11 August 2014

Lakshmi Machine Works

Stock Info

spotlight
The Idea Junction
Bloomberg
CMP (INR)
Equity Shares (m)
M.Cap. (INR b)/(USD b)
LMW IN
3,738
11.3
42.6/0.7
52-Week Range (INR) 4,019/1,726
1,6,12 Rel. Perf. (%) -3/11/73
Best early cycle play in Indian textiles
Dominant presence with 60% market share Financials & Valuation (INR b)
Y/E March 2015E 2016E 2017E
Lakshmi Machine Works (LMW) is among the best plays on textiles capex in India. It
Sales 28.4 33.8 39.9
commands a 70% volume market share and 60% value market share in India and has
EBITDA 3.6 4.5 5.3
been able to defend its market share despite entry of global players like Rieter (15%),
NP 2.6 3.4 4.3
Truzler (13%) and other Chinese players.
EPS (INR) 229.8 300.9 385.5
Indian textiles sector is poised for strong growth. Multiple factors aiding India's structural
EPS Gr. (%) 32.9 30.9 28.1
advantage include: 1) raw material availability - strong self-sufficiency in cotton, 2) BV/Sh. (INR) 1,163 1,392 1,681
competitive cost with lowest wage structure, 3) competitive currency - INR has Valuations
depreciated by 35% against Yuan and 4) supportive government policies. P/E (x) 16.3 12.5 9.7
Order book of INR33.5b translates into a book to bill of 1.6x FY14 revenue, which P/BV (x) 3.2 2.7 2.2
provides strong revenue visibility. We expect earnings to post a CAGR of 31% over EV/EBITDA (x) 8.4 5.9 4.0
FY14-17E. LMW trades at a PE multiple of 16.3x FY15E and 12.5x FY16E earnings. EV/Sales (x) 1.1 0.8 0.5
RoE (%) 21.4 23.6 25.1
Market leader in textile machinery, with 60% value market share RoCE (%) 30.6 33.7 35.8
Globally, LMW is one of the only three players that manufactures the entire
range of spinning machinery, making it one of the biggest manufacturers of yarn
Shareholding pattern (%)
spinning machinery in the world. LMW commands 70% volume market share and As on Jun-14 Mar-14 Jun-13
60% value market share in India and has been able to defend its market share Promoter 28.4 28.4 28.3
despite the entry of global players like Rieter (15%), Truzler (13%) and other DII 23.8 23.1 23.7
Chinese competitors. LMW has many advantages over competition, including FII 2.4 2.6 1.6
cost competitiveness, strong after sales network, a huge customer base and world Others 45.5 46.0 46.3
Notes: FII includes depository receipts
class technology to manufacture products. Textile machinery can last for a period
of 25-30 years and many leading spinning companies regularly modernize their
machinery by replacing old machines with newer ones. Thus, there is a strong Stock performance (1 year)
secondary market for textile machinery. Indian textile players hence prefer LMW
over European and Chinese companies as LMW's spare parts are cheaper and also
as they are unsure of Chinese machinery's second hand value.

Cost competitiveness and superior service network - biggest USPs

LMW's products are cheaper compared to European manufacturers due to lower
cost of production. On an average, LMW's machinery is 10-15% cheaper compared
to European competitors who have set up a base in India. LMW enjoys the
advantage of having set up capacities at historical low costs, while MNCs finding
a foothold in India have to bear the brunt of prevailing costs of capital investment.
Secondly, castings (substantial inputs used in the manufacture of textile
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 spotlight | Lakshmi Machine Works

machinery) are sourced in-house by LMW, while MNCs have to source them from vendors, which
is costlier. For example, LMW's LR9 series machines with 1,440 spindles costs INR4,535 per spindle,
while Rieter quotes ~INR5,000 per spindle for its 1,440 spindle G-312 machinery.

LMW is the best early cycle play on Indian textiles growth

Textile machinery players will be the earliest beneficiaries of textiles sector growth. LMW is the
market leader in textile spinning machinery in India, with a market share of 70% in volume terms
and 60% in value terms. It is currently operating at 50% capacity utilization and is working on only
two shifts, against the normal practice of working on three shifts. Thus, any increase in demand
can be easily met by increasing capacity utilization levels.

Strong outlook for order inflows

LMW has a strong order book of INR33.6b translating into a book to bill of 1.6x. With strong
performance of spinning mills over the last two years, industry profitability and capacity utilization
rates have significantly improved. Our interactions with industry players suggest most of the
yarn manufacturers are operating at nearly 90% utilization. Hence, to meet increasing demand
over the next few years, we believe industry players will expand capacities. Thus, demand outlook
for textile machinery is expected to remain strong. Although LMW has a dominant 60% market
share in India for spinning machinery, it has a minimal 10% market share in export markets.
Management believes there is tremendous scope to ramp up the export market share and is
targeting at least 20% market share over the next few years. Thus, export business is expected to
post 30% CAGR in revenue over FY14-17E.

Indian textiles sector poised for strong growth

China's dominance in the global textiles trade, with a 35% export market share is waning due to
high wage inflation and Yuan appreciation. Simultaneously, India's competitive advantage in
textiles is evolving to be highest in the world. Multiple factors aiding India's structural advantage
include: 1) raw material availability - strong self-sufficiency in cotton, 2) competitive cost with
lowest wage structure, 3) competitive currency - INR has depreciated by 35% against Yuan, 4)
supportive government policies. Indian textiles sector is expected to clock 10% CAGR to USD228b
by 2021.

Best early cycle play on Indian textiles growth

We expect company's revenue to post a CAGR of 20% over FY14-17E, led by the core textile
machinery division which will contribute 90% to revenue. EBITDA would clock 25% CAGR, with
margin expanding 180bp to 13.4%. PAT would post a CAGR of 31%. With current capacities operative
at ~50%, we expect capacity utilization to be ramped up over the next two years, thus requiring
limited maintenance related capex. This would ensure robust free cash generation over FY14-
17E. With highly depreciated fixed assets and a negative working capital cycle, core capital
employed in the business is negligible. LMW's cash on books is expected to rise to 50% of current
market capitalization on the back of robust free cash generation. We expect dividend payout to
increase from 21% to 25% over FY14-17E. LMW trades at a PE of 16.3x FY15E and 12.5x FY16E
earnings. Historically, the stock has traded 14.1x its one-year forward earning. Not Rated.

