LMW: Higher depreciation impacts net

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.