Lakshmi Machine Works- Margin pressures on increased competition: Emkay

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Lakshmi Machine Works

Margin pressures on increased competition

ACCUMULATE

CMP: Rs 2,138                                       Target Price: Rs 2,660

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n     Q3FY11 PAT of Rs458mn in line with our estimates led by better than expected rev. growth and higher other income

n     EBITDA margin down 346bps yoy to 15.4% due to significant increase in raw material price

n     Strong demand for yarn continues to attract capex resulting in LMW’s order book rising to Rs41bn from Rs36bn in Q2FY11

n     Post recent price correction -upgrade rating to ACCUMULATE from HOLD. Valuations at 15.4x /13.7x EPS of Rs139.2 /156.2 for FY11/12E

Q2FY11 results – Revenues up with dented margins

Revenues at Rs4909mn grew by 46% yoy, ahead of our estimates (Rs4524mn).

Revenue growth was led by strong order inflow and higher capacity utilization (83% with

selective third shift operations). EBIDTA grew by 19.3% YoY to Rs756mn (slightly below

our estimate of Rs789mn), however EBIDTA margins fell by 346 bps yoy to 15.4% due

to rise in raw material cost. PAT at Rs458mn is below our expectation of Rs473mn

despite higher other income. The margin pressure was mainly due to raw material cost

pressure and absence of price hikes considering increased competition.

Demand strong, order book rises to Rs41bn

Strong demand for yarn in the domestic market has resulted in capacities expansion

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

increasing to Rs41bn at the end Q3FY11 from Rs36bn at end Q2FY11. Strong demand

for yarn and stronger order booking for LMW provides adequate revenue visibility for the

next 18-24months.

Competition and no price hike to keep EBITDA margin under pressure

EBITDA margin declined 346bps due to 63% yoy and 42% yoy rise in raw material and

other expenditure, respectively. The rise in raw material prices (steel and pig iron) is

likely to continue to put pressure on margins over the next couple of quarters as the

management is unsure of price hike considering rise in competition from foreign players.

Upgrade EPS by 12.7%/8.6% to Rs139.2/156.2 for FY11/12E

Considering the strong order inflows and higher capacity utilization at 83% and

operating with selective 3rd shift, we have revised our revenue estimates upward by 11%

/10% for FY11E/ 12E. We increase our EPS estimates by 13% / 9% to Rs139.2 /156.2

for FY11E/ 12E. We have factored for 100-170bps EBIDTA margin contraction due to

in-put cost pressures in absence of any price hikes.

Upgrade to ACCUMALATE with target price of Rs2,660

Post upgrade in EPS by 12.7%/8.6% for FY11E/12E and considering the stock price

correction, we upgrade our rating on the stock from HOLD to ACCUMULATE with price

target of Rs 2,660, based on 16x FY12E core EPS of Rs114.4 and net cash of Rs836

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

we highlight that margin pressures are likely to stay for some time. At CMP of

2138, LMW trades at 13.7x FY12E EPS of Rs156.2 and 18.7x core EPS of Rs114 (net

of cash balance of Rs836/share).