11 August 2014 2
 spotlight | Lakshmi Machine Works

Company description
LMW is engaged in the manufacture of yarn spinning machinery since 1962. The first
unit was established at Perianaickenpalayam near Coimbatore, Tamil Nadu. It is the
market leader in India and one of the biggest players in the world in this segment.
LMW holds a market share of ~70% in volume terms and 60% in value terms in
textile machinery in India. Also, it caters to the key textile export markets such as
Turkey, Vietnam, Bangladesh and Pakistan.

Being LMWs main segment, the Textile Machinery Division accounted for ~89% of
its sales in FY14. The other three segments Machine Tools Division, Foundry Division
and Advanced Technology Division contributed 8%, 3% and 0.2% of revenues
respectively in FY14.

LMW profile
LMW is headquartered in
Coimbatore, South India

Source: Company, MOSL

LMW timeline
Timeline
2008, 2011,
1962, 1977, 1988, 1994, Golden Jubilee Year,
MTD RLM China
Established First Export Acquisition of RLM
presence

1968, 1983, 1993, 2007, 2009, 2012, Consolidation

Mechanised TMD 2 Automated Acquisitions ATC merger of LMWML
Foundry Foundry of (ex RLM)
12,000 Tonnes
Source: Company, MOSL

Major divisions
Textile Machinery Division Machine Tool Division Foundry Division Advanced Technology Centre

Source: Company, MOSL

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LMW is the best play on Indian textiles growth

Textile machinery players will be the earliest beneficiaries of textiles sector growth.
LMW is the market leader in textile spinning machinery market in India, with a market
share of 70% in volume terms and 60% in value terms.
Company is utilizing capacities only to the extent of 50% and is working on only two
shifts, against the normal practice of three shifts. Thus, an increase in demand can be
easily met by increasing the capacity utilization levels.
Cost competitiveness and superior service network are LMWs biggest USPs.

LMW is the best early cycle play on Indian textiles growth

With strong growth prospects for Indian textiles industry, we expect textiles capex
to pick up over the next two to three years. Textile machinery players will be the
earliest beneficiaries of textiles sector growth. Improvement in industry capacity
utilization and profitability over the last two years provides strong visibility for
capacity expansion. LMW, with its presence in spinning machinery manufacturing
and 60% value market share, is among the best plays on textiles growth.
Textiles value chain

Source: Company, MOSL

Market leader in textile machinery in India, with dominant 60% market share
LMW is globally one of the only three players that manufactures the entire range of
spinning machinery, making it one of the biggest manufacturers of yarn spinning
machinery in the world. Company commands 70% volume market share and 60%
value market share in India and has been able to defend its market share despite the
entry of many global players like Rieter (15%), Truzler (13%) and Chinese companies.
LMW has many advantages over competition, including cost competitiveness, strong
after sales network, a huge customer base and world class technology to
manufacture products.
Domestic market share (%)
Electrojet, 2%
KTTM, 10%

Truzler, 13%

LMW, 60%
Rieter, 15%

Source: Company, MOSL

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 spotlight | Lakshmi Machine Works

Domestic volume market share Domestic value market share

Others, 30%

Others, 40%

LMW, 60%

LMW, 70%

Source Company, MOSL Source: Company, MOSL

Under-utilized manufacturing capacities provide headroom for growth

LMW is currently operating at 50% capacity utilization and is working on only two
shifts, against the normal practice of working on three shifts. Thus, an increase in
demand can be easily met by increasing the capacity utilization levels. We expect
capacity utilization to be ramped up over the next two years, thus providing enough
headroom for growth and requiring limited capex.

Cost competitiveness and superior service network biggest USPs

LMWs products are cheaper compared to European manufacturers due to lower
cost of production. On an average, LMWs machinery is 10-15% cheaper compared
to European competitors who have set up base in India. LMW enjoys the advantage
of having set up capacities at historical low costs, while MNCs currently finding a
foothold in India have to bear the brunt of prevailing costs of capital investment.
Secondly, castings which constitute substantial part of inputs used in the
manufacture of textile machinery are sourced in-house by LMW, while MNCs have
to source them from vendors, making it costlier.

For example, LMWs LR9 series machines with 1,440 spindles costs INR4,535 per
spindle, while Rieter quotes INR5,000 per spindle for its 1,440 spindle G-312
machinery. Textile machinery can last for a period of 25-30 years and many leading
spinning companies regularly modernize their machinery by replacing old machines
with newer ones. Thus, there is a strong secondary market for textile machinery.
Indian textile players hence prefer LMW over European and Chinese companies as
LMWs spare parts are cheaper and also as they are unsure of Chinese machinerys
second hand value.

Apart from being cost competitive, LMW has a strong competitive advantage over
peers due to an efficient and well spread after-sales network. Company has service
centers in each textile hub of the country, while peers have only three to four
centers. In textiles industry, machinery related technical problems need to be
rectified at the earliest, as the down-time significantly affects production and
profitability of a mill. As LMWs technician reaches a customers site to rectify
problems within 24 hours, it is the preferred choice over peers.

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Strong technological expertise helps match international quality standards

LMW has proven its technological prowess over the years by developing products in-
house. It has largely undertaken independent R&D since 1994-95, when Rieter
decided to venture out on its own in India. Since then, LMW has matched its
European peers in terms of quality. A case in point is the LR9 series machinery that it
developed in-house and unveiled in 2009. The machine has 1,632 spindles, which is
among the maximum that are being currently manufactured in the Indian market.
Comparatively, Rieters G-312 range machine, currently being produced in India,
offers 1,440 spindles.

LMW spends nearly 0.6% of its revenue on R&D, which compares well versus
European players in the yarn spinning machinery space. Companys focus on
research and innovation aided it meet clients requirement by unveiling customized
products to the maximum possible extent. LMW has many products patented in its
name, thus highlighting the importance it gives to R&D. LMW is aware that
automation and technology are vital parameters and is focused on including the
best of three elements electrical, electronic and technology. LMW gauges its
research efforts effectiveness by targeting 20% of revenue from new products.
R&D spend as a percentage of sales
Research & Development Spend (INR m) % of sales
1.4% 124 125 131
1.3% 120
106 104
93 95 94
83 82
67 1.1%
0.8%
0.7% 0.7%
0.6% 0.6% 0.6% 0.6%
0.5%
0.4%

FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

Source: Company, MOSL

Company also has tie-ups to fine tune its technological expertise. For example, LMW
in collaboration with Grossenhainer Textil Maschine of Germany manufactures
speed frame machines. Its technology has clients approval; ~67% of spinning
players surveyed rated LMWs product quality at par or even better than European
products. In terms of yarn quality produced, there is no difference in LMW and
European machines performance. The variance among 33% other players surveyed
was found only in wear and tear of machines, in which the European machinery was
slightly better.
These initiatives aided LMW to meet the maximum possible demand of end
consumer by making the machine leaner, automatic (reducing dependence on
labor), adjusting delivery schedule and reducing cost by value engineering. Thus, the
company withstood competition from global players, including Rieters (global
experience of more than 200 years) and Toyota Kirloskar, and emerged as a
preferred supplier to textile companies.

