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Reuters: LKMC.BO; Bloomberg: LMW IN

Lakshmi Machine Works

Spinning Wealth Lakshmi Machine Works (LMW), the largest player in domestic spinning machinery manufacturing industry, is determined to protect its current revenue market share of 60% in a cyclical, high-entry barrier, patented technology-driven, oligopolistic industry. It has strong client relationships along with sound corporate governance, ethical and transparent business practices. Long-term outlook for LMW is encouraging as India is expected to add 7mn-8mn spindles over FY14-FY19E, which provides a Rs105bn opportunity We expect LMW to clock a PAT CAGR of 15.6% with EBITDA margin/RoIC expansion of 85bps/1091bps to 12.5%/36.1%, respectively over FY15E-FY17E. LMW will continue to provide a high margin of safety on account of market leadership and debt-free (cash surplus) balance sheet along with positive operating cash flow. We expect LMW to cumulatively generate net operating cash flow of Rs8,365mn over FY15E-FY17E. We have assigned Buy rating to LMW with a target price of Rs4,725, valuing the stock at 21x FY17E EPS of Rs225.

Exemplary quality of management with a high margin of safety: LMW has focused on controlling costs through new technologies and making manufacturing processes world class rather than going in for unwarranted price hikes. LMW remained debt free and profitable even after not going for any price hike since the past four years. During this period, annual PAT and cash flow from operations (CFO) averaged Rs1.51bn and Rs1.67bn, respectively. LMW maintains price transparency and uniformity for all clients and follows high standards of corporate governance.

Largest player in domestic market with an ambition to improve its global footprint: LMW is determined to maintain its domestic revenue market share of not less than 60% in the high-entry barrier patented technology-driven textile spinning machinery manufacturing industry. Moreover, LMW is aggressively focusing on other geographies like China, Vietnam, Indonesia, Turkey etc. to improve its global market share beyond 9%. LMW reported a four-year export CAGR of 81% as of FY14-end as against 39% reported by the textile machinery manufacturing industry, and also has the largest share of 21% in total textile machinery exports from India in FY14.

A play on cotton yarn spinning industry: Overall cotton yarn demand is estimated to post a CAGR of 3%-4% over FY14-FY19E and cumulative spindle requirement is seen at 7mn-8mn, which provides a Rs105bn opportunity. The demand for cotton yarn is expected to improve from 4QFY16. With the expected improvement in bank funding, capacity expansion and replacement of spinning machinery is likely to accelerate.

Healthy financials with positive CFO, debt-free status and huge cash on its books: Since FY96, LMW’s CFO remained positive barring in FY98 (-Rs95mn) and FCFO stayed positive for 13 years. LMW has been debt-free since FY05. We expect CFO and FCFO to remain positive going forward as well. Cash balance as of FY14-end stood at 43% of the balance sheet. We expect a PAT CAGR of 15.6% over FY15E-FY17E. Return on equity (RoE) and Return on Invested Capital (RoIC) are seen at 17% and 36.1%, respectively, for FY17E. Order book is expected to remain at ~Rs30bn with a short execution period.

BUY

Sector: Capital Goods

CMP: Rs3,793

Target Price: Rs4,725

Upside: 24%

Sameer Panke [email protected] +91-22-3926 8114

Key Data

Current Shares O/S (mn) 11.3

Market Cap (Rsbn/US$bn) 42.8/693.9

52 Wk High /Low (Rs) 4,504/2,600

Daily Volume (3M NSE Avg.) 7,525

Shareholding (%) 1QFY15 2QFY15 3QFY15

Promoter 28.4 28.4 28.4

FII 1.7 2.2 2.2

DII 23.8 25.0 25.3

Others 46.2 45.0 44.2

One-Year Indexed Stock Performance

Price Performance (%)

1 M 6 M 1 Yr

Lakshmi Machine Works (2.4) 1.2 38.6

Nifty Index 7.0 13.4 44.1

Source: Bloomberg

Y/E March (Rsmn) FY13 FY14 FY15E FY16E FY17E

Revenue 19,171 22,416 24,468 23,871 29,020

YoY (%) (9.3) 16.9 9.2 (2.4) 21.6

EBITDA 2,101 2,564 2,861 2,668 3,638

EBITDA (%) 11.0 11.4 11.7 11.2 12.5

Adj. PAT 1,175 1,837 1,899 1,769 2,539

YoY (%) (14.2) 56.4 3.4 (6.9) 43.5

FDEPS (Rs) 104 163 169 157 225

RoE (%) 12.6 17.8 16.1 13.4 17.0

RoIC (%) 15.3 24.6 25.2 24.6 36.1

P/E (x) 36.4 23.3 22.5 24.2 16.8

EV/EBITDA (x) 16.8 13.2 11.6 11.6 7.7

Source: Company, Nirmal Bang Institutional Equities Research

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LAKSHMI MACHINE NSE CNX NIFTY INDEX

6 February 2015


Lakshmi Machine Works 2

Valuation and outlook

We believe LMW is favourably positioned in capital goods space on EBIDTA margin/ROE vs PER matrix. We have valued LMW by highlighting: a) Higher margin of safety, and b) Economic moat enjoyed by the company.

Higher margin of safety

We have analysed the financial performance of LMW since FY96 (1996). The company has registered a net total revenue CAGR of 8% over FY96-FY14 (1996-2014). For the same period, PAT CAGR was ~9%. However, with the success of TUFS (Technology Upgradation Fund Scheme) which was launched in FY00 (2000), the textile industry’s capex accelerated. Consequently, LMW’s net total revenue and PAT registered a CAGR of 14% and 18% respectively over FY03-FY14. The company never incurred losses, both at the operating and net level. This is even more commendable for a company which operates in a capital-intensive and cyclical sector such as capital goods. Operating margin averaged at a healthy ~14%, with the lowest margin registered being 11% since FY96 (1996). This provides a strong threshold or support level for operating margin, as we have witnessed a few cyclical downturns during this period of 19 years. However, over the preceding three years (FY12-FY14), operating margin averaged 11.5%. We expect an average 11.6% operating margin for FY14-FY17E. Moreover, the company enjoys a debt-free status since FY05 and has accumulated huge cash on its books (43% of balance sheet as of FY14-end and ~20% of current market capitalisation). We believe the company will continue to remain debt-free and profitable, command a double-digit operating margin and remain judicious in deploying its hard-earned cash reserves. LMW is a regular dividend-paying company. For the preceding seven years (FY8-FY14), LMW maintained average dividend rate of 26% with a payout ratio of 21%. Moreover, our interaction with the management suggests higher dividend payout likely in future. This provides a lot of financial safety to investors.

Economic moat

Economic moat means the protection available to the company’s profitability. It protects a company's profits from being attacked by business forces. In traditional management theories, it is also known as sustainable competitive advantage or entry barriers. Without economic moat, competition from rivals will ensure that high returns of a company are lowered to the level of economic cost of capital or even below. LMW enjoys the largest revenue market share of 60% in the second-largest textile spinning machinery manufacturing industry in the world (market size Rs31bn as of FY14 with FY10-FY14 CAGR of 9.8%) (the largest being China). LMW is the fourth-largest player globally and commands a 9% market share (market size US$3.5bn as of FY14-end). There are limited suppliers and a large number of consumers, indicating the oligopoly nature of the market wherein LMW has a major market share. This industry is also driven by patented technology and focus on value addition to improve the quality of yarn produced and reduce power and labour costs. Textile spinning mills expect a total solution from machinery manufacturers and also expect them to provide the entire range of machinery. Hence, spinning machinery manufacturing becomes a very high-entry barrier industry which provides the economic moat for LMW.

Another aspect is the threat of returns declining to the cost of capital or below. LMW is enviably placed on this front. There is competition from large European players in India, but LMW has been following a prudent, ethical, transparent and uniform pricing policy irrespective of the size of the order. The company has always focused on optimising or rationalising the costs rather than going in for unwarranted price hikes to take undue advantage of its dominant market share. LMW has not gone for any price hike since the past four years (FY11) for its machinery and still remained profitable with double-digit operating margin and return ratios This is also on account of lower import content at ~12% in its machinery as against more than 25% in case of European competitors. In fact, its prices are sustainably lower than its European competitors by ~15%. It is extremely difficult for European competitors to remain profitable at LMW’s price points.

Another attribute of the economic moat refers to ability of the company to protect its turf. LMW’s management has shown exemplary vision in anticipating competition and understood the importance of technological innovation to remain at the top by sustained investment in developing new technologies. This has twin advantages: a) Product quality/technology remains world class, and b)The company could retain leadership position as it is adding value to clients’ business by improving yarn quality and reducing power and labour costs. Moreover, LMW is focusing on exports and has set up a manufacturing unit in China. LMW posted a four-year export CAGR of 81% as of FY14-end and occupies a 21% share in total textile machinery exports from India in FY14. Its Chinese subsidiary is profitable and is generating internal accruals. LMW has captured a 10% market share in volume terms in China in the Ring Frame segment in a short span of four years and sold more than 1mn spindles until FY14-end.



We are positive on LMW from a long-term perspective. India is expected to add 7mn-8mn spindles over FY14-FY19E and cotton yarn demand is likely to post a CAGR of 4% over the same period. LMW is well equipped to take advantage of the same. However, we expect FY16 to remain muted for LMW as the textile spinning industry is facing a decline in yarn prices since the past three-four months on account of policy changes in China. We expect LMW to benefit in FY17 on account of the likely recovery in textile spinning capex from 4QFY16 onwards. This will improve order inflow and capacity utilisation, thereby leading to margin expansion. Over FY15E-FY17E, LMW is expected to witness EBITDA margin/RoIC expansion of 85bps/1091bps to 12.5%/36.1%, respectively.

