Lakshmi Machine Works (LMW), is a leading player in the domestic textile machinery manufacturing industry with more than 60% market share in Indian spinning sector. The company can manufacture entire range of spinning machinery from blow room to ring frame. Post separation from their erstwhile partner, Rieter (Global leader), LMW is exploring the overseas market with more vigor and succeeded to establish footprints in the South East Asian markets. Though near term outlook is challenging, we believe the foray into overseas markets, plans to enter post spinning market with ‘Autoconers’ and investment towards defense manufacturing will open new vistas of growth. After likely 20% decline in FY17e, earnings will bounce back in FY18e/19e, by 24% and 21%, respectively.
Management views (Segment wise)
a) The domestic installed yarn spinning capacities aggregate to 52mn spindles of which 85 % is operational. The capacity utilisation of the Indian spinning mills is currently at a low of 50 – 55%. Spindle capacities were aggressively added during the last 4-5 years, in the belief that the incremental demand from China for Indian yarn would continue unabated for a fairly long period of time. Almost 60-70% of the domestic production of yarn was exported to China. However, during the past 2-3 years, China increased its cultivation of cotton and the expansion of the spinning industry in other neighboring countries like Bangladesh, Indonesia, Vietnam, Turkey etc., has impacted the export of yarn from India to China, which has now fallen to 25% of domestic production.
b) The demand for textile machinery have been down by 20% as compared with last year. The spread between cotton and yarn have remained volatile in the recent past. While the yarn prices have remained at relatively lower levels, the cotton prices have fluctuated. Further, the demonetisation has impacted the operations of the spinning industry and has also delayed the timely arrival of cotton. Over 85% of the LMW customers are in the unorganised segment. The annual additions in the domestic spinning industry is 3.5mn spindles of which 20% is the replacement demand. Though LMW can manufacture 3.5mn spindles at full capacities, it currently sells 2 – 2.25mn spindles. Going forward, the company believes that the enhanced focus to increase the volumes of finished garments would also help the feeder industry (spinning mills).
c) The global market for textile spinning machinery is Rs250bn. The Indian market is Rs30bn. Nearly 86% of the market for textile spinning machineries is in the Asia Oceania region. LMW revenue from exports have gone up from 10% of revenues few years back to 24% of revenues. There has been a sharp 30-40% reduction in demand for spindle machineries across the globe. The Chinese demand for textile machineries have dropped by 45%. China is now adding only 3.8mn spindles as against the normal additions of 7mn spindles ( peak additions of 11mn spindles). In Turkey, the market has been on standstill on account of the geo political issues.
II) Advanced Technology Centre (ATC)
a) The ATC division is likely to break even in FY18. The 4QFY17 is expected to be profitable.
b) LMW has received orders from HAL to manufacture structural parts for Chetak helicopters. Though the initial orders are for tail rotors and casings, the company believes that they would be able to make the complete structural for helicopters in the next couple of years.
c) The division has also got the orders for manufacture of radar domes to be fitted on Airbus aircraft ( Sourced from HAL).
d) The company has long term orders aggregating to Rs1.2bn executable over the next 4-5 years.
e) With steady increase in orders, LMW would be investing in the ATC division during FY2018
III) Machine Tools
a) The revenues in the machine tool division is growing at 45% YoY . LMW expects the trend to continue for the next 9-12 months.
b) Bulk of the demand is emanating from automobiles (machining of auto components), oil & gas (values) segments
The Company is a monopoly based business in India with 60% market share in India and 12% market share globally in the textile machinery and with diversification in defense equipment(which is likely to break even in FY18) and machine tools(which command a premium of 5-10% over peers). Therefore the company deserves premium valuation because of its market position in the industry. We value the firm at 25x FY19Earnings and arrive at a target price of Rs6073 over the medium to long term
Looking at long term chart, stock price has been in strong uptrend from year 2009. Post making low of 415 in March 2009 stock has been forming successive higher highs and higher lows pattern which signifies dominance of bulls over bears.
Currently stock has been trading near all time highs and has surpassed its multiyear (2007) peak which is bullish signal shows strength in price. Breakout has accompanied with long range bull candle and with decent rise volumes increases the reliability of breakout. Momentum indicator RSI trading above 60 levels suggests positive momentum and strength in price. Fundamental and technical aspect both supporting bullish view on stock and suggests higher levels in this counter in future. Thus this stock should be kept in radar for buying opportunities at lower levels.