Apollo Tyres, Glenmark Pharma, Ranbaxy, Lupin, SBI, Cadila, Mahindra Satyam, IOC, ILFS, LMW

Apollo Tyres, Glenmark Pharma, Ranbaxy, Lupin, SBI, Cadila, Mahindra Satyam, IOC, ILFS, LMW

Lakshmi Machine Works

Lakshmi Machine Works

Voltas, ABB, Areva, Lakshmi Machine Works

Voltas, ABB, Areva, Lakshmi Machine Works

Lakshmi Machine Works

Lakshmi Machine Works

Marico, Petronet LNG, United Phosphorus, Dena Bank,Lakshmi Machine Works

Marico, Petronet LNG, United Phosphorus, Dena Bank,Lakshmi Machine Works

Lakshmi Machine Works

Lakshmi Machine Works

Lakshmi Machine Works

Lakshmi Machine Works

Lakshmi Machine Works

Lakshmi Machine Works

Emkay - Morning Notes, Lakshmi Machine Works

Emkay - Morning Notes, Lakshmi Machine Works

Emkay - Lakshmi Machine Works

Emkay - Lakshmi Machine Works

Sharekhan Investor's Eye dated June 15, 2007

Cement

Dispatches grow by 11% yoy in May 2007
The industry dispatches grew by 11% year on year (yoy) to 14.2 million tonne in May. Among the major players, the volumes of ACC jumped by a massive 19.2% yoy to 1.8 million metric tonne (MMT) boosted by the capacity expansion at Lakheri. Ambuja Cements and the AV Birla group witnessed a marginal volume growth of 2.7% yoy and 4.8% yoy to 1.5MMT and 2.7MMT respectively, as they did not witness any capacity additions. Among the mid-cap cement companies, Shree Cement's volumes jumped by 20.2% yoy fuelled by its third unit at Ras whereas Madras Cement's volumes grew by 15% yoy to 0.45MMT on account of a lower base in the same month last year. JK Cement's volumes declined yoy in both April and May on account of routine maintenance shutdown of its grinding mill at Nimbahera.

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VIEWPOINT

Lakshmi Machine Works

Growing at a rapid pace
Lakshmi Machine Works (LMW) is a leading textile machinery manufacturer in India with presence in machine tools and foundry businesses. The company is a major player in the textile machinery space and has about 50% of the domestic market share. The machine tools division makes the CNC machine tools and is a brand leader for customised products while the foundry division makes precision casting.

Though the company has presence in three sectors but the revenues from its textile machinery segment, which contributed 89% of the total revenues in FY2007, dominate its top line. LMW is known for its quality and all its divisions are ISO 9000 certified.

Sharekhan Investor's Eye dated June 15, 2007

Lakshmi Machine Works, Crompton Greaves, Nagarjuna Constructions, Britannia, Maruti Udyog, Mahindra & Mahindra, Welspun

ENAM on Lakshmi Machine Works,

Revenue growth expected at 35% in FY08E and 22% in FY09E. A stable pricing environment and volume driven operating leverage is expected to deliver earnings growth of 34% CAGR over the next 2 years.

At CMP (Rs 2,636) the stock trades at P/E of 11x FY08E earnings of Rs 229 and 9x FY09E earnings of 298. We continue to maintain our sector Outperformer rating on the stock.

ENAM on Crompton Greaves

CG has acquired Microsol Holdings, a power automation company for an EV of Euro 10.5mn or 8.7x EV/EBIDTA. The acquisition has further strengthened CG’s power T&D product portfolio, making it a total T&D solutions provider, at par with global majors such as ABB, Siemens, etc. CG believes that it can scale up this acquisition by 5-7 fold to Euro 50-70mn over the next 2 years. Globally power automation is ~20% OPM business and going by CG past track record, we estimate that the acquisition will pay off in < 2 years.

Strong growth in global T&D market and surging corporate capex has enhanced visibility across CG’s segments. Hence, we believe that CG will surpass its guidance of 30% revenue growth and maintain its trend of margin expansion. At CMP (Rs 246), the stock trades at 9x FY09E EV/EBIDTA. Maintain sector Outperformer.

ENAM on Nagarjuna Constructions

NCC has guided for Rs 40bn in revenues in FY08 with an OPM of 9.5%. Further, the management has guided for a 30% tax rate in FY08 due to 80 IB benefits in certain projects. This is inline with our estimates and we maintain our FY08E earnings. We believe that the proposed QIP will accelerate earnings growth for NCC and will be a key trigger for re-rating. At CMP (Rs 161), adjusted for Rs 69/share of BOT + real estate value, the stock trades at an EV/EBIDTA of 6.7x FY08E and 5.7xFY09E. Maintain sector Neutral rating on the stock.

Citigroup on Britannia

Britannia had emerged as the third most attractive candidate for a leveraged buyout (LBO) across our regional consumer universe in Feb-07. While the stock is up 50% since then and no longer attractive in our LBO screen, it is still a good fit for companies like HLL and ITC, which are trying to enhance their presence in the foods segment.