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Strong domestic order book; exports set to grow

LMW has a strong order book of INR33.6b which translates into a book to bill of 1.6x.
50% of LMWs current order book is static. New order inflows coupled with faster
conversion of the static order book into revenue can result in accelerated growth
prospects over the next couple of years.
Export segment contributed 21% to LMWs revenue and is the fastest growing
segment posting 115% growth in FY14. Management believes there is tremendous
scope to ramp up export market share and is targeting at least 20% market share over
the next few years. Thus, export business is expected to post 30% CAGR in revenue
over FY14-17E.

Strong outlook for order inflows

LMW has a strong domestic order book of INR32.6b. With strong performance of
spinning mills over the last two years, industry profitability and capacity utilization
rates have significantly improved. Our interaction with management suggests most
of the yarn manufacturers are running at nearly 90% utilization. Hence, over the
next few years, to meet increasing demand, we believe industry players will
expand their capacities. Hence, demand outlook for textile machinery is expected
to remain strong. LMW derives its order book equally from North, West and South
markets. It has two agents - Voltas and Super Sales - who handle the entire pan
India pre-sales and after-sales service. Majority of LMWs revenue are driven by
Voltas which contributes 75% to sales, while 25% comes from Super Sales.

Domestic order book break-up

North, 35% South, 35%

West, 30%

Source: Company, MOSL

Domestic order book flow for FY14

Source: Company, MOSL

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Faster conversion of static order book can accelerate revenue growth

Delivery timelines for textile machinery range from 8-10 months on an average,
and as LMW is working on 50% utilization currently, it can scale up to 80%
utilization and execute its entire order book within a year. However, close to 50%
of its order book is slow moving, whereby clients are not seeking immediate
delivery of orders placed. Our interaction with LMWs management suggests that
difficulty in roping the necessary funding for capex has been a key reason for the
static order book to remain slow. Company collects 10% of the estimated value of
the machine as advance, which is non-refundable in nature. The final billing is done
as per the price applicable at the time of delivery. LMW is thus hedged against
order cancellations.

In our view, as the financial position of spinners has improved materially over the
last two years due to better profitability, there is strong likelihood of this static
order book getting converted into sales. New order inflows coupled with faster
conversion of the static order book into revenue can result in accelerated growth
prospects for LMW over the next couple of years.

Exports to gain ground

Export segment contributed 21% to LMWs revenue and is the fastest growing one
posting 115% growth in FY14. Turkey, Indonesia, Pakistan and Bangladesh have
been the key export markets for LMW. It sends dismantled units to these countries
and then assembles them. To enhance its presence in export markets, LMW has set
up a plant in China under LMW Suzhou (its 100% Chinese subsidiary), which
contributed 30% of export revenue in FY14. Order execution cycle for exports is
strong with no static orders.

Export order book break-up

Others, 6%

Bangladesh, 15%

Turkey, 39%

Pakistan, 18%

Indonesia, 22%

Source: Company, MOSL

Export order book flow for FY14

Source: Company, MOSL

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Exports to post more than 30% CAGR over FY14-17E

Although LMW has a dominant 60% market share in India for spinning machinery, it
has a minimal 10% market share in export markets. Management believes there is
tremendous scope to ramp up the export market share and is targeting at least 20%
market share over the next few years. Thus, export business is expected to post 30%
CAGR in revenue over FY14-17E.

Export market share (%)

LMW, 10%

Others, 90%

Source: Company, MOSL

China capacity, a strategic decision

China caters to 35% of the global textiles market. To augment this large market,
LMW has strategically set up capacity in China. Apart from focusing on Chinese
markets, company is looking to cater to other key markets like Vietnam from
China, which are being catered from India.

LMW has invested USD29m, of which USD12.5m has been invested through the
equity route and balance USD16.5m has come via local debt, to set up the
manufacturing facility in China. Total capacity of the Chinese unit amounts to
manufacturing of 350 machines aggregating 0.5m spindles. Technical components,
which form close to 40% of the machinery cost, are being sent from India, while
the balance 60% of components are being procured from local markets in China.
LMW aims to emerge as a total textile system solution provider in China over the
next five to six years.

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MTD, ATC contibution to remain low

We expect modest growth for Machine Tools Division (MTD), with overall contribution
expected to decline, given high growth prospects for core textile machinery division.
Contribution from Foundry Division is expected to remain low at 3% of sales. This
division manufactures castings used primarily by LMWs textile machinery division.
Companys Advanced Technology Centre (ATC) contributed 0.2% of FY14 sales. Though
ATC holds huge long term potential, we expect minimal near term contribution.

Machine Tools Division and Foundry Division to post modest growth

Machine Tools Division (MTD) is the second-largest division for LMW and
contributed ~8% of sales in FY14. The division makes a complete range of horizontal
and vertical lathes and machining centers for the auto and auto ancillary, general
engineering and manufacturing industries. Given the high degree of competition,
MTD makes low single digit EBIT margin. We expect modest growth for this
segment, with overall contribution expected to decline given high growth prospects
for the core textile machinery division.

Similarly, Foundry Division contributed 3% to FY14 sales and manufactures castings,

which are primarily used by the companys textile machinery division (80% of
production is captive consumption) with balance being sold to other industries. In
FY14, exports accounted for 60% of the divisions revenue. We expect contribution
from this division as well to remain low.

Foray into aerospace industry still nascent

LMW set up Advanced Technology Centre (ATC) with an investment of INR650m in
FY09. It manufactures aerospace components and parts on a sub-contract basis. It is
a new division and contributed 0.2% of FY14 sales. Though ATC holds huge long
term promise, we expect near term contribution to remain minimal.