LMW reported positive operating cash flow from FY96 to FY14 (1996-2014) except FY98 (-Rs95.1mn). This reflects financial efficiency and solvency of the business. In fact, in FY09, even after recording YoY decline of 39% in revenue and 55% in PAT, LMW posted positive operating cash flow of Rs1.38bn. Free cash flow has been in negative territory only for six times in the past 19 years (FY96-FY14). This shows the ability of the company to fund annual capex from a year’s cash flow for most of the years. Going forward, we expect LMW to continue with its prudent cash flow management and expect operating cash flow to remain positive. In the absence of major capex, free cash flow is expected to remain in positive territory. For the same period of FY96-FY14, we observed that LMW registered negative non-cash net working capital 13 times. In fact, it has been consistently reporting negative net working capital since FY06. Over FY08- FY14, LMW’s cash conversion cycle was negative for three years. We expect the trend of negative net working capital requirement to continue and the cash conversion cycle also to average at five days over FY15E-FY17E. LMW remains debt-free and will continue to generate positive operating/free cash flow.

We believe our earnings estimates have scope for upside revision depending on the expected demand recovery. Moreover, we have not factored in earnings from real estate development and the Chinese subsidiary in our estimates. Therefore, there is an upside risk to our FY17 EPS estimate of Rs225.

Domestic spinning companies are expected to add 7mn-8mn spindles over FY14-FY19E. It translates into an opportunity worth Rs105bn. LMW is a dominant player with a 60% market share. LMW is in a better position to garner a major share as it has world-class products with price advantage over European competitors. With the focus on new product addition, exports and component sales, profitable growth in Chinese operations, and strong financials with debt free and cash surplus balance sheet, we believe LMW should register better performance in FY17E. The stock currently trades at 24.1x/16.8x FY16E/FY17E EPS of Rs157.0/Rs225, respectively. We have assigned Buy rating to LMW with a target price of Rs4,725, valuing the stock at 21xFY17E EPS of Rs.225.

There is no comparable peer in spinning machinery manufacturing industry in the listed space. Hence, we have compared LMW with other leading capital goods companies on EBITDA margin and ROE matrix. EBITDA margin/RoE vs PE comparison indicates favourable positioning for LMW. The average FY17E PER for the selected sample of capital goods companies is at 27x. Our target multiple of 21x for LMW is at 23% discount.

Exhibit 1: Peer comparison

Particulars FY15E FY16E FY17E

Bharat Heavy Electricals

P/E (x) 29.2 23.7 18.0

RoE (%) 5.8 7.9 9.2

EBITDA margin (%) 8.9 10.6 11.8

Thermax

P/E (x) 45.9 33.4 26.5

RoE (%) 12.9 16.4 18.2

EBITDA margin (%) 8.5 9.4 10.1

Blue Star

P/E (x) 26.4 20.3 15.9

RoE (%) 19.9 25.2 26.6


Voltas

P/E (x) 28.1 22.0 18.1

RoE (%) 15.5 17.7 18.7


Particulars FY15E FY16E FY17E

Siemens

P/E (x) 78.0 54.4 41.9

RoE (%) 10.8 14.4 16.6


ABB

P/E (x) 81.2 56.3 44.3

RoE (%) 10.9 14.3 17.8


LMW

P/E (x) 22.5 24.2 16.8

RoE (%) 16.1 13.4 17.0

EBITDA margin (%) 11.7 11.2 12.5

Source: Bloomberg, Nirmal Bang Institutional Equities Research



Exhibit 2: One-year forward P/E

Source: Nirmal Bang Institutional Equities Research Source: Nirmal Bang Institutional Equities Research

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Investment Arguments

Cotton yarn demand likely to post a 4% CAGR with spindle addition at 7mn-8mn over FY14-FY19E

LMW is the largest manufacturer of the entire range spinning machinery in India since the past few decades. The company derives 90% of its revenue from manufacturing textile spinning machinery. The fortunes of the company are closely linked with the status of underlying textile spinning industry, which in turn depends on industry dynamics of cotton crop and cotton yarn. Cotton yarn prices are declining since the past three-four months. We believe there are near-term headwinds for this space on account of change in China’s policy of importing yarn. However, over the long run, cotton yarn demand is estimated to clock a CAGR of 4% over CS14-CS19E (cotton season August-July) to touch 5bn kg. This will be led by domestic and derived demand.

Moreover, Indian spinners are expected to add 7mn-8mn spindles over FY14-FY19E. This translates into a cumulative opportunity of Rs105bn for textile spinning machinery sales. As per Textile Machinery Manufacturers Association (TMMA), India requires an additional 15mn spindles to convert annual cotton production into yarn. TMMA further expects annual replacement demand at 0.5mn-1.0mn spindles. In the near term, likely subdued domestic demand for spinning machinery, to a certain extent, is offset by rising exports to other countries like Bangladesh, Vietnam, Turkey, Pakistan etc. LMW registered export CAGR of 81% as against 39% of the industry over FY10-FY14 at Rs4,330mn. We expect exports to grow YoY by 6%/8%/10% to Rs4,590mn/Rs4,957mn/Rs5,452mn in FY15E/FY16E/FY17E, respectively.

However, we expect the capex cycle in textile spinning industry to be back-ended and revive only from 4QFY16. This will led by improvement in cotton yarn demand, stability in cotton prices, easy in funding to the textile sector, and the need to replace old technology machinery by advanced technology and highly automated machinery to get better quality yarn, more productivity and cut power and labour costs.

We have analysed the financial performance of a sample of 18 spinning companies in the listed space over FY03-FY14. The spinning industry is capital-intensive with fixed asset turnover of ~1x. Revenue and capex registered nearly the same CAGR of 17.4% and 14%. LMW reported textile machinery revenue CAGR of 11.3% over the same period. We expect LMW’s textile machinery segment revenue to decline marginally in FY16 on account of likely slow down in capex by spinning companies owing to subdued cotton yarn prices and demand outlook as exports to China are expected to decline YoY by 21% to 500mn kg. With yarn prices expected to stabilise and demand to revive by 4QFY16, we expect revival recovery in capex by textile spinning mills and consequently LMW’s revenue to bounce back in FY17. LMW’s textile segment’s revenue CAGR is estimated at ~8% over FY14-FY17E.

Exhibit 3: Total cotton yarn demand Exhibit 4: Domestic cotton yarn demand

Note: E: Estimated; P: Projected

Source: Textile Commissioner's Office, CRISIL Research, Nirmal Bang Institutional Equities Research

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Exhibit 5: Spindle addition averaged ~1mn per annum Exhibit 6: Spinning industry capex and LMW revenue

Note: E: Estimated; P: Projected; Source: Textile Commissioner's Office, CRISIL Research, Nirmal Bang Institutional Equities Research

Indigenous spinning machinery manufacturing likely to post a five year CAGR of 9%-10%

Textile spinning machinery manufacturing at ~Rs31bn is almost half of indigenous textile machinery manufacturing industry, with a value share of 47% as of FY14-end. It posted a CAGR of 10% over the past four years ended FY14. TMMA estimates the requirement of over 15mn new spindles for converting entire cotton production of the country into yarn over a period of time. This augurs well for the domestic spinning machinery manufacturing industry. Out of the total installed base of ~53mn spindle equivalents (spindles plus rotors, one rotor equals five spindles) around 44mn are operational. TMMA expects replacement demand at 0.5mn-1mn spindles per annum for the next few years, as it believes only 35mn spindles are currently operational. Moreover, rising exports of spinning machinery to countries like Myanmar, Vietnam, Bangladesh, Turkey, Pakistan, Indonesia, Cambodia etc will boost sales. Consequently, the indigenous spinning machinery manufacturing industry is estimated to clock the same CAGR as of past four years ( 9%-10%) for the next five years with potential of an upside surprise.

Exhibit 7: Value of indigenous production of entire range of textile machinery – spinning machinery has largest share of 47%

Category (Rsmn) FY10 FY11 FY12 FY13 FY14 CAGR (%)

Spinning and allied machinery 21,050 35,000 25,700 23,100 30,650 9.8

YoY growth in spinning machinery (%) 4.0 66.3 (26.6) (10.1) 32.7 -

Share of spinning and allied machinery in entire range of textile machinery produced (%) 49.6 56.9 48.7 40.9 47.3 -

Synthetic filament yarn machinery 8,300 9,000 9,250 9,650 9,300 2.9

Weaving and allied machinery 4,950 6,000 4,800 4,450 4,550 (2.1)

Processing machinery 4,600 7,000 7,500 9,600 10,300 22.3

Misc. (spinning, weaving and processing, jute) machinery 1,200 1,500 1,000 1,200 800 (9.6)

Textile testing & measuring instruments 300 500 650 800 950 33.4

Hosiery machinery/ hosiery needles 350 500 200 450 550 12.0

Total machinery 40,750 59,500 49,100 49,250 57,100 8.8

Spares and accessories 1,700 2,000 3,700 7,250 7,700 45.9

Grand total 42,450 61,500 52,800 56,500 64,800 11.2

YoY growth (%) 4.0 44.9 (14.1) 7.0 14.7 -

Source: TMMA

Robust business model with focus on continuous technology upgradation

LMW’s enviable market share in the high-entry barrier patented technology-driven textile spinning machinery market is the outcome of management vision, and continuous value addition to clients by manufacturing latest technology machinery along with transparent and ethical business practices so as to enable cost savings and improvement in efficiency of the machinery. LMW spent Rs790mn on research and development (R&D) over FY08-FY14.

A) Management vision: LMW primarily caters to the cotton yarn spinning industry. The spinning process captures only 7% of total value addition in the process of converting cotton crop into cotton yarn. In that sense this is a commodity business. And generally commodity and commodity-related industries do not command a price premium and attract a lot of competition. LMW’s management sensed this very early and remained focused on market share rather than margins. The company regularly keeps upgrading product technology, enhancing its product range, focusing on exports and also forayed into China. Moreover, the management focused on cost rationalisation rather than price hikes to keep competition in check and remain profitable.

