Company Name – Lakshmi Machine Works Limited (LMW) Current Share Price – INR 9,544 (April 25, 2022) Market Cap – INR 10,196 cr |
1. What is interesting about the stock?
Textile Industry is a vital source for commerce and employment in India. It is one of the few industries whose demand has stayed durable right from the beginning of human civilization. This is because it accounts for 1 of the 3 fundamental necessities for living which are food, clothing and shelter also known as “Roti, Kapda Aur Makaan”.
The textile industry is the 2nd largest employment generator in India with 4.5 cr workers. The industry also accounts for:
7% of industrial output in terms of value
2% of GDP
12% of export earnings
But the textile industry has many companies involved in different parts of the industry supply chain from spinning and weaving to garment making and retailing. So how does an investor look to gain secular exposure to the textile sector? Investing in a company that supplies critical machinery to the entire sector: Lakshmi Machine Works.
Lakshmi Machine Works Limited is a leading global manufacturer of textile machinery and is one of the only 3 makers worldwide that produce the entire range of spinning machinery. The Company has also ventured into making machine tools, precision castings and aerospace parts. It is also the largest CNC machine tools maker in India. LMW enjoys a market share of over 60% in the textile machinery segment in India. It not only provides a secular exposure throughout the textile industry but also provides a broad exposure across the industrial machinery sector with its other businesses.
The 4 major revenue divisions for the company are:
Textile Machinery: This is the largest operating segment for the company with 68% revenue share in FY21. LMW sold 1,605 units under this division in FY21. The revenue breakup of this segment was
Machine Tools: This is the 2nd largest segment for the company with a 27% revenue share in FY21. It produced 2,311 machines in the year. This division makes mother machines and components for industries other than textile and is expected to do well due to the announcement of various PLI schemes which should lead to a rise in demand for industrial machinery.
Foundry: Under this segment, the Company precision castings for heavy machinery and equipment. This division accounted for 3% of revenues and produced 2,963 units in FY21.
Advanced Technology: Under this segment, LMW develops and makes structural, sheet metal and engine components and sub-assemblies for leading global aerospace OEMs including HAL & DRDO. This segment accounted for 2% of revenues in FY21.
Around 19% of FY21 sales were from exports while the rest were from domestic sales. The Company has a total of 6 manufacturing units with 2 units each for the Textile and Foundry divisions, and 1 each for the Machine Tools and Advanced divisions.
LMW faced a tough time at the start of FY21 when the pandemic and lockdown shut down industrial activity and made delivery and installation of its products at client sites very difficult. It also saw inflation in the prices of raw materials, especially metals which was damaging for all divisions.
Industry Overview
The textile industry is expected to grow steadily due to a variety of long-term drivers including:
Rising Production of Cotton in India
Competitive Cost advantage in textile and garment making in India
100% FDI route open for textile companies
PLI scheme of INR 10,683 cr announced for manmade fibre and technical textiles for 5 years
Rise in organized retail, working-age population and income levels to spur demand for textiles especially fast fashion
Rising exports which are expected to reach USD 65 billion by FY26 from USD 30 billion in FY21 - positive geo-political tailwinds with trouble in Sri Lanka (economic situation) and China (surge in COVID cases)
The machine tools industry is also expected to do well in India due to
Steady pickup in the auto sector in India
Multiple PLI schemes announced which are expected to lead to the building of factories and industrial machinery on a large scale
Rise of the Indian Defense sector along with the Atmanirbhar initiative
Expansion of Indian Railways and Metro lines
The foundry industry is also expected to do well in the future due to the rise in demand from its key end industries like the auto industry, defense industry, heavy engineering, construction, and many others. The biggest contributors to growth in this industry is expected to be the renewable energy and electric mobility sectors.
The aerospace sector in India is expected to reach a market size of USD 70 billion by 2030 driven mainly by the increased focus on developing and manufacturing domestically and the rise in demand for the civil aviation sector.