ATCs key client is Hindustan Aeronautics Ltd (HAL). Management highlighted that it
is a time consuming process (two to three years) to get samples approved from
clients. Hence, gestation period is long. Further, asset intensity in the business is
very high, with peak revenue from the INR650m investment expected at INR250m,
which results in initial losses as the capacity is under-utilized. For FY14, the division
reported INR150m in revenue and posted an EBIT loss of INR130m. Management
expects the division to turn profitable over the next two years as capacity utilization
is ramped up.

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Indian textiles sector poised for strong growth

Chinas dominance in global textiles trade with 35% export market share is waning due
to high wage inflation and Yuan appreciation.
Simultaneously, Indias competitive advantage in textiles is evolving to be the highest
in the world. Multiple factors aiding India to gain a structural advantage include: 1)
Raw material availability - strong self-sufficiency in cotton 2) Competitive cost with
lowest wage structure 3) Competitive currency INR has depreciated by 35% against
Yuan 4) Supportive government policies.
Indian textiles sector is expected to post 10% CAGR to USD223b by 2021.

Chinas dominance wanes on structural factors

China has been the leading source base for textiles and apparel, with a majority
share of ~35% of global exports. China is also a leader in textile production, with a
total industry size of USD351b, of which the domestic segment stood at USD135b
and exports at USD216b. Chinas export of textiles and clothing increased from
USD28.3b (13.3% of world trade) in 1990 to USD216b (35.9% of world trade) in
2010. It garnered almost the entire share that EU lost during this period. Thus, there
is a huge gap between Chinas market share of 35% and Indias market share of 4%
in global textiles trade. This is expected to narrow in favor of India due to the
structural reasons discussed below:

Despite the strengths that China possesses in the apparel sector, inflation and labor
supply challenges have hampered its global competitiveness. Some of the key
challenges are:
Increase in labor cost: Chinese average wage cost is ~USD193 per month. Wage
inflation in China is ~18%.
Currency appreciation: Appreciation of Yuan by 15% and depreciation of INR by
20% makes India more competitive.
Ageing population: Increase in ageing population and one child policy will cause
the wage inflation to rise at a faster pace in the future.

Global textiles trade dominated by China

Source: Industry, MOSL

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India gains competitive advantage

Multiple factors have been aiding India to gain a structural competitive advantage in
global textiles trade. Indias advantage is unparalleled due to factors as follows:
Key factors driving Indias advantage in global textiles trade

Competitive
Competitive
cost
currency
structure

Raw Supportive
material government
availability India policies
Advantage

Source: Company, MOSL

1) Raw material availability - strong self-sufficiency in cotton

India is the only textile exporter globally which has 100% self-sufficiency in cotton
sowing and exports its surplus cotton crop. Many textile centers like Vietnam,
Bangladesh, Indonesia and Thailand do not have cotton. Also, other large exporters
such as China and Pakistan are in cotton deficit, while India is cotton surplus.
Exports of raw cotton accounted for ~23% of production in FY13. Higher acreage and
yields in cotton due to introduction of BT cotton led to Indias cotton production
increasing from 2.02mt in FY92 to 5.78mt in FY13, a CAGR of 5.1%, moving from
being a net importer to a net exporter in FY06. High cotton availability augurs well
for the long term demand outlook for Indian textiles sector as the Government is
focused on ensuring that a larger degree of exports come from processed cotton
either in the form of yarn or fabrics or garments, rather than raw cotton. This will
result in greater employment generation for the country apart from ensuring
greater investment in the sector, which augurs well for textile machinery companies
like LMW.

India: sole textile exporter with 100% cotton self-sufficiency and net export surplus
Opening
Country Output Imports Consumption Exports Closing Stock
Stock
World 90 117.1 38.5 109.5 38.5 97.9
U.S. 3.9 12.9 0 3.6 10.4 2.8
India 12 29.5 0.8 23 8.8 10.4
China 50.4 32 12.8 35.5 0.1 59.6
Pakistan 2.9 9.5 2.5 11.5 0.4 2.9
Bangladesh 0.9 0.1 3.7 3.8 0 0.9
Source: Company, MOSL

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2) Competitive cost structure

India enjoys a favorable cost structure against other exporting nations. Wages are
less than half compared to China, while overall manufacturing costs are 10% lower.

Indian wages are half v/s China

601 Wages (Base India = 100) Power Costs (Base India = 100)
100 101 94 93
76
63
214 174 160 34
100 89 53

Bangladesh

Bangladesh
Pakistan

Pakistan
Egypt

Egypt
Indonesia

Indonesia
China

China
Turkey

Turkey
India

India
Source: Company, MOSL

while overall manufacturing costs are at least 10% lower than China
Manufacturing Costs (Base India = 100)
140
Indias Position
111 Wages are Half of Chinas.
100 98 99
87 Power costs at par with China, Pak, Turkey.
Competitive in manufacturing costs.
Bangladesh
Pakistan

Indonesia
China

Turkey
India

Source: Company, MOSL

Why India is gaining preference over key textile exporters

China Pakistan Bangladesh
Big importer of cotton Cotton Importer Negligible Cotton
Losing export Energy issues Production
Competitiveness Geopolitical issues Environmental compliance
Focus shift from textiles to Compliance issues issues
higher value-added Workers safety issues
industries
Wage inflation
Rising power costs
Stricter environmental
compliance
Focus on domestic
consumption
Yarn capacity closures
Yuan appreciation
Source: Company, MOSL

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3) Competitive currency INR depreciates by 35% against Yuan

While INR depreciated by over 20% against the US Dollar over the last five years, the
depreciation against Chinese Yuan has been even greater at 35%. This resulted in
competiveness shifting in favor of India, against Chinese players. Together with the
labor cost inflation in China, INR depreciation is a major factor driving growth for
Indian textiles sector.

Further, Chinas cotton policy of supporting domestic cotton growers by setting a

minimum support price at 30% premium to global cotton prices has benefited Indian
spinners to a great degree. Indian companies have used the opportunity to either
reduce debt or modernize spindles, thus improving the competitiveness of Indian
yarn manufacturers. China has discontinued its yarn policies and is planning to roll
out direct subsidies (pilot project ongoing). While yarn prices are expected to soften,
Indian yarn manufacturers have used the opportunity to upgrade. We believe direct
subsidies will be difficult to implement in China, leading to reduced cotton
production and hence increasing Indias cotton advantage.