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LMW has an in-house foundry for castings required for spinning machinery and machine tools. LMW is selling its products at an average 15% discount compared to competitors and still remains profitable. This is also on account of lower import content at ~12% in its machinery as against more than 25% in case of European competitors. The company has judiciously managed its financials to remain debt-free and is also cash surplus as well as operating cash flow positive. LMW sells spinning machinery through its distributors and not directly to clients.

B) Technology focus: LMW has regularly launched technologically upgraded versions of its machinery and expanded the product range responding to growing need for automation to reduce costs and improve efficiency. We highlight developments like Autocomber, Autodoffer as some examples in this regard. LMW is now focusing on developing import substitute Autoconer and Compact spinning technology on its own. Indian and global annual market sizes for Autoconer are estimated at Rs10bn and US$1bn, respectively. Autoconer is a patented technology owned by only three players globally. This product augurs well for LMW to increase its share in total capex per spindle by 30%.LMW’s opportunity in per spindle capex is likely to grow from Rs11,000 to Rs16,000.

C) Aims at expansion: LMW is aware of the rising competition on its home turf. The company still holds a 60% market share in value terms in the textile spinning machinery industry. However, LMW has changed its policy of capping exports to 10% of revenue and is now exporting to countries like Bangladesh, Vietnam, Indonesia, Turkey, Pakistan etc. It has set up a 1mn spindle capacity plant in China and captured a 10% market share in volume terms in the Ring Frame segment. LMW is determined to improve its market share in the global textile spinning industry (annual estimated size is US$3.5bn) from 9% currently. The largest player is Rieter (Switzerland) with ~25% market share, followed by Zingwei of China at 21% and Truetzschler of Germany at 18%. LMW commands the fourth-largest market share of 9%.

Exhibit 8: Textile machinery exports from India Exhibit 9: LMW commands ~21% share

Particulars (Rsmn) FY10 FY11 FY12 FY13 FY14 CAGR (%)

Textile machinery exports 5,560 8,830 15,230 15,120 20,850 39.2

LMW textile machinery exports 400 2,223 2,688 1,653 4,330 81.4

LMW's share in textile machinery exports (%)

7.2 25.2 17.6 10.9 20.8 -

Source: TMMA Source: TMMA

D) Transparent pricing and sound order booking policy: LMW follows a transparent and uniform pricing policy for all clients, irrespective of the size of order. The company follows the policy of ‘acceptable price’. As a philosophy, LMW prefers market share over price of the machinery. LMW gives flexibility to clients to postpone or alter their delivery schedule. The order placed by the client will be a part of order book only after LMW receives a 10% advance payment and it delivers the machinery only after getting 100% payment. The current order book size is ~Rs32bn. Slow-moving orders comprise not more than 40% of total orders received. LMW has increased its order execution speed. We expect order inflow to accelerate from 4QFY16 to touch Rs26bn in FY17E from Rs13bn in FY16E.

E) Focus on sale of spares: LMW has ignored this high-margin segment for quite some time. However, the company has now put in place a comprehensive strategy in a big way over the next three to five years. This has three objectives: a) Retain client, b) Improve margins, and c) Keep a check on competition. As per industry estimates, the size of opportunity in spare parts and components is 1.25x the price of machinery over its lifetime. Spare part sales are estimated to post a CAGR of 18% over FY14-FY17E. LMW’s competitors are promising delivery of components within 24 hours as against the company’s current delivery period of seven days. The company is in the process of tying up with a logistics company to reduce delivery period further and is also taking the help of ERP/RFID technology.

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Exhibit 10: Value of indigenous production of textile machinery spare parts - LMW has a 35% share


Indigenously produced spares 1,700 2,000 3,700 7,250 7,700 45.9

LMW's revenue from textile spares 1,117 1,737 2,059 2,447 2,722 24.9

Share of spares in total indigenously produced machinery and spares (%)

4.0 3.3 7.0 12.8 11.9 -

LMW's share in India's textile machinery spares (%)

65.7 86.8 55.7 33.8 35.4 -

Source: TMMA, Company

Textile spinning machinery manufacturing industry has high entry barriers

Indian textile spinning machinery manufacturing industry is cyclical in nature, has high entry barriers, and is a patented technology-driven oligopoly market. LMW has a dominant market share of 60% in revenue terms and 65%-70% in volume terms. The fortunes of the spinning machinery manufacturing industry on the one hand depend upon underlying textile spinning industry and on other, on macro-economic factors like interest rate, inflation, availability of finance, competitive landscape etc.

Textile spinning machinery market is a patented technology-driven one. Apart from LMW, other large players in India with their respective market shares are Rieter (Switzerland 15%-16%), Truetzschler (Germany 11%-12%). Kirloskar Toyota (India 9%-10%) and Electrojet (India 2%-3%).

LMW is the only player with indigenous manufacturing of the entire range of textile spinning machinery from Blow room to Ring Spinning. It is now planning to add standalone Autoconer without Linkconer.LMW has acquired the technology from an Indian company which could not scale up production. There are only three players in the world who own this technology - Schlafhorst (Germany), Morata (Japan) and Savio (Italy). The annual domestic market size for Autoconer is Rs10bn and global market size is US$1bn. Assuming Rs25,000 capex per spindle, the textile spinning machinery component is Rs11,000 and Autoconer capex will be Rs5,000 per spindle. Hence, LMW’s per spindle opportunity will jump from Rs11,000 to Rs16,000.

Exhibit 11: Share of cotton yarn in domestic spun yarn production

Exhibit 12: LMW's revenue market share in domestic spinning machinery market

Source: CRISIL Research Source: TMMA

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LMW's share in India's textile machinery Spares (%) (RHS)

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0

10

20

30

40

50

60

70

80

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000


Production of spinning and allied machines LMW textile segment net revenue

LMW's revenue share (%) (RHS)

(Rsmn) (%)



Exhibit 13: LMW commands a 63% revenue market share

Particulars (Rsmn) FY10 FY11 FY12 FY13 FY14 CAGR %)

Production of spinning and allied machinery 21,050 35,000 25,700 23,100 30,650 9.8

LMW textile segment’s net revenue 9,647 15,181 17,533 16,288 19,294 18.9

LMW's revenue share (%) (RHS) 45.8 43.4 68.2 70.5 62.9 -

Source: TMMA

Exhibit 14: Value of indigenous production




Share of spinning and allied machinery in entire range of textile machinery production (%) 49.6 56.9 48.7 40.9 47.3 -





Textile testing and measuring instruments 300 500 650 800 950 33.4

Hosiery machinery/hosiery needles 350 500 200 450 550 12.0

Total -machinery 40,750 59,500 49,100 49,250 57,100 8.8


Grand total 42,450 61,500 52,800 56,500 64,800 11.2

YoY growth (%) 4.0 44.9 (14.1) 7.0 14.7 -

Source: TMMA

Spinning industry capex continues to grow, albeit at non-linear YoY growth rate

Capital expenditure registered a CAGR of 14% over FY03-FY14 for a sample of 19 textile spinning companies in the listed space. LMW posted textile segment revenue CAGR of 11.3% during the same period. Indian spinners added ~1mn spindles per annum since 2002 till 2014. Domestic yarn production registered a CAGR of 4.1% over 2001-14. India has 53mn installed spindle capacity. TMMA estimates only 35mn spindles are in working condition. India is expected to add 7mn-8mn spindles over FY14-FY19E, while the Asia Oceania region is becoming a global manufacturing destination for yarn spinning. Government of India (GoI) and various State Governments have formulated various promotional policies like Technology Up-gradation Fund Scheme (TUFS) and Scheme for Integrated Textile Parks (SITP). TUFS provides interest and capital subsidies, while SITP provides world class infrastructure to make spinning units globally competitive. With GoI targeting to double India’s share in global textile trade to 8% by 2020 amid LMW’s dominant market position, we believe LMW is well placed to avail the opportunity. Factors like patented technology, drive for automation to replace high-cost labour, to reduce power costs and to improve the quality of yarn produced will drive the growth for LMW in the long run.

Exhibit 15: Spinning industry capex and LMW revenue Exhibit 16: Spindle addition averages ~1mn per annum

Source: Company, Nirmal Bang Institutional Equities Research Source: CRISIL Research

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

Textile spinner's total capex (Rsmn) LMW net textile machinery revenue (Rsmn)

(Rsmn)

(1.1)(0.8)

(2.0)

1.9 2.2

1.4 1.9

0.2

3.9

0.7 0.8

1.9

(3)

(2)

(1)

0

1

2

3

4

5

0

10

20

30

40

50

60

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 E

Total spindle equivalent Operational capacities Operational Spindle equivalent addition(RHS)

(mn)(mn)



Exhibit 17: Spun yarn (cotton, non-cotton, blended) production Exhibit 18: Spun yarn (cotton) production

Source: CRISIL Research Source: CRISIL Research

Exhibit 19: Capacity utilisation rate of textile machinery manufacturing industry

Source: TMMA

China foray profitable, acquired a 10% market share in volume terms in Ring Frame segment

LMW’s100% subsidiary, LMW Textile Machinery (Suzhou) Co. (LMWTM), started operations in FY10. The company has introduced Ring Frame with Auto Doffer. The installed capacity is 1mn spindles or 1,000 machines. The total project cost was US$29.0mn with LMW’s equity commitment of US$12.5mn. The equity commitment has been fully met by LMW.

Asia Oceania region is becoming a global hub for textile spinning, as per the statistics released by International Textile Machinery Shipment. China is the largest market for textile spinning industry with an installed capacity of around 128mn spindles in 2013. Moreover, out of total shipment of 11.55mn spindles globally in 2013, the Asia Oceania region occupied a 92.8% (10.72mn spindles) share.

LMW is facing rising competition on its own turf. The company wanted to increase its global market share beyond 9%. Hence, it was logical for the company to enter the largest market in the world.