There are only 2 other listed players in the textile machinery segment in India which are:
Lakshmi Automatic Loom Works
Veejay Lakshmi Engineering Works
LMW is a family run business that is currently being run by Mr Sanjay Jayacarthanavelu, the 2nd generation after the founder GK Devarajulu. The promoters are part of the Lakshmi Mills family which has been a major part of the textile industry from Coimbatore since 1910.
Key MOATs
Robust market positioning in the textile machinery space - The textile industry is a very big industry in India and the Company’s positioning as the market leader in this space in India enables it to capture the opportunity provided by the growth of this critical industry segment
Strong reputation in making industrial machinery for textiles has also helped it develop and expand into other segments thus enabling it to be able to take advantage of the secular industrial growth of India. The company was given the award of “The Most Innovative Company in India” in 2020 by CII or Confederation of Indian Industry which highlights the company’s technological edge and R&D capabilities.
2. Key Historical Financials
The company saw its sales growth CAGR for the last decade drop to 1% due to a massive drop in FY20 revenues to INR 1,500 cr levels from INR 2,700 cr in FY19. It has somewhat recovered and exceeded pre-covid revenue levels now, but the EBITDA margin so far remains below FY19 levels. The EBITDA margin was down in FY20 and FY21 mainly due to a drop in operating leverage while the TTM EBITDA margin has risen somewhat but not to pre-covid levels mainly due to a rise in raw material commodity prices
The Q3FY22 results were very good with over 91% YoY rise in revenues and a 94% YoY rise in profits. These results were so high mainly due to the low base in Q3FY21. It also saw a good QoQ rise of 14% in revenues.
The Working Capital days have also seen a big rise in FY20 due to the pandemic and is coming down to normal levels now. The cash generation of the company is quite inconsistent with CFO rising and falling due to working capital changes each year. Cash & bank balance was at INR 782 cr as of March 31, 2021.
3. What is my view on Company valuation?
LMW has seen a rise in its share price of ~120% in the last 5 years vs the NIFTY 50 Index which has risen ~90% in the same period. It is also above the NIFTY500 Index which has risen ~90% in the same period. This shows that the company has decently outperformed the general market.
LMW trades at a P/E (TTM) of 70x. The 5 year median P/E ratio of the Company is ~35x. So, the Company is currently trading at 2 times the long term average. Business recovering in the recent quarters could lead to partial depression in the P/E ratio.
Based on the great potential of the textile and manufacturing sectors in India and the demand outlook spurred by the various govt schemes including PLI schemes, I expect Lakshmi Machine Works to have a steady growth momentum going forward and rise at above 10% revenue CAGR for the next few years.
At its current valuation, the stock does not appear to be cheap at all but given its strong market position and its long-term potential, it is a good stock for long term investors to evaluate at lower prices.
4. What are the risks to the investment analysis?
Risks to the analysis are:
High dependence on the textile industry for LMW - This exposes the Company to all the risks associated with the textile sector like industry cyclicality, agricultural risks to cotton production, and others.
High commodity prices can have impact on the business
Drop in demand for the various end industries once the govt support and policies like the PLI schemes expire. Much of the potential ahead arises from the expected capex into building new factories and machines for various industries to take advantage of the various PLI schemes and this pace of industrial capex is not expected to sustain for long
About the Author
I have over 6 years of experience in the Investment sector and have been an active prop trader in European Bond Futures in the past. Currently I am working as head of Research at Smart Sync Services where we are working on simplifying and expanding financial and investment knowledge to make the investment world as accessible for everyday investors as much as possible.
I graduated from the Master of Finance Program from Cambridge University in 2016 after completing my Bachelor of Engineering program from Jadavpur University, Kolkata in 2011.
I am an insignificant public investor & have avid interest in following emerging trends both in technology and other fast evolving sectors. I am also a lifelong learner and relish the chance to learn something new all the time.
Disclosure
I have no stock, option or similar derivative position in any of the companies mentioned since last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purpose and not to be construed as an investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.