INR depreciates by 35% against Yuan over the last 5 years

12

10

4
Sep-09

Sep-10

Sep-11

Sep-12

Sep-13
Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14
Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Jun-11

Dec-11

Jun-12

Dec-12

Jun-13

Dec-13

Jun-14
Source: Company, MOSL

4) Supportive government policies

The textiles and apparel industry accounts for ~14% of Indias overall industrial
production, 12% of exports and contributes nearly 4% to the countrys GDP. It
employs nearly 45m people and its annual turnover is ~USD90b, with USD40b
coming from exports. Given high contribution from the textiles sector on multiple
fronts, there is a constant need to support the industry. Upgradation of textiles
industry is one of the most crucial areas and priority to face increased competition
from exporting countries like China, Vietnam, Bangladesh and Sri Lanka.

TUFS and state level policies key drivers for textile investment
One of the reasons for Chinas success in textiles and clothing exports has been its
government support in the form of interest rebate, VAT refunds, technology grants,
local grants and income tax rebate. Investment in the textiles sector is attributable
to the Technology Upgradation Fund Scheme (TUFS) from Indias Finance Ministry.
The governments focus on the sector, considering the potential to generate
employment opportunities, augurs well for the industry. The recent Budget has
allocated INR23b for TUFS. Since major demand comes from greenfield projects and
not replacement market (despite the average life of spindles being around nine
years), the allocation announced in Budget implies continued capex by textile

11 August 2014 14
 spotlight | Lakshmi Machine Works

players. The scheme offers interest subsidy of 2% for standalone spinning, 5% for
integrated facility, processing, garmenting and technical textiles and 6% for weaving.
With a 2% interest subvention provided to spinning units under TUFS and 5%
interest subvention provided to weaving units under TUFS, the blended subsidy is
~3.5-4%, implying a potential textile capex under TUFS to be at least INR82b
(interest subvention is provided for seven years under TUFS). With LMW enjoying
leadership position in textile machinery, it is among the biggest beneficiaries of
TUFS.

In addition to governments TUFS loan, there are additional benefits of state related
policies. All relevant states offer 5-6% interest subsidy for capital investment.
Overall blended capital cost (including working capital) of any new capex in textiles
is 5-6%. Another outcome of the TUFS policy is an increase in integrated large
facilities. One of the studies found that India sub-contracted 74% of its output
compared to ~11% in Hong Kong, 18% in China, 20% in Thailand, 28% in South Korea
and 36% in Taiwan. This supports the Indian governments thrust on promoting
integrated units and enhancing value-add provided by the Indian textiles sector.

Indian textiles sector expected to post 10% CAGR to USD223b by 2021

Indian textiles industry is a leading one in the world and steadily improving on its
capabilities and competitiveness versus global players. Indian industry is poised to
play a vital role in the economic development of the country. Indias total apparel
and textiles industry (domestic + exports) in 2011 stood at USD88b. This is projected
to grow to ~USD143b by 2016 and USD223b by 2021, driven by both domestic and
export segments. While exports are likely to grow from ~USD31b in 2011 to USD82b
in 2021, the domestic industry is projected to grow from USD58b to USD141b during
the same period (source: Technopak Report 2012).

Indian textiles industry - size and growth estimates (USD b) Domestic textiles - size and growth estimates (USD b)
Domestic Exports Total Apparel Textiles Total

223
82

143
141 50 44
89 31
93 26
31 13
82 38
58 50 18 24

2011 2016 (P) 2021 (P) 2011 2016 (P) 2021 (P)

Source: Industry, MOSL Source: Industry, MOSL

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 spotlight | Lakshmi Machine Works

Earnings to post 31% CAGR over FY14-17E

Pick-up in textile capex to drive earnings growth

We expect revenue to clock a CAGR of 20% over FY14-17E, led by the core textile
machinery division which will contribute 90% to revenue. EBITDA would grow at 25%
CAGR, with margins expanding 180bp to 12.4%. PAT would post a CAGR of 31%.
With current capacities operative at ~50% utilization, we expect capacity utilization to
be ramped up over the next two years, thus requiring limited maintenance related
capex. This would ensure robust free cash generation over FY14-17.
With highly depreciated fixed assets and a negative working capital cycle, core capital
employed in the business is negligible. Cash on books for LMW is expected to rise to
50% of current market capitalization on the back of robust free cash generation.
We expect dividend payout to increase from 21% to 25% over FY14-17E.

Expect revenue CAGR of 20% over FY14-17E

We expect consolidated revenue to grow at a CAGR of 20% over FY14-17 led by
Textile Machinery Division which is expected to contribute 90% of revenues.
Revenue to post 15% CAGR over FY14-17E

Revenues (INR m)

39,890
33,780
28,388
23,378
20,172

FY13 FY14 FY15E FY16E FY17E

Source: Company, MOSL

EBITDA to post 25% CAGR, margins to expand by 180bp

We expect EBITDA to post 18% CAGR over FY14-17E. Margins should expand 180bp
to 13.4%, driven by better operating leverage.
EBITDA to clock 18% CAGR over FY14-17E
EBITDA (INR m) EBITDA Margins (%)

13.4%
13.2%
12.6% 5,342
4,456
11.6% 3,575
11.3%
2,711
2,270

FY13 FY14 FY15E FY16E FY17E

Source: Company, MOSL

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 spotlight | Lakshmi Machine Works

PAT to post 31% CAGR over FY14-17E

We expect PAT to clock a CAGR of 31% over FY14-17E, from INR1.9b to INR4.3b led
by strong 20% top-line growth and 180bp improvement in EBITDA margins.

PAT (INR m)

PAT (INR m)

4,345
3,391
2,590
1,891
1,296

FY13 FY14 FY15E FY16E FY17E

Source: MOSL

Negative working capital cycle to remain negative

We expect consolidated working capital days to remain negative at -39 days.

Cash conversion cycle (days)

Inventory Days Debtor Days Loans and Advances Days Current Liability Days Cash Conversion Cycle

28 27 27 27 27
22 24 24 24 24
49 52 52 52 52

-142 -142 -142 -142

-39 -39 -39
-152 -39

-53

FY13 FY14 FY15E FY16E FY17E

Source: MOSL

Operating cash flow to remain robust; free cash flows to improve

We expect operating cash flow to remain robust and free cash flow to improve to
INR5.8b over FY14-17E. Capex during the period would only be maintenance and
modernization related and is unlikely to exceed depreciation amount for the year.