LMW probably is the only engineering and capital goods company which has set up manufacturing operations in China and turned profitable within three years of its operations. The company acquired a 10% market share in volume terms in China in the Ring Frame segment as of FY14-end. The total market size was 3,500 machines and LMW sold 350 machines till the end of FY14.

LMW became profitable within three years of its operations, mainly on account of huge demand for its high-technology fully automated Ring Frame (with Auto doffer), higher localisation at 60% of the value of the machinery and better pricing. LMW is deliberately not increasing capacity utilisation of Ring Frame as this product has a lower margin when compared with other machinery that the company wants to introduce. LMW has introduced Draw Frame machinery as well. The plan is to offer the entire range of the products over a period of five years.

We expect the Chinese plant to generate EPS of Rs9 per share for LMW by FY17E. We have not factored in this in our calculations.

7.2

12.4

(7.2)

11.3

9.1

(10)

(5)

0

5

10

15

0

1,000

2,000

3,000

4,000

5,000

6,000

2009 2010 2011 2012 2013 2014P

Spun yarn (cotton, non-cotton, blended) production (mn kg) YoY growth (%) (RHS)

(mn kg) (%)

6.3

13.3

(10.4)

14.6

9.6

(15)

(10)

(5)

0

5

10

15

20

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2009 2010 2011 2012 2013 2014P

Spun yarn (cotton) production (mn kg) YoY growth (%) (RHS)

(mn kg) (%)

53.0

68.0

58.0 60.0

69.0

0

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20

30

40

50

60

70

80

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000


Capacity (Rsmn) Production (Rsmn) Utilisation (%) (RHS)

(Rsmn) (%)



Exhibit 20: Short staple spindle shipment in 2013 and region-wise percentage share - Asia Oceania is largest market for spinning machinery

Short staple spindle shipment Year 2013 (%)

Asia Oceania 92.8

Europe 5.3

America 0.9

Africa 1.1

Source: International Textile Machinery Shipment Statistics

Exhibit 21: Chinese subsidiary’s financials

Particulars (Rsmn) FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

Share capital 177 233 233 395 651 651 761 761

Reserves and surplus (52) (177) (164) (37) 84 163 243 344

Net worth 124 56 68 358 735 814 1,005 1,106

Total assets 174 641 827 1,079 1,438 1,617 1,828 2,079

Total liabilities 174 641 827 1,079 1,438 1,617 1,828 2,079

Net sales and services including other income 42 1,123 1,594 1,537 1,449 1,576 1,589 1,923

Interest expense - - - - - 7 9 10

Profit before tax (47) (127) 9 132 100 105 106 134

Provision for tax - - - 9 25 26 26 33

Profit after tax (47) (127) 9 122 75 79 80 101

YoY growth (%) - 172.8 (107.4) 1,206.4 (38.3) 5.1 1.1 26.2

PBT Margin (%) (111.0) (11.3) 0.6 8.6 7.0 6.7 6.7 7.0

PAT Margin (%) (111.0) (11.3) 0.6 8.0 5.3 5.1 5.1 5.3

RoE (%) (37.5) (229.3) 13.7 34.1 10.3 9.7 8.0 9.1

LMW equity capital 124 113 113 113 113 113 113 113

Face value (Rs) 10 10 10 10 10 10 10 10

China’s profit per share (Rs/share) (3.8) (11.3) 0.8 10.8 6.7 7.0 7.1 9.0


Exhibit 22: Chinese subsidiary’s financial performance


92.8

5.30.9 1.1

Asia Oceania Europe America Africa

1,122

1,586 1,529 1,434 1,566 1,579

1,913

(127) 9 122 75 79 80 101

(50)

(40)

(30)

(20)

(10)

0

10

20

30

40

50

(500)

0

500

1,000

1,500

2,000

2,500

FY11 FY12 FY13 FY14 FY15E FY16E FY17E

Revenue (excl other income) (Rsmn) PAT (Rsmn)

YoY revenue growth (%) (RHS) YoY PAT growth (%) (RHS)

PAT margin (%) (RHS)

(Rsmn) (%)



Other business segments - performance improving

A) Advanced technology division

As LMW is a hardcore engineering company, it decided to look at aerospace industry. This division specialised in the manufacture and supply of high precision parts and components required for the aerospace industry. Currently, LMW is doing only job work for Hindustan Aeronautics (HAL). The company gets the design and it does job work like machining for HAL. This is not a very high-margin work. It is only after some time that LMW will get high-margin sub-assembly and/or component manufacturing orders from HAL. LMW manufactures engine parts, landing gears, structural parts for aircraft wings and bleed walls used in instruments for controlling air pressure in an aircraft.

LMW has invested Rs650mn till date in this business. The company is not focusing on top-line growth, but on bottom-line and Return on Investment (RoI). There is no dearth of orders, but margins are not up to LMW’s expectations and moreover require further investments for which LMW is not prepared to take the risk currently.

In the past three years, LMW secured a lot of product approvals and now they are in production stage. Hence, the top-line will improve significantly over a period of next three to five years as one big profitable order can change the fortunes of this division. This division is likely to achieve break-even in FY16 and turn profitable.

We expect revenue to increase to Rs196mn/Rs373mn/Rs560mn by FY15E/ FY16E/ FY17E, respectively.

Exhibit 23: Advanced technology division revenue


B) Machine tools and foundry division is a play on auto ancillary, engineering and power sectors

These two businesses are commodity-related. Machine tool industry size is estimated at Rs112bn. Out of this, Rs76bn (68%) worth of machine tools are imported. Japan. Italy and Germany are global leaders in this field. The value addition by LMW is very low in its products as 80% to 85% of the components are outsourced. Technology plays a big role in this space. LMW is focusing on better margin value-added machining centre rather than lathe machines. The company recently tied up with an Italian company for manufacturing. The fortunes of this division are closely linked to revival in automobile ancillary and engineering sectors. Foundry division mainly caters to in-house requirement of castings for textile machinery and machine tool divisions.

We expect revenue from this division at Rs2,446mn/Rs2,467mn/Rs2,785mn by FY15E/FY16E/FY17E, respectively.

47

196

373

560

0

100

200

300

400

500

600

FY14 FY15E FY16E FY17E

(Rsmn)



Exhibit 24: Machine tools and foundry division


C) Real estate development

LMW has a couple of surplus land parcels in Coimbatore on which the company is planning joint development with Sobha Developers. LMW’s share will be 30% in the joint venture (JV). The first project will be 0.3mn sq. ft. of residential development. The project is expected to add to the bottom-line of the company. The realisation per square foot is estimated at Rs5,000 by LMW. The other land parcel will come up for joint development after the end of its first project. LMW has no further interest in real estate beyond these two projects. We have not factored in any earnings from real estate business in our estimates.

48.2

25.1

(26.4)

(1.7)5.9 0.9

12.9

(40)

(30)

(20)

(10)

0

10

20

30

40

50

60

0

500

1,000

1,500

2,000

2,500

3,000

3,500


Revenue (Rsmn) YoY growth (%)

(Rsmn) (%)



Financial performance

Textile machinery division revenue likely to grow YoY by ~22% and PAT by ~43% by FY17E

LMW is a play on the textile spinning industry as the company draws ~90% of its revenue from manufacturing textile machinery It is a cyclical industry. Accordingly, LMW’s revenue/profits also witnessed gyrations in the past. Currently, cotton yarn demand and prices are subdued on account of declining exports to China. For LMW, we expect a decline of ~4% in revenue in FY16E from this segment. However, exports of textile machinery (~25% of LMW’s textile division revenue) are estimated to grow 8% and Autoconer is expected to contribute to total revenue from FY16. Consequently, operating margin is expected to plummet. Benign raw material prices and cost rationalisation initiatives by the company are expected to arrest the quantum of decline in operating margin.

However, on account of estimated revival in capex cycle by 4QFY16 led by price stability in cotton yarn, rise in demand, lowering of interest rates and improvement in funding to the textile sector, we expect an improvement in order inflow and execution, which translates into YoY revenue growth of ~22% for this segment for FY17E. There is latent demand for unitary machines on account of replacement of outdated spinning machinery by advanced technology machines. These machines produce better quality of yarn and are more efficient as they reduce labour and power costs. TMMA has estimated machinery replacement demand at 0.5mn-1.0mn spindles per annum in the past few years. Estimated step-up in machinery demand will improve capacity utilisation from the current 60%-65% level. Change in the product mix towards more automated and larger configuration machines is expected to boost realisation from FY17. Higher margin spare parts revenue is estimated to grow 22% and higher realisation generating exports to grow YoY to 10% by FY17E. We expect FY17E revenue for this segment to increase by ~22% YoY. All these factors will boost capacity utilisation. Hence, well-controlled operating cost structure and higher capacity utilisation is expected to result in YoY expansion of 136bps in operating margin to 12.5%. Consequently, YoY PAT growth is estimated to touch 43% by FY17E.

