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Sowmya Sundar

Riding on buoyant demand for textile machinery.

INVESTORS can hold on to the LMW stock and wait for the volatility in the broad market to settle before considering exposures. Any decline related to the broad market can be used to accumulate the stock, which trades at 13 times its trailing 12-month per share earnings.

The improving replacement demand for textile machinery and the pick up in LMW's new business — castings — should lead to revenue growth. On the flip side, the recent reduction of import duties would make the market extremely challenging and price-competitive, impacting realisations.

Revenue growth

LMW declared impressive revenue growth for the seventh straight quarter. The modernisation and replacement of textile units is gaining momentum as the textile industry prepares itself for the quota-free regime. Being the market leader, LMW's revenue growth has been stronger than that of the industry. The revenue growth at 27 per cent outpaced the broad domestic industry growth rate of 10 per cent in 2002-03. Its casting division, which primarily caters to the export market, is also growing at a fast clip. Its contribution to the bottomline has also increased in the December quarter.

The division contributed 15 per cent to revenue (13 per cent) and 7.7 per cent of the profits (3.7 per cent) for the period. Rising volumes offset lower margins on the casting business.

Merger of Textool

The strong revenue growth has negated to some extent the effect of the merger of Textool, an ailing group company, with LMW. On a consolidated basis (post-merger), LMW's sales rose 13 per cent. Margins have almost doubled to 24 per cent. This can be attributed to higher volume offtake, higher realisation and favourable product mix. It appears that a significant part of the margin expansion may be due to the 40 per cent reduction in miscellaneous expenditure.

The addition of Textool's debt and capacities increased the interest and depreciation charges. The rise in interest costs, at 14 per cent (on comparabale basis) is, however, limited. In contrast, interest coverage increased one percentage point to 11 per cent as improved margins and revenues offset the debt burden. The near three-fold rise in depreciation charges is due to goodwill amortisation that occurred due to the merger. The additional capacities and the resultant depreciation would continue to impact profitability.

Conservative accounting for tax concessions and other merger-related adjustments indicate that the profits are sustainable.

On a better footing

LMW is on a better footing that it was two years ago. Improving industry fundamentals the pick up in its new business augurs well for the company. The new compact yarn-spinning machine, an import substitute, is expected to add to its product portfolio and translate into better demand. The reduction in import duties may have an impact on its ability to fetch a better price. LMW, however, has faced import onslaught throughout the decade and the recent cut would not have a substantial impact on the demand for the company's products.

Exposure can be considered on any decline related to the broad market trend.

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