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Lakshmi Mach. Works: Margin blues - Views on News from Equitymaster
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Lakshmi Mach. Works: Margin blues
Jan 25, 2012

Lakshmi Machine Works has announced its December quarter results. The company has reported a 10% growth in topline and 14% YoY drop in net profits for the quarter ended December 2011. Here is our analysis of the results.

Performance summary
  • Topline grows by 10% YoY during the quarter.
  • Rise in raw materials expenditure leads to 2.6% contraction in operating margins and 9% fall in operating profits
  • Bottomline witnesses a drop of 14% YoY, mainly on account of poor operating performance
  • Bottomline for the nine month period grows by 7% YoY on the back of a 28% growth in topline

(Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Net sales 4,909 5,383 9.7% 12,794 16,308 27.5%
Expenditure 4,153 4,695 13.1% 10,704 14,023 31.0%
Operating profit (EBDITA) 756 687 -9.1% 2,091 2,285 9.3%
EBDITA margin (%) 15.4% 12.8%   16.3% 14.0%  
Other income 175 199 13.3% 464 458 -1.3%
Interest (net) - -   - -  
Depreciation 263 300 13.8% 757 828 9.3%
Profit before tax 668 587 -12.2% 1,798 1,915 6.5%
Extraordinary items - -   - -  
Tax 210 190 -9.5% 580 615 6.0%
Profit after tax/(loss) 458 397 -13.5% 1,218 1,300 6.8%
Net profit margin (%) 9.3% 7.4%   9.5% 8.0%  
No. of shares (m) 11.3 11.3   11.3 11.3  
Diluted earnings per share (Rs)*         154.6  
Price to earnings ratio (x)*         10.3  
(* on trailing twelve months earnings)

What has driven performance in 3QFY12?
  • The near 10% growth in company's topline during the quarter was driven by a slightly higher growth rate of 11% in its major segment of textile machinery. The topline on a QoQ basis however has come in lower by some 7%. The management has opined that the existing orders are active and the company has been supplying for orders booked during FY11. The order inflow however has witnessed a slowdown in recent months. As far as China is concerned, the order inflow has been good there and the company plans to add more products in the days to come.
    Cost break-up...
    (Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
    Raw materials 2,857 3,392 18.7% 7,338 9,944 35.5%
    % sales 58.2% 63.0%   57.4% 61.0%  
    Staff cost 395 414 4.7% 1,145 1,343 17.3%
    % sales 8.1% 7.7%   8.9% 8.2%  
    Other expenditure 901 890 -1.2% 2,221 2,736 23.2%
    % sales 18.3% 16.5%   17.4% 16.8%  

  • On the margins front, they suffered a significant contraction to the tune of 2.6% YoY. This was on account of higher raw material costs. The company was however to minimise the damage due to a strict control on both staff costs as well as other expenses.

  • Growth in depreciation charges as well as slightly higher tax rates further impacted profits and led to a 14% fall in the same on a YoY basis for the quarter. The current plant utilisation level is believed to be in the range of 80% currently.

What to expect?
At the current price of Rs 1,596, the stock trades at around 8 times its expected FY14 earnings per share. While the company has struggled in the latest quarter, we believe the reasons are more cyclical than structural in nature and hence do not affect the long term story of the company. We remain positive on the stock.

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