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LMW: Slipping at a rapid speed

Jul 28, 2009

Performance summary
  • Revenues slump by 59% YoY during 1QFY10. This is on account of a 63% YoY fall in revenues from the textile machinery division and a 27% decline in the company’s machine tools & foundry division.
  • Operating margins contract by 9.2% YoY during the quarter. Margin contraction is on account of higher raw material and employee costs (as percentage of sales).
  • Net profits fall by 77% YoY during 1QFY10. A poor operating performance coupled with high depreciation costs lead to fall in profits.

Standalone financial snapshot
(Rs m) 1QFY09 1QFY10 Change
Sales 4,591 1,865 -59.4%
Expenditure 3,799 1,714 -54.9%
Operating profit (EBDITA) 792 151 -80.9%
Operating profit margin (%) 17.3% 8.1%  
Other income 252 201 -20.0%
Depreciation 316 184 -41.9%
Profit before tax 727 168 -76.9%
Tax 250 57 -77.2%
Profit after tax/(loss) 477 111 -76.7%
Net profit margin (%) 10.4% 6.0%  
No. of shares (m)   12.4  
Diluted earnings per share (Rs)   56.9  
P/E ratio (x)*   17.4  
* On a trailing 12-month basis

What has driven performance in 1QFY10?
  • LMW’s revenues dropped by 59% YoY during the quarter. This gives a good indication of how difficult are the times for a textile machinery manufacturer like LMW. As the management had indicated to us recently, textile manufacturers (clients of LMW) are not looking at expanding capacities. In fact, quite a few of them are even delaying or canceling their plans. This is clearly evident in the fall in the company’s order backlog, which had dropped to Rs 34 bn at the end of FY09 as compared to Rs 45 bn a year ago. The company’s management had also stated that the company has reduced its utilisation from 3 shifts to only 1 shift (as there is less business).

  • LMW’s operating margins took a major beating during the quarter, falling by 9.2% YoY. The culprits behind the same were higher costs of raw materials and employees (as percentage of sales). During our interaction with the management, it had stated that the company has not been able to pass on the higher raw material prices to its customers. Also the fact that the company has only permanent employees on its rolls (as against contractual employees) works to its disadvantage. However, it may be noted that all the cost heads – raw materials, staff costs and other expenditure – decreased in absolute terms on a year on year basis.

  • On looking at the company’s segmental performance during the quarter, it really does paint a grim picture. Apart from revenues, the profit before interest and tax (PBIT) margins for the textile business dropped considerably. However, the company was relatively well-off in its machine tools and foundry business, as margins here fell by only 0.5% YoY.

    Segment wise performance
    (Rs m) 1QFY09 1QFY10 Change
    Textile Machinery Division
    Revenue 4,305 1,608 -62.6%
    % share 90.7% 83.2%  
    PBIT margin 14.4% 1.2%  
    Machine Tool & Foundry Divisions
    Revenue 442 324 -26.7%
    % share 9.3% 16.8%  
    PBIT margin 6.5% 6.0%  
    Revenue 4,747 1,932 -59.3%
    PBIT Margin 13.7% 2.0%  
    * Excluding inter-segment adjustments

  • LMW reported a 77% YoY fall in profits during 1QFY10. Apart from a poor operating performance, higher depreciation costs (as a percentage of sales) also impacted the performance. However, it’s the company’s other income that acted as a savior in this quarter. Although other income is lower in absolute terms (on a year on year basis), the fall was not as significant as that in revenues. It may be noted that if one excludes other income in both the quarters, the company would have reported a loss of Rs 90 m.

What to expect?
At the current price of Rs 990, the stock is trading at a multiple of 17.4 times its trailing 12-month earnings. The chart below shows how LMW’s business environment has changed over the past few quarters. The company has been feeling the pressure of slowdown in textile industry since the end of 2007, wherein its revenues have been falling not only on a year on year basis but also on a sequential basis. Further, in our recent interaction with the company, the management did mention that it was unsure about when things will take a turn for the better. As such, we maintain a cautious view on the stock.

Feeling the pressure of declining revenues
Source: Company, BSE

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