net sales grew by 59.2% YoY to Rs4.43bn (v/s our

estimate of Rs3.9bn) led by strong order in-flows and improved capacity utilization.

EBIDTA grew by 38.6% YoY to Rs777mn, (v/s our estimate of Rs662mn), while EBIDTA

margins fell by 260 bps yoy to 16.1% due to in-put cost increases. We highlight that

despite in-put cost pressures and continued strong order in-flows, LMW has not taken

any price increases which has impacted the margins.

Demand strong, order book rises to Rs36bn

Strong global demand for yarn continues to result in increasing capacities across the

textile spinning industry. LMW’s order book continued to rise with order book increasing

to Rs36bn at the end Q2FY11 from Rs32bn at end Q1FY11. This rise in order book is

despite the higher delivery time being quoted by the company at ~12 months. Strong

demand for yarn and stronger order booking for LMW provides adequate revenue

visibility for the next 12-18months.

Upgrade EPS by 6%/12% to Rs123.5/143.9 for FY11/12E

Considering strong order in-flows and improved capacity utilizations, we increase our

revenue estimates by 8.9% /11.8% for FY11E/ 12E. We highlight that LMW is operating

on 2 shifts v/s capacity of 3 shifts due to labor shortage, and does not intend to operate

the 3rd shift, which caps its quarterly revenue run-rate to Rs4.5-5bn. We increase our

EPS estimates by 6% /12% to Rs123.5 /143.9 for FY11E/ 12E. We have factored for

120-140bps EBIDTA margin contraction due to in-put cost pressures and no price hikes.

FY11 cash of Rs687 per share

LMW at the end of FY10 had cash reserves of Rs7.3bn (Rs592/ share) which we

estimate would increase to Rs8.5bn (Rs687/ share). Apart from the cash, LMW also has

equity investments with market value of Rs921mn (Rs75/ share). While LMW has

announced a buy-back of equity shares upto Rs2,045/ share from its cash reserves, the

stock price has run-up much higher to CMP Rs2,766.

Retain HOLD rating with revised target price of Rs2,660

Post upgrade in EPS by 6%/12% for FY11E/12E we also increase our target price on

the stock to Rs2,660, based on 18x FY12E core EPS of Rs110 and FY11E cash of

Rs687 per share. While the demand outlook has become very strong and so have order

in-flows, we highlight that capacity constraints remain, which would limit revenue growth

for the company. At CMP of 2766, LMW trades at 19.2x FY12E EPS of Rs143.9 and

17.5x core EPS of Rs110 (net of cash balance of Rs687/share). Retain HOLD rating.