Exhibit 25: Segmental revenue break-up Exhibit 26: Segmental revenue growth rate

Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 27: Textile machinery revenue break-up Exhibit 28: Revenue growth rates


85.6 84.6 87.4 89.1 88.8 87.6 88.0

14.4 15.4 12.6 10.7 10.4 10.8 10.0

0.2 0.8 1.6 2.0

0

20

40

60

80

100

120


Textile machinery division Machine tools and foundry division Advance technology centre

(%)

57.4

15.5 (7.1)

18.5

8.7

(4.3)

22.3

48.2

25.1

(26.4)

(1.7)5.9

0.9 12.9

(40)

(30)

(20)

(10)

0

10

20

30

40

50

60

70


Textile machinery division Machine tools and foundry division

(%)

41.5 36.6 40.6 39.0 38.1 35.3 35.5

47.2 51.6 44.3 47.4 46.7 44.6 43.4

11.4 11.7 15.0 14.1 15.2 18.3 18.2

1.9 2.9

0

20

40

60

80

100

120


Spinning preparatory machines Yarn-making machine Spare parts Autoconer

(%)

(30)

(20)

(10)

0

10

20

30

40

50

60

70

80


Spinning preparatory machines Yarn-making machine Spare parts

(%)



Exhibit 29: Total exports Exhibit 30: Margin profile


Exhibit 31: Quarterly performance


LMW has been very prudent in managing working capital requirement

LMW has a very strict control over its working capital requirement. In fact, this is one of the highlights of the company. Non-cash net working capital remained negative for the past several years. We have analysed its financials for the past 19 years (FY96-FY14) and noticed that LMW has registered negative non-cash net working capital 13 times. In fact, it has been consistently reporting negative net working capital since FY06. The company follows the process of taking advance payment of at least 10% on new orders, which augurs well in managing the working capital requirement. We have noticed that LMW has registered cash conversion cycle of twelve days in FY14. This highlights prudent liquidity management by the company. Over FY08- FY14, LMW’s cash conversion cycle was negative for three years. We expect the trend of negative net working capital requirement to continue and the cash conversion cycle also to average at five days over FY15E-FY17E.

Exhibit 32: Negative working capital and cash conversion cycle


14.2 15.512.4

22.1 21.5 23.9 21.5

88.4 83.6

71.5

90.4 90.3 90.6 90.9

0

10

20

30

40

50

60

70

80

90

100

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000


Total exports (Rsmn) as a % of total revenue (RHS)

Textile machinery as a % total exports (RHS)

(Rsmn) (%)

14.6

12.2

11.0 11.4 11.711.2

12.5

9.2

6.5 6.1

8.2 7.8 7.4

8.7

0

2

4

6

8

10

12

14

16


EBITDA PAT

(%)

0 500

1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 5,500 6,000 6,500 7,000

Se

pt0

7

De

c07

Ma

r08

Jun

08

Se

pt0

8

De

c08

Ma

r09

Jun

09

Se

pt0

9

De

c09

Ma

r10

Jun

10

Se

pt1

0

De

c10

Ma

r11

Jun

11

Se

pt1

1

De

c11

Ma

r12

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pt1

2

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c12

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r13

Jun

13

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c13

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r14

Jun

14

Se

pt1

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c14

Net profit Total net revenue Textile machinery dvision revenue

(Rsmn)

1

(4)

(1)

12

7

4 3

(6)

(4)

(2)

0

2

4

6

8

10

12

14

(2,500)

(2,000)

(1,500)

(1,000)

(500)

0


Negative working capital Cash conversion cycle

(Rsmn) (Days)



LMW generated positive operating and free cash flow for many years in the past 19 years

LMW has been reporting positive operating cash flow from FY96 to FY14 except FY98 (-Rs95.1mn). This reflects financial efficiency and solvency of the business. In fact, in FY09, even after recording YoY decline of 39% in revenue and 55% in PAT, LMW posted positive operating cash flow of Rs1.38bn. Free cash flow has been in negative territory only for six times in the past 19 years (FY96-FY14). This shows the ability of the company to fund annual capex from a year’s cash flow for most of the years. Going forward, we expect LMW to continue with its prudent cash flow management and expect operating cash flow to remain positive. In the absence of major capex, free cash flow is expected to remain in positive territory.

Exhibit 33: Operating cash flow, free cash flow


LMW debt-free since FY05 and had cash surplus amounting to 43% of balance sheet as of FY14-end

LMW acquired a debt-free status from FY05 and we expect the company to remain debt-free going forward as well. Moreover, LMW accumulated huge cash (Rs8.8bn), which accounted for 43% of the balance sheet as of FY14-end.

Exhibit 34: Huge cash surplus


RoE, RoCE and RoIC expected to improve by FY17

In the absence of financial leverage and low asset turnover ratio of ~1.5x, RoE becomes a direct function of net profit margin and follows a similar trend. In FY14, RoE improved to 17.8% YoY from 12.6% following the PAT margin trend, which moved up YoY to 8.2% from 6.1%. We expect PAT margin to improve to 8.7% by FY17E from 7.4% in FY16E and consequently, RoE to expand to 17.0% in FY17E from 13.4% in FY16E. LMW has huge cash on books which fetches lower returns from bank fixed deposits than the returns it could have generated in its own business. It suppresses RoCE and is estimated at 15.7% in FY17E. However, RoIC was healthy at 24.6% in FY14 and is expected to touch 36.1% by FY17E.

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500


Operating cash flow Free cash flow

(Rsmn)

647 615 665781 845

1,037

1,303

40.0 36.8

41.8 43.5 46.8

53.9

58.8

0

10

20

30

40

50

60

70

0

200

400

600

800

1,000

1,200

1,400


Cash per share (Rs) (LHS) Operating cash flow per share (Rs) (LHS)

Cash balance as % of balance sheet (RHS)

(Rs) (%)



Exhibit 35: Return ratios


Key risks and concerns

1) Subdued price and demand regime for cotton yarn on account of change in China’s policy may continue longer than expected.

2) LMW has successfully maintained its share in domestic market at around 60% in value terms till now. Rising competition may further deteriorate LMW’s share.

3) There are other problems faced by the textile spinning industry like rising power costs and outages, increased labour costs and lack of adequate funds from banks. This situation may continue for some time.

4) Textile sector gets a lot of interest and capital subsidy from Central Government and various State Governments. Any decline in government support may adversely affect the sector.

5) LMW has huge cash on its books which is suppressing return ratios. The company has no concrete plan as of now on utilisation of the same.

Company profile and important milestones

LMW, founded in 1962, is today a global player and one among the three manufacturers of the entire range of textile machinery. History stands as a documented proof of LMW’s corporate and financial success, reflecting phenomenal growth since the first year of its operations. LMW has a 60% market share in the domestic textile spinning machinery industry.

LMW diversified into CNC machine tools and is a brand leader in manufacturing customised products. LMW Foundry makes precision castings for industries the world over. LMW is the only company in Asia outside Europe to manufacture Original Equipmet products for Mikron of Switzerland.

LMW’s global presence has grown over the years, with a market presence not only in developing countries, but also in Europe. LMW won the Top Exporter Award in textile machine exports for the past several years.

Exhibit 36: Important milestones

Source: Industry, Company

20.115.9

12.6

17.816.1

13.4

17.0

13.1 12.39.3

14.1 13.812.2

15.7

21.920.0

15.3

24.6 25.2 24.6

36.1

0

5

10

15

20

25

30

35

40


RoE RoCE RoIC

(%)



Exhibit 37: Various machinery required for yarn manufacture and their functions

Blow room Cleans, mixes and blends cotton to form a lap; becomes ready for carding.

Carding Pulls the fibres into a parallel alignment to form a thin web; condensed into a continuous untwisted rope-like strand (sliver).

Comber Transferred to a combing machine, where fibres shorter than half-inch and impurities are removed from the cotton, enhancing sliver smoothness and uniformity.

Draw frame Sliver elongation and pulling to orient the fibres in the direction of the strand, reducing linear density.

Speed frame Sliver slightly twisted to improve strength, then wound on bobbins for the ring spinning process (not necessarily open-end spinning).

Ring spinning Traditional way of making spun yarn to achieve yarn fineness and strength.

Open-end spinning Sliver becomes yarn without the roving process; combing roll creates draft, cleans stock and feeds fibre to rotor; rotor assembles fibres and imparts twist to the yarn.

Winding Extraction of all disturbing yarn faults (short, long thick, long thin, spinner's doubles, etc.) Converts small ring spun packages to large packages which can be used in dyeing, weaving and knitting, etc.

Source: Industry, Company



Annexure I – Cotton yarn industry

Cotton yarn spinning is the largest segment in Indian yarn-making industry

Indian textile machinery industry’s fortunes are closely linked to the industry dynamics of cotton crop and cotton yarn, as cotton yarn spinning is the largest segment with a 70% volume share in a 5.3bn kg-sized domestic spun yarn industry.

Exhibit 38: Domestic spun yarn production Exhibit 39: Share of cotton yarn in domestic spun yarn output

Year Cotton

(mn kg) Blended (mn kg)

Non-cotton (mn kg)

Total (mn kg)

Share of cotton yarn in domestic spun yarn

production (%)

2001 2,267 646 247 3,160 71.7

2002 2,212 609 280 3,101 71.3

2003 2,171 585 319 3,075 70.6

2004 2,121 589 342 3,052 69.5

2005 2,272 585 366 3,223 70.5

2006 2,521 588 349 3,458 72.9

2007 2,824 635 354 3,813 74.1

2008 2,948 677 378 4,003 73.6

2009 2,896 655 361 3,912 74.0

2010 3,079 707 407 4,193 73.4

2011 3,490 797 426 4,713 74.1

2012 3,126 789 457 4,372 71.5

2013 3,583 828 457 4,868 73.6

2014 3,928 896 485 5,309 74.0

CAGR 4.3% 2.5% 5.3% 4.1%

Source: Textile Commissioner's Office, CRISIL Research Source: Textile Commissioner's Office, CRISIL Research

Despite near-term pressure, cotton prices expected to remain range bound in medium term

Monthly world cotton prices declined in November 2014 by ~3%. However, they remained stable in December 2014. Domestic cotton prices also declined in November 2014 by 2% to 3% before rising ~1% in December 2014. This was on account of Cotton Corporation of India’s (CCI) intervention in the market, as cotton was trading below its minimum support price (MSP). The expected rise in domestic production to around 40mn bales (One bale equals 170 kg) in the current season, likely rise in global inventory (including China) by 8% to 10% in the cotton season (CS) ending July 2015 and sufficient stock of around 18 months at 11.5 bn kg as of September 2014-end in China are expected to keep the cotton prices range-bound in India.