Operating cash flow to remain strong Limited capex to aid robust free cash generation

Operating Cash Flow (INR m) Free Cash Flow (INR m)

4,419 5,852
3,835
3,183 4,768
3,946

1,509
1,714
823 1,217

FY13 FY14 FY15E FY16E FY17E FY13 FY14 FY15E FY16E FY17E

Source: Company, MOSL Source: Company, MOSL

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 spotlight | Lakshmi Machine Works

Return ratios to improve; cash on books to keep return ratios capped

With highly depreciated fixed assets and a negative working capital cycle, core
capital employed in the business is negligible. However, huge cash accumulated
over the years (82% of capital employed as of FY14) results in cash drag. We expect
RoCE to improve from 26.8% to 35.8% and RoE to improve from 18.9% to 25.1%.
RoCE (%) RoE (%)

RoCE (%) RoE (%)

33.7 35.8
23.6 25.1
30.6 21.4
26.8 18.9
20.0 14.1

FY13 FY14 FY15E FY16E FY17E FY13 FY14 FY15E FY16E FY17E

Source: Company, MOSL Source: Company, MOSL

Cash on books to expand significantly to 50% of current m-cap by FY17

LMWs cash on books is expected to rise to 50% of current market capitalization on
the back of robust free cash generation.
.

Cash on books to rise further

Cash on books (INR m) % of Mcap
50%

39% 21,240
29%
16,469
21%
18% 12,513
9,135
7,694

FY13 FY14 FY15E FY16E FY17E

Source: Company, MOSL

Dividend payout to improve from 21% to 25% over FY14-17E

We expect dividend payout to increase from 21% to 25% over FY14-17E.

Dividend payout to improve

Dividend (INR m) Payout (%)
25%
24%
902
22%
21%
20% 676

473
338
225

FY13 FY14 FY15E FY16E FY17E

Source: Company, MOSL

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 spotlight | Lakshmi Machine Works

Valuation and view

LMW is among the best plays on textile capex in India.
Order book of INR33.5b translates to a book to bill of 1.6x FY14 revenue, provides
strong revenue visibility.
We expect revenue to post a CAGR of 20% over FY14-17E, led by the core textile
machinery division which will contribute 90% to revenue. EBITDA would clock 25%
CAGR, with margin expanding 180bp to 13.4%. Consequently, PAT to post 31% CAGR.
LMW trades at a PE multiple of 16.3x FY15E and 12.5x FY16E earnings. Not Rated.

Best play on textile sector

LMW is among the best plays on textile capex in India. Due to structural
improvement in outlook for Indian textiles sector, we expect capex by Indian
spinning mills to pick up over the next two to three years, leading to strong growth
outlook for LMW a dominant leader in textile machinery in India with 60%
market share. Order book of INR33.5b translates to a book to bill of 1.6x FY14
revenue and provides strong revenue visibility. Further, there is a strong likelihood
that substantial portion of slow moving orders within the order book (~50%) can
get converted into execution and thereby revenue, which can accelerate the
current outlook of 20% revenue CAGR over FY14-17E.
LMW trades at a PE multiple of 16.3x FY15E and 12.5x FY16E earnings. Historically,
the stock has traded at 14.1x one-year forward earnings. Not Rated.

Price to earnings (x) Price to book (x)

P/E (x) 5 Yrs Avg(x) P/B (x) 5 Yrs Avg(x)
28 5.0
4.0
21 3.1
15.4 3.0 2.3
14.1
14 2.0

7 1.0
0.0
0
Feb-10

Feb-11

Feb-12

Feb-13

Feb-14
Aug-09

Aug-10

Aug-11

Aug-12

Aug-13

Aug-14
Aug-09

Aug-10

Aug-11

Aug-12

Aug-13

Aug-14
Feb-10

Feb-11

Feb-12

Feb-13

Feb-14

Source: Company, MOSL Source: Company, MOSL

EV/EBITDA (x)

10 EV/EBDITA(x) Avg(x)

8 7.0

4 5.2

0
Feb-10

Feb-11

Feb-12

Feb-13

Feb-14
Aug-09

Aug-10

Aug-11

Aug-12

Aug-13

Aug-14

Source: Company, MOSL

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 spotlight | Lakshmi Machine Works

Risks and concerns

Exposed to vagaries of textiles sector
Huge amount of capital is needed to set up plants in the textile spinning sector and
with 80% of the sector being unorganized, predictability can be an issue.

Deferment of orders
LMW faces cyclicality related to business outlook of textiles industry. If there is an
unforeseen downturn in textiles industry, it may hamper spinning players plans to
expand capacity. In such a case, textile companies usually defer delivery of
machinery orders, as was witnessed during the slowdown in FY08-10. This would
impact its revenue growth despite having a strong order book.

European players increased aggression in India

Historically, European players supplied imported machinery subject to various
duties. Thus, their products were expensive compared to LMW. However, with
foreign players like Rieter setting up manufacturing bases in India, the price
differential has reduced from as high as 40% to 10% currently. This made European
players more cost competitive, which could impact LMWs market share to an
extent. However, we believe that LMW is in a strong position to defend its market
share due to its well spread sales network, huge existing customer base and
technological competence.

Increase in competitive intensity

LMW competes with cheaper Chinese players on the one hand and global giants on
the other, who have greater experience in the textile machinery segment. However,
component life is much better for LMW compared to Chinese companies. Products
manufactured by the company are at least 10-15% cost effective compared to large
players. However, any aggressive steps taken by global giants can impact LMW
negatively.

Government support with TUFS

Any change in TUFS policy may impact textile sector capex and in turn LMWs
growth prospects.

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 spotlight | Lakshmi Machine Works

Management team
Mr Sanjay Jayavarthanavelu, CMD
Has been the Managing Director of Lakshmi Machine Works since June 11, 2010 and
Chairman since October 29, 2012.

Mr M V Subbiah, Director
An Indian industrialist, patriarch of the Murugappa family and a former executive
chairman of the Murugappa Group, known for his turnaround of EID Parry. In 2012,
he was awarded India's third highest civilian honor, the Padma Bhushan. From 2008
till 2013 he was the Chairman of National Skill Development Corporation.

