Accumulate Lakshmi Machine Works – 3QFY2011 Result Update:: Angel Broking-

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 Lakshmi Machine Works  – 3QFY2011 Result Update

          Angel Broking upgrades Lakshmi Machine Works to Buy from Accumulate with a Target Price of Rs. 2,891.

For 3QFY2011, Lakshmi Machine Works (LMW) reported top-line growth of

49.7% yoy to `491cr (`328cr), which was 2.8% below our estimates of `505cr.

OPM fell by 141bp to 15.4% (16.8%), which was below our estimates of 16.5%.

On account of strong top-line growth , PAT grew by robust 50.2% yoy to `46cr

(`31cr). For FY2011 and FY2012, we have revised our top-line estimates

marginally downwards by 1.1% and 1.4% to `1,863cr and `2,453cr, respectively,

and PAT estimates by 1.5% and 2.9% to `156cr and `223cr, respectively. Owing

to the correction in the stock price, we upgrade the stock to Buy (Accumulate) with

a revised Target Price of `2,891/share.

Strong top-line growth reported amidst strong business environment: LMW

reported strong top-line and bottom-line growth, as demand from textile

manufacturers remained strong for this quarter as well. LMW’s current order book

stands at `4,100cr, with an order inflow of nearly `1,000cr during the quarter.

Outlook and valuation: We remain positive on the company’s prospects, given its

strong outstanding order book of `4,100cr and robust demand from the textile

industry, as reflected in the strong order inflows. The textile industry in general is

witnessing strong demand, with spinning mills operating at high utilisation levels.

The stock is currently trading at 16.9x and 11.8x its FY2011E and FY2012E EPS,

which we believe is attractive. Owing to the recent correction in the stock price,

we upgrade the stock to Buy with a revised Target Price of `2,891/share.

Management call – Key takeaways

􀂄 Order book rose to `4,100cr at the end of 3QFY2011, compared to `3,600cr

at the end of 2QFY2011.

􀂄 The total order inflow in 9MFY2011 was `2,300cr. For 3QFY2011, the figure

stood at ~`1,000cr.

􀂄 The company has increased the quoted delivery time to 12–14 months, up

from 10–12 months in the previous quarter, indicating strong demand growth.

􀂄 The open offer to buy back the shares of the company would open from

February 9, 2011, and close on February 24, 2011. The buy-back price is

`2,045/share.

􀂄 Chinese operations are progressing steadily. The company is facing strong

demand; however, it plans to expand its operations in a calibrated way.

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 manufacture the entire range of

spinning machinery. In India, the company has high market share of around 70%

in yarn spinning and preparatory machines. LMW has been able to sustain this

market share on the back of strong after-sales service coupled with providing the

world’s best technology to customers at the cheapest rates. The company has

service centres at all the textile hubs across the country, which gives it a strong

advantage over its European peers, who at the most have service centres in only

3–4 cities. LMW also enjoys an edge over competition as it caters to most of the

textile players (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, LMW’s products are at least 10% cheaper than its

European peers who have manufacturing base in India.

Strong order book to translate into robust sales growth: LMW has a strong order

book of `4,100cr. The upturn in the spinning industry has lent a boost to the

company’s order inflow. Yarn prices have increased at a 15.0% CAGR over the

last two years, and most listed yarn manufacturers surveyed by us are operating at

utilisation rates of around 95%. This indicates that there is low probability of order

deferments, and the company’s robust order book is expected to result in strong

growth.

Outlook and valuation

We remain positive on the outlook of the company, given the strong demand

situation in the user industry of textiles. The order book of the company has swelled

to `4,100cr. The company is currently quoting a delivery time of 12–14 months,

which further reinforces our positive view. On the back of this strong order book

position and sustained high demand, we expect sales to post a 47.3% CAGR over

FY2010–12E to `2,453cr. We expect PAT to report a 49.6% CAGR to `223cr over

the same period. Currently, the stock is trading at 16.9x and 11.8x its FY2011E

and FY2012E EPS, respectively. Owing to the recent correction in the stock price,

we upgrade the stock to Buy (Accumulate) with a revised Target Price of

`2,891/share