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LMW: The other income kicker

Nov 10, 2009

Performance summary
  • Revenues decline by 39% YoY during 2QFY10, 50% YoY during 1HFY10. The drop in revenues during first half of fiscal is on the back of a 52% YoY decline in revenues in the company’s textile machinery business and a 20% YoY decline in the machine tools and foundry business.
  • Operating margins stood at 17.3% during the quarter (lower by 0.8%). During 1HFY10, operating margins contract by 4.2% YoY. Margin contraction during 1HFY10 is mainly on account of higher employee costs (as percentage of sales).
  • Net profits fall by 15% YoY during 2QFY10, 49% YoY during 1HFY10. During the quarter, the company was able to reduce the decline in profits on account of higher other income. On excluding the same, profits are lower by 68% YoY during the quarter.

Standalone financial snapshot
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Sales 4,418 2,686 -39.2% 9,009 4,551 -49.5%
Expenditure 3,618 2,222 -38.6% 7,417 3,936 -46.9%
Operating profit (EBDITA) 800 464 -42.0% 1,592 615 -61.4%
Operating profit margin (%) 18.1% 17.3%   17.7% 13.5%  
Other income 119 241 102.4% 371 443 19.4%
Depreciation 333 218 -34.4% 649 402 -38.1%
Profit before tax 586 487 -17.0% 1,313 655 -50.1%
Tax 208 163 -21.5% 457 220 -51.9%
Profit after tax/(loss) 379 324 -14.5% 856 435 -49.2%
Net profit margin (%) 8.6% 12.1%   9.5% 9.6%  
No. of shares (m)         12.4  
Diluted earnings per share (Rs)         53.1  
P/E ratio (x)*         26.7  
* On a trailing 12-month basis

What has driven performance in 2QFY10?
  • LMW reported a 39% YoY drop in revenues during the quarter ending September 2009. Revenues however fell by a sharper 50% YoY during the first six months of the current fiscal. The performance of the latter period is mainly on account of a comparatively poorer performance during the preceding quarter i.e. 1QFY10 wherein revenues and profits dropped by 59% and 77% respectively on a year on year basis. However, on a quarter on quarter basis, revenues and profits are higher by 44% and 192% respectively.

    The performance of the company during the first half of the current fiscal has been hampered on the back of muted business environment of the textile industry. Not so long ago, LMW’s management had mentioned to us that most of the orders were being deferred and that some customers were not even ready to take the delivery of the orders that was scheduled for delivery. At the end of the quarter, LMW had an order back log of about Rs 29 bn as compared to Rs 34 at the end of FY09. It may be noted that at the end of FY08, LMW’s order backlog stood at Rs 45 bn.

  • As compared to the preceding quarter, LMW has put up a much better performance at the operating level. During 1QFY10, the company’s margins stood at 8.1%, while in the quarter ending September 2009, they stood at a much higher 17.3%. However, on a year on year basis, they stood lower by 0.8% YoY. This was mainly on the back of higher employee costs (as a percentage of sales). As it was explained to us, most of the company’s employees are permanent (as compared to contractual employees). This works against the company as its fixed cost component remains high.

  • If we look at the company’s segmental performance during the quarter, it paints quite a mixed picture. While the fall in revenues has been sharp, there has been a good improvement in margins at the PBIT level of its textile machinery division (which forms about 85% of revenues excluding inter-segmental adjustments). However, margins of its machine and tools division dropped to 2.3% (lower by 3% YoY).

    Segment wise performance
    (Rs m) 2QFY09 2QFY10 Change
    Textile Machinery Division
    Revenue 4,012 2,383 -40.6%
    % share 89.5% 85.3%  
    PBIT margin 12.9% 15.3%  
    Machine Tool & Foundry Divisions
    Revenue 470 410 -12.8%
    % share 10.5% 14.7%  
    PBIT margin 5.3% 2.3%  
    Revenue 4,482 2,793 -37.7%
    PBIT Margin 12.1% 13.4%  
    * Excluding inter-segment adjustments

  • LMW reported a 15% YoY fall in profits during 2QFY10.However, its 1HFY10 performance was much worse as it has recorded a profit fall of 50% YoY. During the quarter, the performance at the bottomline level was much better than that at the operating level. This was on the back of higher other income (which surged by 102% YoY during the quarter). A large chunk of this was on the back of LMW selling wind energy to the Tamil Nadu Electricity Board on the back of lower internal consumption. It may be noted that if we ignore the other income (during both the periods), profits are lower by 68% YoY. If we do the same for 1HFY10, the company would actually be seeing a loss of Rs 8 m.

What to expect?
At the current price of Rs 1,420, the stock is trading at a multiple of 26.7 times its trailing 12-month earnings. LMW’s management is expecting a better second half on the back of it executing the remaining backlog. Plus, the company also feels that the textile industry is slowly climbing out of slump on the back of the overall revival in economy. In addition, the government initiatives (Technology Upgradation Fund Scheme) have also helped improving the liquidity.

Keeping the above-mentioned developments in mind, the company is hoping to record a flat performance at the revenue level for the full year. However, looking at the company’s 1HFY10 performance, we believe that it would be a major task for LMW if it was able to achieve the same. Also, the business environment has not yet reached a comfortable point for LMW as its clients, textile mills, are still going through a difficult time (although better as compared to the past one to two quarters) in terms of pricing pressures and lower utilisation rates. Considering the overall scenario of the textile industry and the high valuations, we maintain our cautious view on the stock.

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