Mr S Pathy
CMD of Lakshmi Mills, has around four decades of experience in the field of textile,
textile machinery, finance and administration.

Mr Basavaraju
Mr Basavaraju is ex-director of LIC and a board director.

Mr Aditya Himatsingka
Executive Director of Himatsingka Seide, having more than two decades of
experience in the silk industry.

Dr Mukund Govind Rajan

Director

Mr V Sathyakumar
Nominee (LIC)

Mr R Rajendran
With LMW since 1971. Has in-depth experience in the functions of accounts,
finance, tax and administration.

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 spotlight | Lakshmi Machine Works

About LMW
LMW is engaged in the manufacture of yarn spinning machinery since 1962. The first
unit was established at Perianaickenpalayam near Coimbatore, Tamil Nadu. It is the
market leader in India and one of the biggest players in the world in this segment.
LMW holds a market share of ~70% in volume terms and 60% in value terms in
textile machinery in India. Also, it caters to the key textile export markets such as
Turkey, Vietnam, Bangladesh and Pakistan.
Business verticals

Source: Company, MOSL

Revenue mix (%)

MTD, Dom Vs Exports

TMD, Machinery Vs Spares

LMW, Turnover Breakup

TMD, Domestic Vs Exports FDY, Domestic Vs Exports

Source: Company, MOSL

11 August 2014 22
 spotlight | Lakshmi Machine Works

Textile Machinery Division

Being LMWs main segment, the Textile Machinery Division accounted for ~89% of
its sales in FY14. Company manufactures the entire range of spinning machinery
from blowroom to ring spinning machines. It is one of the only three players in the
world with this range of machinery, besides Rieter and Marzoli. Initially, LMW
acquired the technological knowhow from Rieter, post which Rieter chose to go solo
in India. Since then, LMW has been developing technology in-house.
Presence primarily in spinning machinery
LMW is present only in the spinning machinery business and does not have any
presence in other segments of the textile value chain. LMW is one of the only
players offering machinery, thus catering to the entire spectrum of spinning ranging
from blow room lines to ring frames. This is a key USP for the company.

Textile value chain

Source: Company, MOSL

Products Machinery & Spares

Blowroom Lines Cards Draw Frames Combers Speed Frames Ring Frames
Source: Company, MOSL
Global reach

Source: Company, MOSL

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 spotlight | Lakshmi Machine Works

Machine Tools Division

This is the second-largest division contributing ~8% of companys sales in FY14. It
makes the complete range of horizontal and vertical lathes and machining centers
for the auto and auto ancillary, general engineering and manufacturing industries.
Machine Tools Division products

Horizontal Lathes Turn Mill Centers Vertical Lathes Horizontal M/c Centre Vertical M/c Centre

Source: Company, MOSL

Machine Tools Division value chain

Source: Company, MOSL

Foundry Division
Castings are among the vital inputs for manufacture of machinery. This division
contributed 3% to FY14 sales and manufactures castings, which are primarily used
for captive consumption by the companys machinery division and the balance being
sold to other industries. Ductile Iron and Grey Iron Castings are mainly
manufactured to suit the demand specifications of other user industries. LMW sells
the surplus production to players across industries. Foundry Division is also a key
export revenue generator for LMW as large quantities of castings are exported. In
FY14, exports accounted for 60% of the divisions revenue.

Foundry Division products, SG & GI Castings

Windmill Adapter Turbo Casing Windmill Hub Gear Box Housing Locomotive Castings
Source: Company, MOSL

11 August 2014 24
 spotlight | Lakshmi Machine Works

Foundry process value chain

Source: Company, MOSL

Advanced Technology Centre

Advanced Technology Centre (ATC) manufactures aerospace components and parts
on a sub-contract basis. It is a new division and contributed 0.2% of FY14 sales.

Special processes
Business Focus Select Products

Brackets, Stiffeners, Frames,

Engine Structural
Fairings, wings, ribs, fuselage, etc
Parts Parts

Aero engine components

Casings, Blisks, shafts, housings,
stators, NGV, Pump housing
Structural Precision
Bushing, Sleeves and sub
Parts Machining
assembly , LRU`s Gear Boxes,
Actuators, Landing gears

Aero engine sheet metal

Sheet components Assemblies &
Metal Fabrications, Seal Segments, Rings
Fabrication Heat Shields, Vane Inserts, Cover
Plates, Springs, etc.

Source: Company, MOSL

Aerospace demand drivers Special processes

Source: Company, MOSL Source: Company, MOSL

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 spotlight | Lakshmi Machine Works

Captive wind ensures consistent energy availability

Given poor availability of power in South India, LMW has installed 28 windmills with
a total installed capacity of 36.85mw. During FY14, the windmills generated 855 lakh
units of power. Captive wind energy catered to 80% of LMWs energy requirements
in FY14. Company has invested INR2b to set up this 36.85mw capacity.

Focused addition of windmills

2011-12
2007-08 8,850
4,950 KW
2006-07
KW 2008-09
6,600
1,500
KW KW
2005-06
8,250
KW

2004-05
6,650
KW
Total Capacity: 36.80 MW, Total Investment: 221 Crores

Source: Company, MOSL

Windmills capacity breakup Windmills generation trend

Capacity Count Year Generated
250 KW 6 2008-09 623
850 KW 1 2009-10 728
1,250 KW 4 2010-11 689
1,650 KW 13 2011-12 647
2,000 KW 4 2012-13 945
Total 28 2013-14 855
Source: Company, MOSL Source: Company, MOSL

Surplus land being efficiently monetized

LMW is effectively monetizing its non-core real estate assets. Company has got a
land bank in Coimbatore which is presently not in productive use. It entered into a
JV with Sobha Developers for a part of its land, whereby Sobha will develop the land
and the proceeds of the same would be shared in the ratio of 70:30 in favor of
Sobha. The initial process is expected to generate one lakh sqft of constructed
property and should fetch LMW close to INR520m at INR5,200/sqft. The project
named Elan is situated at Parasakthinagar, Ganapathy, Coimbatore and is spread
over 4.76 acres for constructing 236 residential apartments of 1, 2 and 3 BHK. It is
estimated to be completed by 2016. LMW is also contemplating to utilize the same
business model for land in other areas like Singanallur in Coimbatore.

