Lokesh Machines IPO

Background :

• Lokesh Machines Ltd. (Lokesh) was incorporated in1983 and started its commercial production from 1986.
• Lokesh is in the manufacturing of CNC machines.The current operations of the company can be categorised into CNC lathes, vertical machine centers (VMC), horizontal machining centers (HMC), special purpose machines (SPM) and auto components. The company also caters to foreign market and has orders for Italy, Germany and Japan.
• At present, the company has a facility for machining and supply of 1,20,000 each of cylinder blocks and cylinder heads per annum, which is being utilized for supplies to Mahindra and Mahindra Ltd.
• The key customers of the company include Mahindra & Mahindra Ltd., Bharat Forge Ltd., Ashok Leyland Ltd. and Everest Kanto Cylinder.

Object Of The Issue :

• Setting up the facility for machining and supply of cylinder blocks and cylinder heads for commercial vehicles for Rs.2,098.5 lakhs
• Modernization Project for upgradation of the existing facilities for manufacture of machines and machine tools for Rs.1,829.26 lakhs
• To meet working capital needs and issue expenses of the company for Rs.773.32 lakhs.

Strengths :

• Lokesh has entered into an agreement with Ashok Leyland Ltd. to supply cylinder block and cylinder heads for commercial vehicles for a period of three years. The company is setting up an additional facility for machining and supply of 40,000 each of cylinder blocks and cylinder heads per annum. The entire facility will be utilized to execute the said agreement with Ashok Leyland Ltd. with effect from February 1, 2006.
• The company intends importing state of the art mother machines to augment and upgrade the capacities and capabilities of the equipment currently available. This will enhance the competence of the company to manufacture with machines of greater versatility and effectiveness
• The company is making efforts to enhance export revenue. In financial year 2006, 25 machines (375,000 euro) were exported. The company has confirmed export orders for 42 machines for the financial year 2007, valued at approximately Euro 630,000.
• Revenue and Net profits of the company has grown at a CAGR of 28.6% and 110.3% respectively from FY2001 to FY2005.
• The Company's current aggregate order booking condition as on February 28, 2006 is around Rs.3,118 lakhs. Revenue reported for seven months ending October 2005 is Rs.4,053.94 lakhs.
• The domestic market for CNC lathes is expected to grow at a CAGR of 32.4% till FY2007 in terms of revenues. CAGR for HMC, VMC, SPM in terms of revenue for the same period are 30.2%, 31% and 19.4% respectively. Indian automotive industry is registering a growth rate of above 20% per annum.

Weaknesses :

• Lokesh's basic raw material is mild steel constituting around 60% to the total cost. Steel is a highly price intensive industry. Current trend reflects firming up of steel prices in global and domestic markets. The same would increase the cost of raw material for the company.
• The company faces competition from the unorganized sector. The competition comes mainly in the segments of SPMs and CNCs. HMT Ltd., Lakshmi Machine Works, Ace Designers Ltd. are the competitors in domestic market.
• The company is in a business that involves long manufacturing cycle. Realization of revenues is delayed causing pressure on working capital requirement. Debtors to sales ratio for FY2005 and seven months ending October 2005 are 24.37% and 47.8% respectively.

Peer Group Comparison

For FY2005

COMPANY	NPM (%)	P/E	EPS (Rs.)	Debt/Equity Ratio	Book Value (Rs.)	RONW (%)
Lokesh.	8.66	37-41	5.9	1.91	23.17	25.69
Avery India.	3.77	24.3	2.8	0	33.10	6.06
Batliboi.	8.63	25.3	5.40	0.41	17.90	23.53

Valuation :

• The company has reported a Net Profit of Rs.522.48 lakhs for the year ending March 2005, an increase of 452% over previous years net profit. Net profit margin was 8.66% for FY2005 as against 2.52% for FY2004. Inventory for FY2005 was Rs.2378.91 lakhs.
• Sales of the company registered a growth of 60.8% in FY2005. The same was Rs.6,035.18 lakhs as against Rs.3,753.17 lakhs in FY2004.
• EPS for FY2005 is Rs.5.9. Post issue EPS based on October 2005 results is Rs.3.4. PE for a price range of Rs.130 to Rs.140 is in the range of 37-41. Industry PE is 23.4.