Exhibit 40: Monthly cotton prices

Source: CRISIL Research

71.771.3

70.6

69.5

70.5

72.9

74.173.6

74.0

73.4

74.1

71.5

73.674.0

67

68

69

70

71

72

73

74

75

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

(%)

0

20

40

60

80

100

120

140

160

180

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4

Monthly world cotton prices (cents per pound) (LHS)

Monthly domestic cotton (S-6) prices (Rs per kg) (RHS)

Monthly domestic cotton (J-34) prices (Rs per kg) (RHS)

(Cents/pound) (Rs/kg)



Domestic demand to drive cotton yarn prices and output, although near term exports seen subdued

Domestic cotton yarn prices (40s count) declined in November and December 2014 by ~5% and ~1%, respectively, to Rs179 per kg. The prices are estimated to stabilise by July 2015. Cotton yarn production and demand grew YoY by ~14% and 13% in CS13 and by ~10% and 10% in CS14, respectively. For the past five years ended CS14, the production and demand CAGR for cotton yarn was ~6% and ~7%, respectively. However, cotton yarn demand growth is estimated to slow down sharply to 1% in CS15E. The primary reason for this is an expected 5% to 10% decline in cotton yarn exports, as Chinese demand slows down by 21%. As of CS14-end, out of 1.3bn kg of cotton yarn exports, China accounted for around 0.6bn kg (45% of exports).

Post CS15, cotton yarn demand growth is expected to pick up. From CS15 to CS19, cotton yarn demand is estimated to post a 3%-4% CAGR. Growth will be led by domestic and derived demand, both of which are expected to post around 4% CAGR up to CS19E. However, direct yarn exports are expected to slow down over the same period, registering a mere 2% CAGR, as demand from China is likely to decline and is estimated to stabilise around 400mn kg by CS19E. However, a sharp growth in shipment to other countries such as Vietnam, Turkey, Egypt and Bangladesh is expected to arrest the decline to some extent. Removal of anti-dumping duty on Indian cotton yarn by Turkey in 2013 will give a boost to India's exports to that country.

Exhibit 41: Monthly domestic cotton yarn price (40s count) Exhibit 42: China's monthly cotton yarn imports


Exhibit 43: Domestic spun yarn production Exhibit 44: Domestic spun yarn (cotton) production

Year Spun yarn (cotton, non-cotton, blended)

production (mn kg) YoY growth

(%)

2009 3,912 -

2010 4,193 7.2

2011 4,713 12.4

2012 4,373 (7.2)

2013 4,868 11.3

2014P 5,309 9.1

CAGR 6.3%

Year Spun yarn (cotton) production

(mn kg) YoY growth

(%)

2009 2,896 -

2010 3,079 6.3

2011 3,490 13.3

2012 3,126 (10.4)

2013 3,583 14.6

2014P 3,928 9.6

CAGR 6.3%

Note: P= Projected

Source: Textile Commissioner's Office, CRISIL Research

Note: P= Projected


0

50

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3

Jul-1

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-14

Ap

r-1

4

Jul-1

4

Oct

-14

Value of China's cotton yarn import (US$ mn) Quantity (mn kgs) (RHS)

(US$mn) (mn kgs)



Exhibit 45: Total cotton yarn demand Exhibit 46: Domestic cotton yarn demand

Exhibit 47: Cotton yarn domestic demand - largest demand driver with ~50% share

Exhibit 48: Annual export of cotton yarn to China and other countries

Note: E-Estimate P- Projected; Source: Textile Commissioner's Office, CRISIL research Note: E-Estimate P- Projected; Source: Textile Commissioner's Office, CRISIL research

Exhibit 49: Domestic cotton yarn demand and cotton yarn exports


What happened in China?

Over the past three cotton seasons (CS11-CS13), Chinese policy of procuring cotton at a high minimum support price kept cotton prices in India elevated. Domestic cotton prices in China were higher than international prices. As a result, Chinese spinning mills did not buy domestically produced cotton and were consequently forced to import cotton in CS12 as a result of which China's imports more than doubled during that season and state reserves also started rising. This led to an increase in international prices in the past two years. To force the consumption of domestically produced cotton, Chinese authorities introduced import quotas and high duties. As a result, Chinese spinning mills' competitiveness deteriorated and cotton yarn imports started rising. Chinese cotton yarn imports more than doubled in CS13 and grew by over 40% in CS14. Lower domestic procurement led to a huge built-up of inventory in Chinese state reserves as the government had to procure cotton from the farmers.

0

1

2

3

4

5

6

2009 2013 2014E 2015P 2019P

(bn kg)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2009 2013 2014E 2015P 2019P

(bn kg)

57% 55% 51% 48% 49% 49%

0%

22%20% 21% 21% 21%

19%

22% 29% 32% 30% 29%

0%

20%

40%

60%

80%

100%

120%

2009 2012 2013 2014E 2015P 2019P

Domestic demand (%) Derived demand (%) Direct yarn exports (%)

55 65 90 163

386

637500

501 524610

589

724

695

750

0

200

400

600

800

1,000

1,200

1,400

2009 2010 2011 2012 2014 2014E 2015P

Exports to china (mn kg) Exports to others (mn kg)

(mn kg)

1.7

1.92.0

1.9 1.93 1.99

0.6 0.60.7 0.8

1.1

1.3

0.0

0.5

1.0

1.5

2.0

2.5

2009 2010 2011 2012 2013 2014E

Domestic demand Direct yarn exports

(bn/kg)



Consequently, cotton inventory touched a high of 11.5bn kg (17.5 months) in CS14. The authorities now intend to cut down the cotton stock by increasing domestic off-take. As a result, as per the revised Chinese cotton policy, China will stop releasing additional import quotas beyond annual obligations of 0.894mt under World Trade Organisation (WTO) commitment. Thus, any imports above the prescribed limit will face an import duty of 40%. Hence, import demand from China is expected to be lower by nearly 35% in CS15E, which is pulling international prices down.

Spindle requirement in India over FY14-FY19 estimated at 7mn-8mn

Over FY14-FY19, Indian spinners are likely to require at least 7mn to 8mn spindles, which is equivalent to capacity addition made in the past five years. TMMA has estimated the requirement of 15mn spindles to convert annual cotton production into yarn. However, till CS15, the pace of capacity expansion is projected to slow down on declining demand for yarn. Total cotton spun yarn demand is projected to post around 4% CAGR at 5bn kg by CS19E from estimated 4.2bn kg as of CS14-end. Out of the total installed base of ~53mn spindle equivalents (spindles plus rotors, one rotor equals five spindles) around 44mn are operational. TMMA estimates replacement demand at 0.5mn-1mn spindles per annum for the next few years as it believes only 35mn spindles are currently operational.

CS14 fantastic, but CS15 and 1HCS16 likely to be subdued

As the uncertainty on TUFS is over and also on various other promotional schemes by different State governments, the spinning industry is estimated to have added 1.9mn spindles equivalent in CS ended July 2014 as against average 0.8mn spindles added in CS12 and CS13 each on account of subdued yarn demand. In CS15, the pace of capacity addition is expected to decelerate to around 1mn spindles because of slowdown in cotton yarn demand, with direct yarn exports plunging. Consequently, operating rates of spinners are expected to decline in CS15. The fall in operating rates would have been sharper in case there was no sustained healthy growth in demand for blended and non-cotton yarn.

Exhibit 50: Spindle addition averaged at ~1mn per annum Exhibit 51: Spinning capacity in India

Year Installed spindles

(mn)

Rotors (mn)

Total spindle equivalent

(mn)

Operational capacity

(mn)

Operational spindle equivalent

addition (mn)

2002 40.0 0.6 42.9 33.1 -

2003 40.3 0.5 43.0 32.0 (1.1)

2004 38.3 0.6 41.1 31.2 (0.8)

2005 38.5 0.2 39.3 29.2 (2.0)

2006 38.4 0.6 41.2 31.1 1.9

2007 39.8 0.6 42.9 33.3 2.2

2008 39.2 0.6 42.4 34.7 1.4

2009 41.3 0.6 44.5 36.6 1.9

2010 41.9 0.7 45.2 36.8 0.2

2011 47.5 0.7 51.2 40.7 3.9

2012 48.3 0.8 52.2 41.4 0.7

2013 49.1 0.8 53.1 42.2 0.8

2014 E 49.3 0.8 53.4 44.1 1.9

Average 0.9


Exhibit 52: Operating rate of spinning industry

E: Estimated; P: Projected Source: Textile Commissioner's Office, CRISIL Research

(1.1)(0.8)

(2.0)

1.9 2.2

1.4 1.9

0.2

3.9

0.7 0.8

1.9

(3)

(2)

(1)

0

1

2

3

4

5

0

10

20

30

40

50

60

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 E

Total Spindle equivalent (mn) Operational capacities (mn)

Operational Spindle equivalent addition (mn) (RHS)

(%)(mn)

78.0

83.0

85.0

77.0

84.0

89.0

87.0

70

72

74

76

78

80

82

84

86

88

90

0

1,000

2,000

3,000

4,000

5,000

6,000

FY09 FY10 FY11 FY12 FY13 FY14E FY15P

Spun yarn capacity (mn Kg) Production (mnkg) Operating rates (%) (RHS)

(%)(mn kg)



Spinning industry fragmented, region centric and more organised than fabric industry

The spinning industry is capital-intensive on account of high technology requirement and is, therefore, more organised compared to the fabric industry. The capex for setting up 50,000 spindle capacity greenfield project is estimated at Rs1 bn. Currently, the average number of spindles per mill is estimated at around 15,000, down from around 20,000 spindles in the decade prior to FY10. So with a cost of Rs20,000 per spindle, the average size of greenfield project works out to Rs30bn. Currently, the domestic yarn industry comprises 3,069 spinning mills including small scale industrial (SSI) units and 197 composite mills, with a total installed capacity of around 53mn spindles. Out of this, an estimated 44mn spindles are operational. Spinning mills are mainly concentrated in Tamil Nadu, Maharashtra, Gujarat, Andhra Pradesh and Punjab. These states together account for about 76% of total spinning capacity in India. Gujarat accounts for almost 33% of total domestic cotton production as only 5% of all spinning mills operate in that state. On the other hand, Tamil Nadu accounts for 46% of total spinning capacity in India, but contributes only 2% to total cotton output.

