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LMW: Higher depreciation impacts net - Views on News from Equitymaster

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LMW: Higher depreciation impacts net
May 20, 2008

Performance summary
  • Sales grow 19% YoY in FY08, 10% YoY in 4QFY08 - textile machinery sales grow by 20% YoY during the fiscal. Actual topline figure 4% lower than our estimates.
  • Operating margins expand by 2.5% YoY during the fiscal, owing to decline across all cost heads (as percentage of sales).

  • Net profits grow by 18% YoY during FY08, slightly lower than the growth in topline. Profit performance impacted by a sharp 69% YoY jump in depreciation charges and a marginally lower other income. Actual net profit figure 6% lower than our estimates.

  • Board recommends dividend of Rs 25 per share (dividend yield of 1.5%).

Financial performance snapshot
(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
Sales 5,492 6,040 10.0% 18,536 22,052 19.0%
Expenditure 4,610 5,045 9.4% 15,644 18,057 15.4%
Operating profit (EBDITA) 881 995 12.9% 2,892 3,995 38.1%
Operating profit margin (%) 16.1% 16.5%   15.6% 18.1%  
Other income 330 293 -11.2% 881 875 -0.7%
Depreciation 221 356 61.3% 688 1,159 68.5%
Profit before tax 991 932 -5.9% 3,086 3,712 20.3%
Tax 305 332 9.0% 1,024 1,289 25.8%
Profit after tax/(loss) 686 600 -12.6% 2,062 2,423 17.5%
Net profit margin (%) 12.5% 9.9%   11.1% 11.0%  
No. of shares       12.4 12.4  
Diluted earnings per share (Rs)       166.7 195.9  
P/E ratio (x)         8.5  

What has driven performance in FY08?
  • The 19% YoY growth in LMW’s FY08 net sales largely a result of the 20% YoY growth in its textile machinery division sales. This segment contributed 91% to the company total sales during the fiscal (89% in FY07). As for the second segment of machine tools and foundry, sales declined by 4% YoY.

    Segment-wise performance
    (Rs m) FY07 FY08 Change FY07 FY08 Change
    Textile machinery            
    Revenue 5,119 5,689 11.1% 17,114 20,564 20.2%
    % share 87.4% 90.8%   89.0% 91.0%  
    PBIT margin 18.8% 14.6%   16.5% 16.4%  
    Machine tools & Foundry            
    Revenue 735 577 -21.5% 2,114 2,026 -4.1%
    % share 12.6% 9.2%   11.0% 9.0%  
    PBIT margin -0.9% 5.1%   4.3% 7.1%  
    Total            
    Revenue* 5,854 6,266 7.0% 19,228 22,590 17.5%
    PBIT margin 16.3% 13.7%   15.2% 15.5%  
    * Excluding inter-segment adjustments

  • LMW recorded a 2.5% expansion in its operating margins during FY08. This was made possible by decline in all the major cost heads of the company. Specifically, raw material expenses and other costs declined from 60.1% and 17.7% of sales in FY07 to 59.6% and 16.1% respectively during FY08.

  • LMW’s net profits, while recording an 18% YoY growth during the fiscal, were impacted by a sharp jump in depreciation charges (that were up 69% YoY). These charges have seemingly increased on account of the new capacity and windmills set up during the year.

What to expect?
At the current price of Rs 1,658, the stock is trading at a multiple of 6.3 times our estimated FY10 earnings for the company. This we believe is fairly attractive for long term investment perspective. We shall update this analysis post the company’s analyst meet scheduled to be held tomorrow evening.

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