The Hindu Business Line : Stock wrap-up

TEXTILE machinery stocks, a neglected lot for almost five years, have gained momentum in the last four months. The stocks of LMW and Veejay Lakshmi have more than tripled in value. It is not just the me-too factor (as part of the broad-based bull run) that is driving the stocks.

But some fundamental changes in individual companies and a mild pick up in demand that have also infused confidence in these stocks. The poor financial state of most players rule them out from an investment perspective. The two that stand out are LMW and Veejay Lakshmi Engineering.

LMW, the market leader has posted a 27 per cent growth in textile machinery offtake in 2002-03. And Veejay Lakshmi Engineering turned around in 2002-03 aided by higher turnover of the textile machinery division and debt reduction.

The other players, such as Lakshmi Automatic Loom Works, though deep in the red, have registered marginal growth in their topline. Some of the key success factors behind the improved performance are improved demand, restructuring, concentration on product improvement and indigenisation of imported components.

LMW: It is the market leader and contributes close to 60 per cent of the domestic production and has a 17 per cent share in the total demand. LMW is one of the few companies that has a presence across the whole range of textile machinery from preparatory to spinning and weaving machinery. Even during the recession, the company managed to stay in the black.

In an industry which is saddled with debt, LMW maintained its low-debt status even during the most turbulent times. Given its inherent strengths, and the broad product portfolio, LMW would walk away with a major slice of the cake once modernisation clicks off.

The company has decided to merge another group company, Textool, with itself. The merger would provide LMW with capacity, especially for making weaving machinery.

The current average capacity utilisation rate of LMW is about 40 per cent, which is higher than the industry average of 30 per cent.

Post-merger, the capacity utilisation would drop below 30 per cent at the current production levels. There has to be a substantial increase in sales to justify the capacity addition.

The acquisition of Textool's debt will not affect LMW adversely owing to its low-debt status. The post-merger debt would be a third of the shareholder funds as compared to one-fifth now. The acquisition could have a near-term impact on the operating margins of LMW.

At Rs 3071, fresh exposures can be considered. Since LMW would be a major beneficiary of the investments that would take place in the next 3-4 years, there is scope for the stock appreciating further .

Veejay Lakshmi: Veejay Lakshmi Engineering Works is another stock that can be considered for investment. It has restructured its operations and turned around in 2002-03.

The company has spun of its textile division into a separate subsidiary so that the operations do not affect each other's profitability.

It has reduced debt and the interest cost savings has resulted in better liquidity. A pick up in demand can be gauged from a more than two-fold increase in the advances received against sales as per the 2003 balance-sheet.

The company manufactures automatic cone winders and two-for-one twisters. It enjoys a good market share in its product range and has a technical and financial tie up with Savio of Italy.

The company has embarked on an indigenisation drive. Its project for developing indigenous components for two-in-one twisters is in the final stages of completion. The share of imported raw materials and components as a percentage of total cost has declined to 67 per cent from 73 per cent the year before.

With orders on hand for the next 6-7 months, the prospects for earnings growth appear good. The good order book position and the benefits that would flow from lower interest costs and cost savings on account of indigenisation would also improve earnings.

At Rs 50, the stock trades at four times its trailing 12-month per share earnings of Rs 13. Given the better prospects, the stock holds good scope for appreciation from the current levels. Investors can consider exposures in the stock.

Lakshmi Auto: Owing to a dearth of orders, Lakshmi Automatic Loom Works converted its knitting division into a 100 per cent export-oriented unit (EOU) to utilise its capacity. It has entered into a buyback arrangement with a German company for supply of parts and sub-assemblies and has made a beginning.

Post-restructuring, the prospects for the EOU appear better. However, the huge debt burden and accumulated losses weigh on the company's turnaround.

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