Jitendra Kumar Gupta Moneycontrol Research
The Swiss and the Germans are best known for their machinery and engineering products. And it was with this knowledge that Lakshmi Machine Works started its textile machine operations with a technical collaboration with a Swiss textile machine manufacturer and German steel major in 1962.
Even today, after almost 6 decades of existence, Lakshmi Machine Works remains a dominant player in the Indian textile machinery space, with a 70 percent market share. It has strong pricing power, with its operating margins constantly staying at 14-15 percent over the last five years.
An efficient business
Since the business requires very little capital, it has generously paid dividends and retained cash. To put it in perspective, over the last 9 years (starting FY10), the company has added Rs 1,538 crore to its annual revenue figure, with only a modest addition of around Rs 150 crore to its tangible assets.
Based on its FY18 balance sheet, Lakshmi Machine Works is sitting on cash and cash equivalent (including quoted investments) of close to Rs 1,287 crore, which is 74 percent of its equity capital. Adjusting for the cash, it is generating a return on equity of over 30 percent on its core business.
Will buyback create value?
While the company's business appears to be quite hygienic, what is worth noting is its recent announcement of a buyback, which not only shows the its confidence about its own future prospects, but is also the best use of the cash sitting on its books.
Since May this year, the stock has fallen by around 40 percent from Rs 9,383 to around Rs 5,667. It is currently trading at 28 times its FY19 annualised earnings.
The company has made an offer to buyback shares for an aggregate amount of Rs 160 crore at Rs 6,000 a share, as against a market price of Rs 5,667. This would provide the stock some stability and reduce the company's equity as the offer forms almost 9.2 percent of its net worth.
Reduction in equity at an attractive price would mean benefits for the shareholders who remain invested in the company. Firstly, they benefit because of the valuation re-rating. And secondly, the distributable profits and dividends per share would increase. But does the future hold anything worth staying invested for?
Capitalising on newer segments
Lakshmi Machine Works' textile business is a cash cow with strong entry barriers, generating a good amount of free cash flow. During the quarter ended September 2018, the textile machinery division reported a 27.45 percent growth in sales. With newer technologies and greater reach, this division keeps growing at a decent pace.
Moreover, the company is getting into other value added products. Its machine tools and foundry division, which finds applications in several industries such as automobiles, railways, textile, defence, earth moving equipment, electric machinery, etc., has seen a 38 percent increase in assets employed, and during the quarter gone by, this segment reported a year-on-year growth of 54 percent in revenue.
Similarly, its advanced technology systems, which cater to critical engines and structural parts and metal components required for the national and international aerospace OEMs, has seen close to a fourfold jump in assets employed in the last 12 months to Rs 35.96 crore as at the end of September.
During the quarter, this segment reported close to 100 percent jump in sales to Rs 8.24 crore. It has recently received award for the best performance from one of its key client Hindustan Aeronautics.
While these are small segments, the company has silently built capabilities over the years and is now scaling these businesses further with the hope of getting to a higher scale and greater contribution to overall profitability, which the current valuations may not be fully capturing.
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