An investment can be considered in the initial public offer of Lokesh Machines. At Rs 130 — the lower end of the band — the offer is priced at 20 times the annualised FY-06 per share earnings on the post-issue equity. Our recommendation is based on the positive outlook for the automobile industry, revenue visibility in terms of securing long-term contract with Ashok Leyland, good order-book, performance over the years and the ability to withstand a downturn.
Steady performance
Lokesh Machines makes machine tools and auto components. Promoted by a first generation entrepreneur, the company has delivered consistent performance over the last decade even when the entire machine tool industry was in dire straits. The company's ability to maintain growth during a slowdown when most engineering companies struggled to make profits, enthuses confidence in the management.
Lokesh Machines kept up with the growth momentum by diversifying its customer base, adding auto components to its portfolio, exploring export opportunities and coming up with innovative import-substitute products for the Indian market. Over the last decade, the company's revenues have grown from Rs 5 crore to Rs 75 crore in FY-05.
Auto capex, key driver
The capacity expansion in the automobile and auto component industry would be the key demand driver. Capex in these two industries alone is expected to be about Rs 5,000 crore and Rs 2,000 crore annually over the next three years. With both multinationals and domestic companies expanding, the demand for machine tools is expected to be robust.
The positive demand outlook for the commercial vehicle industry improves revenue visibility for its auto component division. The company makes cylinder blocks and heads for commercial vehicles. Mahindra and Mahindra, and Ashok Leyland are the two key customers. Though client concentration involves some risk, the favourable outlook for these companies for at least the next couple of years mitigates this risk.
Moreover, the company has been gradually diversifying and supplies to other big firms such as Bharat Forge and Honda Motors. Having supplied to big names, the company could overcome the client concentration risk over a period. The fresh capacities for cylinder blocks and heads would be exclusive for Ashok Leyland under a three-year contract. This gives revenue visibility in the near- to medium-term.
Breakthrough in exports
Over the last two-three years, Lokesh Machines has been able to break through the export market for general purpose machines. Exports accounted for about 10 per cent of the revenues in FY-05. It has export orders worth Rs 3.3 crore for FY-07, double that in FY-06, though on a small base. The total order-book, as on February 2006, was roughly Rs 31 crore, approximately half the turnover for FY-05.
Offer details: The funds generated from the IPO would be used to create additional capacities for cylinder blocks and heads and modernise the machine tool capacity. The output would be exclusively supplied to Ashok Leyland for the next three years and is renewable on a yearly basis. The new facility would add 40,000 units to its existing capacity of 1,20,000 units.
Lokesh Machines expects to raise Rs 39 crore to Rs 43 crore. The offer is to be priced in Rs 130-140 band. The bid closes on April 13, 2006. The offer is lead-managed by Karvy Investor Services and UTI Securities.