Exhibit 53: Number of spindles per mill Exhibit 54: State-wise spindle capacity

Note: Spindles includes rotors. One rotor is equal to five spindles; As on 31st July, 2014; Source: CRISIL Research, Office of Textile Commissioner

Government policies help the textile sector to remain competitive

GoI, through its various favourable policies, helped the textile industry in India to become internationally competitive in terms of manufacturing practices and exports. Moreover, states such as Gujarat and Maharashtra have their own textile policies to boost investments in the respective states.

Technology Upgradation Fund Scheme (TUFS)

TUFS is interest reimbursement and capital subsidy scheme. In FY14 Union Budget, the uncertainty over TUFS was removed. The scheme has been extended for the entire 12th Five-Year Plan. This is expected to give a push to the investment plans that were kept on hold because of uncertainty over TUFS. For FY14, allocation under the TUFS stood at Rs23bn compared to the revised estimate of Rs19.5bn in FY13. Increased allocation to TUFS will encourage capex. We expect spinners to add about 1mn spindle capacity in FY15E.

Category-wise subsidy approved under the scheme as of 31 March 2014

Standalone spinning sector accounts for 43% of term loans sanctioned and utilised 17% of subsidy made available under TUFS in the 12th Plan period as of 31 March 2014.

Exhibit 55: Category-wise subsidy approved under TUFS as of 31/3/2014 - spinning industry benefited the most

Category

Type of unit

No. of UIDs

issued

Project cost

(Rsmn)

Term loan sanctioned

(Rsmn)

Term loan eligible under TUFS (Rsmn)

Subsidy cap limit earmarked

(Rsmn)

Subsidy utilised in 12th

Plan (Rsmn)

Available subsidy

cap (Rsmn)

Stand alone spinning MSME 22 714 400 387 475 21 454

Non-MSME 118 26,264 18,621 17,115 4,273 1,033 3,240

Total 140 26,978 19,022 17,502 4,748 1,054 3,694

Others MSME 308 14,349 4,015 3,758 1,888 887 1,001

Non-MSME 138 25,744 20,849 19,293 16,990 4,233 12,757

Total 446 40,093 24,863 23,051 18,877 5,119 13,758

Overall MSME 330 15,063 4,415 4,145 2,363 908 1,455

Non- MSME 256 52,008 39,470 36,408 21,263 5,266 15,997

Grand total 586 67,071 43,885 40,553 23,625 6,174 17,452

Spinning as % of grand total

23.9 40.2 43.3 43.2 20.1 17.1 21.2

Source: TMMA

20,314 20,289

13,505 13,466 14,652 14,895 15,141

0

5,000

10,000

15,000

20,000

25,000

FY01 FY06 FY10 FY11 FY12 FY13 FY14P

45.4

9.1

5.28.4 7.4

3.4 4.1 4.51.6 1.7 1.6 1.3

6.1

0

10

20

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0

5

10

15

20

25

30

Ta

mil

Na

du

Ma

ha

rash

tra

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ra P

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ar P

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rla

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s

No of spindles (mn) Share (%) (RHS)

(%)(mn)



A) Various State governments also give support

Exhibit 56: The benefits that State governments provide is above TUFS benefit provided by Central government

State Benefit type Benefit

Gujarat Interest subsidy Maximum of 7% for cotton spinning for five years in addition to subsidy given under TUFS.

Power subsidy Re1/unit for five years, assured supply of lignite for five years to mills having captive plants.

Maharashtra Interest subsidy Linked with TUFS; effective interest rate is either 0% or 2% depending on the region of the state.

Madhya Pradesh Interest subsidy 2% for a period of five years up to a maximum Rs50mn.

Up to 10% of the eligible capital; up to a maximum of Rs10mn.

Seven-year tax holiday for new units with fixed capital investment of more than Rs1bn.

Source: CRISIL Research

B) Scheme for Integrated Textile Parks (SITP)

Scheme for Integrated Textile Parks (SITP) was introduced in 2005 to provide textile units world-class infrastructure facility so as to make them internationally competitive. Since the beginning of SITP, the Central government has received applications for 61 parks and has approved 48 parks (Maharashtra 12, Gujarat and Tamil Nadu 8 each), with aggregate project cost of Rs 49bn. For the approved parks, the Central government’s grant has been released, either fully or partially. Out of the total sanctioned grant of Rs17.3bn, the Central government has released grant worth Rs10.90bn till now. The remaining 13 parks are yet to be approved.



Annexure II – Textile spinning machinery manufacturing industry

Indian textile machinery manufacturing industry likely to clock a five-year CAGR of 8%-9%

Total indigenous demand (excluding exports) for the entire range of textile machinery and components registered a CAGR of 13% for the past four years to touch around Rs119bn in FY14. Total value of indigenous production (including exports of ~Rs21bn) posted a CAGR of 11% for the same period at around Rs65bn. Therefore, adjusted for exports, 37% of entire domestic demand has been met by indigenous production. Our interactions with various industry sources indicate that the textile machinery manufacturing industry is estimated to post a CAGR of 8%- 9% on account of: a) Asia, especially India (with an aim to double its share to 8% in world textile trade by 2020), becoming a global hub for sourcing textile products, which will drive indigenous machinery demand, and b) Growing demand from other Asian and African countries for Indian machinery, which is reflected by machinery export CGAR of 39% over FY10-FY14 at ~Rs21bn. This indicates the rising demand for machinery and components from 1,400 odd Indian textile machinery manufacturers.

Indigenous spinning machinery manufacturing to post a five year CAGR of 9%-10%

Textile spinning machinery manufacturing at ~Rs31bn accounts for almost half of indigenous textile machinery manufacturing industry, with a value share of 47% as of FY14-end. It posted a CAGR of 10% in the past four years ended FY14. TMMA estimates the requirement of over 15mn new spindles for converting entire cotton production of the country into yarn over a period of time. This augurs well for domestic spinning machinery manufacturing industry. Out of total installed base of ~53mn spindle equivalents (spindles plus rotors, one rotor equals five spindles) around 44mn are operational. TMMA expects replacement demand at 0.5mn-1mn spindles per annum for the next few years as it believes only 35mn spindles are currently operational. Moreover, rising exports of spinning machinery to countries like Myanmar, Vietnam, Bangladesh, Turkey, Pakistan, Indonesia, Cambodia etc will boost sales. Consequently, the indigenous spinning machinery manufacturing industry is expected to clock the same CAGR as of past four years, 9% -10%, for the next five years with potential of an upside surprise.

TMMA has made some suggestions to create a level-playing field for Indian manufacturers

GoI should take few remedial steps to give more teeth to domestic textile machinery manufacturers. TMMA has suggested a few measures with respect to residual life of imported second-hand machines, extending TUFS benefit to second-hand machinery, tax break for manufacturing high-technology machines and extending TUFS benefits to domestic textile machinery manufacturers so as to create a level-playing field for them with a view to compete effectively with foreign suppliers in the domestic market. To promote exports, duty drawback rates should be increased to the highest level, TMMA has suggested.

LMW is dominant Indian player in high-entry barrier spinning machinery manufacturing

LMW has the largest market share of around 60% in value terms and around 65% in volume terms in the Indian textile spinning machinery market. Out of total indigenous production of ~Rs31bn of spinning machinery and components as of FY14-end, LMW’s net revenue contribution stood at ~Rs19bn. In this, LMW enjoyed a 35% share in spares and components business. LMW, with export revenue of more than Rs4bn, occupied a 21% share in India’s consolidated exports of ~Rs21bn as of FY14-end.

Exhibit 57: Value of indigenous production of entire range of textile machinery – spinning has largest share at 47%




Share of spinning and allied machinery in entire range of textile machinery production (%) 49.6 56.9 48.7 40.9 47.3 -





Textile testing and measuring instruments 300 500 650 800 950 33.4

Hosiery machinery/hosiery needles 350 500 200 450 550 12.0

Total - machinery 40,750 59,500 49,100 49,250 57,100 8.8


Grand total 42,450 61,500 52,800 56,500 64,800 11.2

YoY growth % 4.0 44.9 (14.1) 7.0 14.7 -

Source: TMMA



Exhibit 58: Value of domestic demand for all types of textile machinery – only 37% of demand met by indigenous machinery


Production less exports 36,890 52,670 37,570 41,380 43,950 4.5

Imports less parts imported by machinery makers

37,150 43,920 68,510 67,510 75,280 19.3

Total domestic demand 74,040 96,590 106,080 108,890 119,230 12.6

Share of demand met by domestic industry (%)

49.8 54.5 35.4 38.0 36.9 -

YoY growth % - 30.5 9.8 2.6 9.5 -


Exhibit 59: LMW’s revenue market share in indigenous spinning machinery manufacturing industry is 63%


Production of spinning and allied machinery

21,050 35,000 25,700 23,100 30,650 9.8

LMW textile segment’s net revenue

9,647 15,181 17,533 16,288 19,294 18.9


45.8 43.4 68.2 70.5 62.9 -


Exhibit 60: Capacity utilisation of textile machinery manufacturing industry was around 60% since past four years


Capacity 80,480 91,000 91,000 93,500 93,500 3.8

Production 42,450 61,500 52,800 56,500 64,800 11.2

Utilisation (%) (RHS) 53.0 68.0 58.0 60.0 69.0 6.8


Exhibit 61: Production, export and import of textile machinery and components - exports clocked a CAGR of 39%


Production 42450 61,500 52,800 56,500 64,800 11.2

Imports 42,450 53,150 75,430 75,990 85,000 19.0

Exports 5,560 8,830 15,230 15,120 20,850 39.2


49.854.5

35.438.0 36.9

0

10

20

30

40

50

60

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000


Production less exports Imports less parts imported by machinery makers

Total Indigenous demand Share of demand met by domestic industry (%) (RHS)

