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LMW: A comeback of sorts - Views on News from Equitymaster

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LMW: A comeback of sorts

Feb 17, 2010

Performance summary
  • Sales grow 30% YoY in 3QFY10, fall 32% YoY in 9mFY10 – machine tools and foundry sales grow by 34% YoY during the quarter. A large part of the growth during the quarter can be attributed to the very low base because of an extremely weak performance in 3QFY09.
  • Operating margins expand by 7.3% during the quarter, owing to a decrease in raw material expenses as also a decrease in other expenditure (as percentage of sales).
  • Net profits grow by 129% YoY during 3QFY10. Profit performance helped by the significant expansion in operating margins and lower depreciation charges.

Financial performance snapshot
(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Sales 2,563 3,279 27.9% 11,572 7,830 -32.3%
Expenditure 2,319 2,728 17.6% 9,736 6,664 -31.6%
Operating profit (EBDITA) 244 551 125.9% 1,836 1,166 -36.5%
Operating profit margin (%) 9.5% 16.8%   15.9% 14.9%  
Other income 304 183 -39.7% 675 626 -7.3%
Depreciation 343 280 -18.5% 993 682 -31.3%
Profit before tax 205 455 121.9% 1,519 1,110 -26.9%
Tax 72 150   530 370 -30.1%
Profit after tax/(loss) 133 305 129.4% 989 740 -25.2%
Net profit margin (%) 5.2% 9.3%   8.5% 9.5%  
No. of shares       12.4 12.4  
Diluted earnings per share (Rs)         140.1  
P/E ratio (x)*         13.3  
* on a trailing 12 months basis

What has driven performance in 3QFY10?
  • The 28% YoY growth in LMW’s 3QFY10 net sales was largely a result of a robust 34% YoY growth in its machine tools and foundry division’s sales. Its primary division of textile machinery too saw a healthy growth of 25% during the quarter. This segment contributed 86% to the company’s total sales during in this period.

    Segment-wise performance
    (Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
    Textile machinery            
    Revenue 2,331 2,910 24.8% 10,645 6,901 -35.2%
    % share 87.0% 86.2%   89.2% 85.2%  
    PBIT margin 2.8% 11.1%   11.3% 10.3%  
    Machine tools & Foundry            
    Revenue 348 465.23 33.8% 1,287 1,199 -6.8%
    % share 13.0% 13.8%   10.8% 14.8%  
    PBIT margin 4.5% 12.1%   5.4% 7.1%  
    Revenue* 2,678 3,375 26.0% 11,933 8,100 -32.1%
    PBIT margin 3.0% 11.3%   10.7% 9.8%  
    * Excluding inter-segment adjustments

  • LMW recorded a 7.3% expansion in operating margins during 3QFY10. This was mainly due to a 3.9% fall in raw material costs as a percentage of sales during 3QFY10 as compared to 3QFY09, and a similar 3.9% fall in other expenditure during the same period.

  • The company’s net profits shot up by 130% YoY during 3QFY10. This great performance at the bottomline level was a result of the above mentioned expansion in operating margins as also a fall in depreciation charges both as a percentage of sales and in absolute terms.

What to expect?
At the current price of Rs 1,860, the stock is trading at a multiple of 16.5 times our estimated FY12 earnings. After the highly uncertain environment that the company had been seeing since FY09, it has finally begun to see some positives once again. In a discussion we had with the company’s management, it expressed how things are back on track in both its business segments, and how it expects to see further improvement from here on.

Customers from the textile industry are back with expansion plans and are now looking to expand capacities. Thus, the offtake for the textile machinery business has improved once again. Infact, even new customers have started coming in once again. The management sees this trend as sustainable going forward.

As far as its other ‘machine tools and foundry’ business segment is concerned, it too is finding itself in a sound situation currently, mainly on the back of auto boom that India is witnessing currently. Tier 1, tier 2 and tier 3 auto component vendors are all looking to expand their capacity once again, which is providing a fillip to this business segment. Overall, the management is hopeful of a 20% to 24% YoY growth for next year, i.e. FY11. However, at current levels, we have a cautions view on the stock.

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