Lakshmi Machine Works Ltd

Lakshmi Machine Works (LMW) is India’s largest textile spinning machinery manufacturer. The company’s business is organized into three business segments - textile machinery division (TMD), Machine Tools Division (MTD) and Foundry division (Foundry). Besides they have small operation in Wind Energy and has Advance Technology Center. The textile machinery business accounts for almost 85% of LMW’s revenues with remaining 15% contributed by machine tools and foundry businesses.


LMW is one of the three leading textile machinery manufacturers in the world (the other two being Rieter and Marzoli). The company has been one of the prime catalysts of the textile spinning industry in India, commanding more than 50% share of the spinning machinery industry. LMW has maintained its credibility and stronghold on the industry across business cycles while maintaining its credit terms intact.

Industry Analysis
 India's textile sector is trying to come out of one the toughest period due to financial crisis in the last 2 years. The ambitious expansion, modernization and capacity build up being carried out by the textile mills after the phasing out of quota regime in 2005 added to the woes. Mills had either postponed or abandoned their investment proposals in light of the uncertainty prevailing at the time.

LMW have been affected significantly over the last 2 years, not only did new orders for machinery slow down to a trickle, even the older orders were deferred, canceled or customers refused to take delivery. However, things have shown some improvement in the last two quarters.
Consequently, the offtake of the company's textile machinery has seen an improvement with new orders that have started coming in. More so, the company will be the biggest beneficiary of the same considering its extremely strong position in the Indian textile machinery industry.

Competition
Although the company has a domestic competitor in Kirloskar Toyoda, the difference between the two's technology, capacity and Sarket share is not something that should worry LMW. As a matter of fact, the latter has roughly 15% share of the Indian spinning machinery market, against LMW's market share of over 50%.
While Chinese manufacturers score poorly on quality of products, there are no real risks even from MNCs like Rieter who has been a long time collaborator of LMW. Rieter and LMW are also 50:50 owners of a 100% export joint venture called Rieter-LMW Machinery Limited, which manufactures ring frame components for export to the Rieter Group. Finally, the company's existing manufacturing facilities, which are already well depreciated, will act as an entry barrier for any competition in the future.

Financial Performance
LMW has been consistently generating strong cash flows in the past, which adds to its balance sheet strength, not to forget a zero debt status. At the end of FY09, the company's cash and investment levels stood at Rs 592 per share (30% of current stock price), however significant of cash is advance payment by customer. We estimate the company to consistently generate cash from its operating and investing activities over the next few years.
Management
I evaluated the company management on following criteria.
a. Capital Allocation – Management has done good job in capital allocation which is evident from the RoE and RoCE over last decades.
b. Compensation – Management compensation is on higher side. Overall directors salary is around 6-7% of net profit which in my mind is on higher side
c. Disclosure / Communication – Disclosure and communication with shareholder has been pretty okay but nothing much.
d. Accounting practice – The accounting practice appears conservative. No significant entry into related party trade is also reassuring.

Conclusion
The company has very dominant position is textile machinery business and will see good demand because of a. replacement demand from textile company b. changing expectation and improved domestic demand requires newer and newer machinery c. focus on textile industry as it is 2nd largest employer in India (after agriculture) and d. china products getting banned in US selectively should spur export from India. LMW has also increased focus on Machine tools and china market (they have open a subsidiary in china will be the key to drive additional revenue in future. India has potential to become manufacturing hub for small / medium cars which should help machine tools division.
At present company is trading at 25 PE (TTM) which is on higher side. However, my average acquisition cost is around 900 / share so given the market leadership and intention to leverage its manufacturing competency in emerging sector should help in growing at around 10-15% over last 5 years.

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