Lakshmi Machine: Spinning a success stroy, says Nirmal Bang

Lakshmi Machine Works Ltd (LMW) is the third largest textile machinery manufacturer in the world. It produces an entire range of spinning machinery and holds around 70% of the market share in the domestic textile spinning machinery industry. This has been possible mainly because of its strong after sales service and economical product portfolio.

LMW has also diversified into the manufacture of CNC machine tools, heavy castings and parts and components for the aerospace industry.

High volatility in cotton prices last year, combined with high inflation, high interest rates, power shortage in southern India and global economic stress took a toll on the textile industry, including the performance of the textile machinery manufacturing unit of LMW.

However, the situation has revived in the past few months and the second half of FY13 is expected to be better, aided by the extension of the Technology Upgradation Fund Scheme (TUFS) by the Government of India for the textile industry in the country.

LMW has two wholly-owned subsidiaries - LMW Textile Machinery (Suzhou) in China and LMW Machinery Ltd (Coimbatore). LMW's textile machinery division's plants are all located at Coimbatore. It also has its foundry division's machine shop and advance technology centre at Coimbatore. Apart from this, its windmill is located at Tirupur in Tamil Nadu.

Investment Rationale

Expert in textile machinery and enjoys competitive pricing

LMW is a leader in the domestic textile machinery market, commanding a market share of around 70%. Further, LMW would be able to cash in on any growth in the domestic textile industry owing to its widespread network of customers comprising 1,300 out of the total 1,600 spinners in the country.

LMW is priced around 10% cheaper than its closest competitor. LMW's foreign competitors include players like Rieter, a global leader in textile machinery and Chinese players like Pacific Mechatronic Group and China Textile Machinery Group, among others.

Also, LMW goes beyond providing machinery for the textile industry. Its comprehensive range of spinning systems is accompanied by various value-added services. These services are meant to familiarize customers with the systems and help them attain optimum performance outputs. While adhering to its mission of continuous after sales support to customers, LMW has formulated a dynamic technical support centre to handle technical queries of customers.

Strong Balance Sheet

LMW has a debt-free balance sheet and holds approximately Rs 680 crore cash in its books. Out of this, Rs 400 crore is advances from its customers. With a minimum capex lined up in the medium term, we expect the cash balance in the balance sheet to improve going forward with improving profitability. We feel a strong balance sheet will help it to command a premium in the improved business scenario.

Other highlights of the company

The company has a land bank of 25 acres in two plots in Coimbatore. It plans to develop these two properties into a residential space.

It has already obtained an approval from the government to build 236 flats (both 2 BHK and 3 BHK) in 5 acres of land. It is now looking for a builder to develop this property. The company management expects cash flows from this property in FY14.

The company added 8.85 MW of wind power in FY12, totaling its wind mill capacity to 36.85 MW, which can satisfy 75% of the power requirement of the company.

In a Nutshell

LMW's spectacular growth in financials during FY11 and FY12 came to a halt from Q1FY13 on the back of sluggish growth in the textile industry, resulting in a flattish order book position. With interest rates and inflation cycles expected to take a reversal and extension of TUFS in the 12th Five-Year Plan, the textile industry is headed for better times, going forward. The order book position of LMW has shown signs of a revival in the latest Q2FY13 quarter and the management hopes that H2FY13 will be better that the first half.

Distinctive leadership position with nearly 70% market share in the textile machinery industry, a strong balance sheet, consistent dividend-paying record and customer-centric approach are all LMW's strengths. These fundamentals in an improving business environment puts the company in a sweet spot.

At the current market price (CMP) of Rs 2,242, the stock is trading at 17.9x and 14.6 x its FY13E and FY14E expected earnings (based on Bloomberg consensus estimates) looks quite attractive.

Source: Nirmal Bang's Beyond Market

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