(Rsmn) (%)

45.8

43.4

68.2 70.5

62.9

0

10

20

30

40

50

60

70

80

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000


Production of spinning and allied machines LMW textile segment net revenue


(Rsmn) (%)

53.0

68.0

58.0 60.0

69.0

0

10

20

30

40

50

60

70

80

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000


Capacity (Rsmn) Production (Rsmn) Utilisation (%) (RHS)

(Rsmn) (%)

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000


Production Import Exports

(Rsmn)



Exhibit 62: Export of textile machinery and components - LMW is major player with a 21% share


Textile machinery exports

5,560

8,830

15,230

15,120

20,850 39.2

LMW textile machinery exports

400

2,223

2,688

1,653

4,330

81.4


7.2 25.2 17.6 10.9 20.8 -


Exhibit 63: Value of indigenous production of textile machinery spare parts - spares occupy a 12% share in total indigenous production of machinery and spares and LMW has a 35% share in spares business


Indigenously produced spares

1,700 2,000 3,700 7,250 7,700 45.9

LMW's revenue from textile spares

1,117 1,737 2,059 2,447 2,722 24.9

Share of spares in total indigenously produced machinery and spares (%)

4.0 3.3 7.0 12.8 11.9 -

LMW's share in India's textile machinery spares (%)

65.7 86.8 55.7 33.8 35.4 -


Exhibit 64: TMMA has suggested changes in existing rules to create a level-playing field for local textile machinery makers

Particulars

Present status

Excise rate (%)

Customs duty (%)

Duty drawback rate (%)

Various policy matters

On all textile machinery items incl. components

12.0 5.0 1.7 1) Free import of second-hand machinery with no restriction on its residual life.

Specified machinery 6.0 5.0 1.7 2) Imported second-hand machinery eligible for TUFS and CLCS.

3) Tax breaks are not there for units manufacturing high technology machinery.

4) No TUFS benefit for textile machinery industry.

Particulars

TMMA expectations

Excise rate (%)

Customs duty (%)

Duty drawback rate (%)

Various policy matters

On all textile machinery items

8.0 7.5 7.2 1) Government should allow import of only those second-hand machinery which is not

older than five years and have a residual life of minimum 10 years.

Machinery raw material, components

8.0 5.0 7.2 2) Imported second-hand machines should not be eligible for TUFS and CLCS.

Specified machinery 8.0 7.5 7.2 3) Tax break for a period of five years for units manufacturing high technology machinery

with or without foreign collaboration.

High carbon and alloy steel wire rod

- 0.0 - 4) TUFS benefit should be extended to textile machinery industry.

Note: TUFS - Technology Up-gradation Fund Scheme; CLCS – Credit-Linked Capital Subsidy Scheme; Source: TMMA

7.2

25.2

17.6

10.9

20.8

0

5

10

15

20

25

30

0

5,000

10,000

15,000

20,000

25,000


Textile machinery exports LMW textile machinery exports


(Rsmn) (%)

4.0 3.3 7.0

12.8 11.9

65.7

86.8

55.7

33.8 35.4

0

10

20

30

40

50

60

70

80

90

100

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000


Indigenously produced Spares (Rsmn)

LMW's revenue from Textile Spares (Rsmn)

Share of Spares in total indigenously produced Machinery and Spares (%) (RHS)

LMW's share in India's textile machinery Spares (%) (RHS)

(Rsmn) (%)



Financials

Exhibit 65: Income statement


Net revenue from segments 18,643 21,652 23,606 22,906 27,877

Other operating income 528 764 862 965 1,143

Revenue from operations 19,171 22,416 24,468 23,871 29,020

Other income 787 1,155 988 957 1,114

Total revenue 19,958 23,571 25,456 24,828 30,134

Cost of material consumed 12,015 14,216 15,491 14,743 17,984

Changes in the inventories (226) (270) (129) (82) (97)

Employee benefits expenses 1,796 2,269 2,359 2,488 3,005

Other expenses 3,486 3,637 3,887 4,054 4,490

Total expenses 17,071 19,853 21,608 21,203 25,382

EBITDA (Incl. OI) 2,888 3,719 3,849 3,625 4,752

EBITDA (excl. OI) 2,101 2,564 2,861 2,668 3,638

Depreciation 1,177 1,025 1,040 1,062 1,086

EBIT (Incl. OI) 1,711 2,693 2,808 2,564 3,667

Financial charges and interest 4 6 8 11 13

PBT (Before exceptional items) 1,707 2,688 2,800 2,553 3,653

Exceptional item - VRS - 82 89 30 20

PBT 1,707 2,606 2,711 2,523 3,633

Total tax 532 769 812 754 1,095

Current tax 600 879 915 852 1,226

Deferred tax (Net) (118) (103) (100) (95) (126)

Prior year taxes 50 (8) (3) (3) (6)

Profit after tax 1,175 1,837 1,899 1,769 2,539


Exhibit 67: Balance sheet


Share capital 113 113 113 113 113

Reserves and Surplus 9,490 10,932 12,424 13,786 15,781

Networth 9,603 11,044 12,537 13,898 15,894

Non- current liabilities 2,469 2,258 1,291 1,251 1,478

Deferred tax liabilities (net) 129 26 26 26 26

Other long-term liabilities 2,340 2,232 1,265 1,225 1,452

Current liabilities 5,876 6,924 6,518 6,540 7,600

Trade payables 2,538 2,921 3,183 3,151 3,695

Other current liabilities 3,040 3,539 2,866 2,919 3,295

Short-term provisions 298 463 469 470 610

Total liabilities 17,948 20,226 20,346 21,690 24,973

Total gross block 16,610 16,775 17,225 17,575 17,905

Accumulated depreciation 12,244 12,946 13,986 15,048 16,133

Net fixed assets 4,366 3,829 3,239 2,527 1,772

Capital work in progress 132 27 15 15 15

Non-current investments 1,038 1,288 1,288 1,288 1,288

Long-term loans and advances 249 224 230 219 251

Current assets 12,162 14,857 15,574 17,640 21,647

Inventories 2,257 2,806 2,777 2,691 3,145

Trade receivables 1,200 1,828 2,011 1,962 2,226

Cash and carry equivalents 7,497 8,794 9,517 11,685 14,684

Short-term loans and advances 864 928 856 901 1,100

Other current assets 344 502 412 401 491

Total assets 17,948 20,226 20,346 21,690 24,973


Exhibit 66: Cash flow


EBIT (Incl OI) 1,711 2,693 2,808 2,564 3,667

Exceptional item (-) - (82) (89) (30) (20)

(Inc.)/Dec in working capital (946) (350) (399) 124 53

Cash flow from operations 765 2,262 2,320 2,657 3,700

Depreciation 1,177 1,025 1,040 1,062 1,086

Interest paid (-) (4) (6) (8) (11) (13)

Tax paid (-) (532) (769) (812) (754) (1,095)

Other long term liability - - (967) (40) 227

Long term assets (-) - - (6) 11 (32)

Net cash from operations 1,406 2,512 1,568 2,925 3,873

Capital expenditure (-) (615) (60) (438) (350) (330)

Net cash after capex 791 2,452 1,130 2,575 3,543

Dividends paid (-) (264) (395) (407) (407) (543)

(Inc.)/Dec. in investments 502 (250) - - -

Cash from Financial Activities 239 (645) (407) (407) (543)

Others (456) (509) - - -

Opening cash 6,923 7,497 8,794 9,517 11,685

Closing cash 7,497 8,794 9,517 11,685 14,684

Change in cash 573 1,297 723 2,168 3,000


Exhibit 68: Key ratios

Y/E March FY13 FY14 FY15E FY16E FY17E FY14 FY15E Per share (Rs)

EPS 104.3 163.0 168.6 157.0 225.3

CEPS 208.8 254.0 260.9 251.2 321.7

BV 852.3 980.3 1,112.7 1,233.6 1,410.7

DPS 20.0 30.0 30.0 30.0 40.0

Dividend payout (%) 19.2 18.4 17.8 19.1 17.8

Valuation (x)

P/E 36.4 23.3 22.5 24.2 16.8

P/BV 4.5 3.9 3.4 3.1 2.7

EV/EBITDA 16.8 13.2 11.6 11.6 7.7

M-cap/ sales 2.2 1.9 1.7 1.8 1.5

EV/sales 1.8 1.5 1.4 1.3 1.0

Return ratios (%)

RoANW 12.6 17.8 16.1 13.4 17.0

RoACE 9.3 14.1 13.8 12.2 15.7

RoAIC 15.3 24.6 25.2 24.6 36.1

Margin (%)

EBIDTA margin (excl. O.I.) 11.0 11.4 11.7 11.2 12.5

EBIDTA margin (incl. O.I.) 15.1 16.6 15.7 15.2 16.4

EBIT margin 8.9 12.0 11.5 10.7 12.6

Tax/PBT 31.2 29.5 29.9 29.9 30.1

Net profit margin 6.1 8.2 7.8 7.4 8.7

Expense ratios (% of revenue)

Cost of material consumed 61 62 63 61 62

Employee benefits expenses 9 10 10 10 10

Total expenses 89 89 88 89 87

Turnover ratios

Debtors period (days) 23 30 30 30 28

Inventory period (days) 54 57 52 52 50

Creditors period (days) 77 75 75 78 75

Cash conversion cycle (days) (1) 12 7 4 3

Fixed asset turnover (x) 1.2 1.3 1.4 1.4 1.6

Working capital turnover (x) 3.5 3.2 2.9 2.4 2.3

Non-cash working capital (Rsmn) (1,210.4) (860.2) (461.1) (584.8) (637.8)




Disclaimer

Stock Ratings Absolute Returns

BUY > 15%

ACCUMULATE -5% to15%

SELL < -5%

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