11 August 2014 26
 spotlight | Lakshmi Machine Works

Financials and valuations

Income statement (INR Million)
Y/E March 2012 2013 2014 2015E 2016E 2017E
Net Sales 23,054 20,172 23,378 28,388 33,780 39,890
Change (%) 26.4 -12.5 15.9 21.4 19.0 18.1
EBITDA 2,692 2,270 2,711 3,575 4,456 5,342
EBITDA Margin (%) 11.7 11.3 11.6 12.6 13.2 13.4
Depreciation 1,200 1,192 1,045 1,067 1,098 1,129
EBIT 1,493 1,078 1,666 2,507 3,358 4,213
Interest 56 4 6 0 0 0
Other Income 847 763 1,106 1,192 1,486 1,994
Extraordinary items 0 0 82 0 0 0
PBT 2,284 1,837 2,684 3,699 4,844 6,207
Tax 896 541 794 1,110 1,453 1,862
Tax Rate (%) 39.2 29.5 29.6 30.0 30.0 30.0
Reported PAT 1,388 1,296 1,891 2,590 3,391 4,345
Adjusted PAT 1,388 1,296 1,948 2,590 3,391 4,345
Change (%) -9.4 -6.7 50.3 32.9 30.9 28.1
Min. Int. & Assoc. Share 0 0 0 0 0 0
Adj Cons PAT 1,388 1,296 1,948 2,590 3,391 4,345

Balance sheet (INR Million)

Y/E March 2012 2013 2014 2015E 2016E 2017E
Share Capital 113 113 113 113 113 113
Reserves 8,726 9,452 10,969 12,990 15,570 18,833
Net Worth 8,838 9,565 11,081 13,103 15,683 18,946
Debt 0 0 0 0 0 0
Deferred Tax 254 132 48 48 48 48
Total Capital Employed 9,093 9,697 11,129 13,151 15,730 18,993
Gross Fixed Assets 16,595 16,705 16,930 17,430 17,930 18,430
Less: Acc Depreciation 11,673 12,283 13,003 14,070 15,169 16,298
Net Fixed Assets 4,922 4,423 3,927 3,359 2,761 2,132
Capital WIP 103 143 355 284 338 399
Investments 643 643 637 637 637 637
Current Assets 13,271 13,185 15,764 20,562 26,048 32,550
Inventory 2,622 2,707 3,348 4,065 4,838 5,713
Debtors 1,544 1,209 1,532 1,860 2,213 2,613
Cash & Bank 7,131 7,694 9,135 12,513 16,469 21,240
Loans & Adv, Others 1,974 1,575 1,749 2,124 2,527 2,985
Curr Liabs & Provns 10,453 8,699 9,575 11,713 14,075 16,746
Curr. Liabilities 9,741 8,402 9,111 11,064 13,165 15,547
Provisions 712 298 463 649 909 1,199
Net Current Assets 2,818 4,485 6,189 8,849 11,973 15,805
Total Assets 9,093 9,697 11,129 13,151 15,730 18,993
E: MOSL Estimates

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 spotlight | Lakshmi Machine Works

Financials and valuations

Ratios
Y/E March 2012 2013 2014 2015E 2016E 2017E
Basic (INR)
EPS 123.2 115.0 172.9 229.8 300.9 385.5
Cash EPS 229.6 220.8 265.6 324.5 398.3 485.7
Book Value 784.2 848.7 983.3 1162.7 1391.5 1681.1
DPS 50.0 20.0 30.0 42.0 60.0 80.0
Payout (incl. Div. Tax.) 47.2 20.3 20.9 21.9 23.9 24.9
Valuation(x)
P/E 30.4 32.6 21.7 16.3 12.5 9.7
Cash P/E 16.3 17.0 14.1 11.5 9.4 7.7
Price / Book Value 4.8 4.4 3.8 3.2 2.7 2.2
EV/Sales 0.0 0.0 1.4 1.1 0.8 0.5
EV/EBITDA 0.0 0.0 12.3 8.4 5.9 4.0
Dividend Yield (%) 1.3 0.5 0.8 1.1 1.6 2.1
Profitability Ratios (%)
RoE 16.4 14.1 18.9 21.4 23.6 25.1
RoCE 27.6 20.0 26.8 30.6 33.7 35.8
Turnover Ratios (%)
Asset Turnover (x) 2.5 2.1 2.1 2.2 2.1 2.1
Debtors (No. of Days) 22.7 20.0 22.2 22.2 22.2 22.2
Inventory (No. of Days) 41.5 49.0 52.3 52.3 52.3 52.3
Creditors (No. of Days) 53.0 55.6 55.6 56.3 56.7 56.8
Leverage Ratios (%)
Net Debt/Equity (x) 0.0 0.0 0.0 0.0 0.0 0.0

Cash flow statement (INR Million)

Y/E March 2012 2013 2014 2015E 2016E 2017E
OP/(Loss) before Tax 2,284 1,837 2,684 3,699 4,844 6,207
Depreciation 1,200 1,192 1,045 1,067 1,098 1,129
Others 0 0 0 0 0 0
Interest -559 -697 -789 -1,192 -1,486 -1,994
Direct Taxes Paid -913 -655 -898 -1,110 -1,453 -1,862
(Inc)/Dec in Wkg Cap -223 -810 -334 718 832 939
CF from Op. Activity 1,762 823 1,509 3,183 3,835 4,419
(Inc)/Dec in FA & CWIP -1,850 -400 -581 -429 -554 -561
(Pur)/Sale of Invt 0 0 0 0 0 0
Others 55 793 786 1,192 1,486 1,994
CF from Inv. Activity -1,794 394 205 764 932 1,433
Inc/(Dec) in Net Worth 0 0 0 0 0 0
Inc / (Dec) in Debt 0 0 0 0 0 0
Interest Paid -7 -3 -4 0 0 0
Divd Paid (incl Tax) -327 -559 -229 -568 -811 -1,082
CF from Fin. Activity -397 -654 -273 -568 -811 -1,082
Inc/(Dec) in Cash -429 563 1,441 3,378 3,956 4,770
Add: Opening Balance 7,561 7,131 7,694 9,135 12,513 16,469
Closing Balance 7,131 7,694 9,135 12,513 16,469 21,240
E: MOSL Estimates

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 spotlight | Lakshmi Machine Works

NOTES

11 August 2014 29
Disclosures
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spotlight
report is for personal information of the select recipient and does not construe to be any investment, legal or taxation advice to you. This research report | Lakshmi
does not constitute Machine
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