Despite factoring in lower raw material costs we are cutting our FY08E-FY09E EPS estimates by 9.2%-23.5%, mainly reflecting 1) lower than expected FY07 and 2) higher ad expenses going forward. However we increase our price target to Rs1, 825 as we roll forward our target 20x P/E 1-year forward to mid-FY09E.

Citigroup on Maruti Udyog

Domestic sales rose modestly c.10% YoY due to slowdown in mid-size segment. High base effect has also led to a moderation in growth. Maruti is offering attractive finance schemes at around 8% in select cities aided by promotions to maintain steady growth.

Key risk factors are rising rates, changing model mix and higher promotional spends/discounts. Target of 945

Citigroup on Mahindra & Mahindra

Bouyed by strong UV sales (+23% YoY) and modest tractor sales (+2% YoY). Strong Scorpio sales (+28% YoY) led to a strong growth in UV sales. UV sales without Scorpio grew by +21% YoY. 3 wheeler sales also grew by a robust +22% YoY after a modest decline in April 07.

Key downside risks are: reduced market value of principal subsidiaries (off which our sum-of-the-parts target price is pegged); rising interest rates – which could curb growth; rise in input costs. Target of 1032 (37% upside)

Macquarie on Welspun

Appreciation of the Indian Rupee (versus US dollar) is a near term concern but should not dampen Welspun’s intention to grow through multiple routes. Its organic growth strategy aims to tap the 5% interest subsidy provided through the technology upgradation fund to fund massive capacity expansion.

The Christy acquisition is in line with the inorganic strategy of driving margins through increased contributions from designer brands. Welspun is currently trading at extremely compelling valuations, considering its multiple growth drivers (PEG is <0.4). Our revised price target of Rs95 provides 34% upside

Lakshmi Machine Works: Buy

A long-term investment with a two/three-year perspective can be considered in the stock of Lakshmi Machine Works (LMW), the largest maker of spinning machinery in India. An established presence in the market with a strong revenue growth visibility, a hefty order book, and the company's thrust on technological upgradation underscore our recommendation.

At the current market price, the stock trades at about 16 times its FY-08 per share earnings. Market corrections, if any, may also be used as good entry opportunity.

Investment Argument

The company operates in three business segments — textile spinning machinery, CNC (Computer Numerical Control) machine tools, and high precision machine castings (foundry). The textile machine division, which caters to about 60 per cent of the domestic market, provides cost competitive solutions to the spinning industry. The division operates with an 80 per cent capacity utilisation, contributing nearly 91 per cent of revenues. With the upgradation of its existing plants, installation of high-tech mother machines and the merger with erstwhile Jeestex Engineering (JEL), the installed capacity is set to increase from 1.8 million spindles to 2.7 million by the end of March 2007. This would, however, contribute to the earnings from FY-08 only.

The machine tools and foundry division, though not as significant as its textile division, contributed to about 10 per cent of the total sales during the first half of FY-07. Despite the pricing pressure that the CNC machine tools division faces from its competitors, we believe the company's plan to roll out customised products in this segment would pay-off in the future, given the growth in user industries driven by by the manufacturing boom. The foundry division, apart from meeting most of its captive-consumption demands, supplies international companies, such as General Electric, Siemens and Armstrong, with critical castings.

LMW's order-book, which is around Rs 4,500 crore, has recorded a growth of over 65 per cent over the past year.

Despite the higher waiting period for delivery of textile machinery of 22-26 months, demand continues to outstrip supply. This is reflected by LMW's healthy growth in the order book. Moreover, it faces no significant threat from its competitors and given that most of the parts and processes in the industry are patented, the possibility of a new entrant is remote. This again provides further revenue visibility to the company. Further, we have not taken into account the savings due to lower sales tax on VAT implementation in Tamil Nadu from January 1, 2007.

Strategies

LMW charges its clients a 10 per cent advance against booking, irrespective of the order size. Its zero-debt position plus these cash advances have ensured a comfortable cash flow position for the company.

This apart, its thrust on both R&D and plant modernisation has helped de-bottleneck manufacturing capabilities and hence improve overall productivity. During the current fiscal, about 2 per cent of the net turnover was earmarked for R&D expenditure. The introduction of assembly line manufacturing has also augured well for the company.

For the quarter ended September, revenues increased by 43.5 per cent on a year-on-year basis.

The operating profit margins increased by about 350 basis points, largely driven by volume growth in the textile division. The company's efforts to continuously upgrade its technology have also helped it contain cost.

Concerns

Since the nature of its business is cyclical, any recession in the textile sector would affect LMW's business. Moreover, the stretched delivery period can also prompt the mill owners to import second-hand machines (not cost-effective now), leading to a loss in LMW's market share.

In addition to this, the relatively lower liquidity of the stock is likely to be a cause for concern during exit.

Slowdown in capex plans of textile companies, rise in raw material cost and increase in competition from international suppliers of textile machines could also pose a downside risk to our recommendation.