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Please Refer DISCLAIMER on the Last Page

Date: 12-July-13

CMP: `1860 TARGET: `2226

Upside: 20%

SENSEX 19496

NIFTY 5868

Eq. Cap. (` Crs) 11.27

Face Value (`) 10.0

M. Cap (` Crs) 2,096

BSE Code 500252

NSE Code LAXMIMACH

Financial Year Apr-Mar

52-w H/L 2330/1540

Avg. Daily Vol. 833

TTM EPS (`) 115.0

P/E (x) 16.2x

BVPS (`) 852.10

P/BVPS (x) 2.18x

M.Cap/Sales 1.07x

Dividend Declared 200%

Stock vs. Sensex

LAKSHMI MACHINE WORKS LTD (LMW)

Lakshmi Machine Works Ltd (LMW), founded in the year 1962, is a leading Textile Machinery Manufacturer in India and one among the 3 in the world to produce the entire range of Spinning Machinery (Blowroom to Ring Frames). LMW has ~65% market share in the domestic Textile Spinning Machinery Industry.

Enjoys highest market share in Yarn spinning

In India, the company has a high market share in yarn spinning and preparatory machines. The company has been able to sustain this market share on the back of strong after-sales service coupled with providing the world’s best technology to customers at reasonable rates. LMW has service centers at all textile hubs across India, which gives it a strong advantage over its Global peers.

TEXTILE MACHINERY DIVISION (TMD)

Recently, yarn exports from India have improved due to a change in yarn import policy in China. Signs of improvement reported in the American, the EU and Japanese economies, depletion of textile inventory within the American and the European markets augur well for the Indian textile industry.

MACHINE TOOL DIVISION (MTD)

LMW’ machine tools division has regularly participated in Indian and international exhibitions like IMTEX-2013, Bangalore, AMTEX -13 New Delhi and ACMEE-13 at Chennai and were well received. During FY13, the machine tools division introduced 10 new machines/new variants of existing machines which enhanced the value proposition for customers which should translate into healthy growth over the coming years.

FOUNDRY DIVISION

In FY13, LMW’ foundry division has sold 5,500 MT of ductile iron and grey iron castings valued at Rs.90.5 Crs vs. Rs.91.7 Crs recorded in FY12. This Division has exported castings worth Rs.65.2 Crs and export turnover constitutes 72% of the division’s turnover. The growth in exports is mainly on account of growing demand for locomotive castings due to the growth of railway locomotive business in North America and Europe. Commencement of infrastructure projects like metro rail in major cities of the country, constant growth of renewal energy segment, setting up of factories in India by MNCs manufacturing OE equipments, will give fillip to Foundry industry in India.

Other Key Positives

The company had orders for Rs.3,700 Crs and it got orders to the tune of Rs.1,100 Crs during the last fiscal.

The company has been a debt free company since FY05.

The company has strong history of bonus issues in 1981 (3:5), 1989 (1:2) and 1997 (1:1).

Cash Flow from Operating activities has been positive since last 5-6 years.

Cash Per share and Book Value per share (BVPS) stood strong at Rs.757.34 and Rs.852.10 respectively as on date.

In last 5 years the company has paid Rs.150 Crs towards Dividend.

At the CMP of Rs.1860, the stock is trading at 12.5x FY15E consolidated EPS of Rs.148.41 respectively. We recommend BUY on the stock with a 12-18 months target price of Rs.2226, providing an upside of 20%. .

BUY

Research Desk

Lakshmi Machine Works Ltd. 2 05-July-2013

Company Profile Dedicated manufacturing facilities supported by well established OSP infrastructure.

Lakshmi Machine Works Ltd (LMW), founded in the year 1962, is a leading Textile Machinery Manufacturer in India and one among the 3 in the world to produce the entire range of Spinning Machinery (Blowroom to Ring Frames). LMW has ~65% market share in the domestic Textile Spinning Machinery Industry.

LMW started its operation in Periyanaickenpalayam in Coimbatore city with technical collaboration with Swiss based textile machinery manufacturer Rieter for textile machineries and German based Steel and Ammunution major Krupp. In mid 1980's the company bought over its Coimbatore based longtime rival and much older Textile and engineering giant Textool.

LMW diversified into CNC (Computer Numerical Control) Machine Tools and is a brand leader in manufacturing customized products. LMW Foundry makes Precision Castings for industries the world over. LMW is the only company in Asia outside Europe to manufacture Original Equipment products for Mikron of Switzerland. LMW's Global presence has grown over the years, with a market presence not only in developing countries, but also in Europe. LMW has won the Top Export Award in textile machine exports for the past 7 years.

BUSINESS MODEL

LMW has 3 major product segments namely, the Textile Machinery Division (TMD), Machine Tools Division (MTD) and the Foundry Division (FD). Besides these divisions, the company has a Wind Energy Division and an Advanced Technology Centre.

87.2%

7.7% 4.8%

0.2% Revenue Mix - FY13

Textile Machinery Division

Machine Tool Division

Foundry Division

Others

Research Desk

Lakshmi Machine Works Ltd. 3 05-July-2013

INVESTMENT POSITIVES

Focusing on value-added products backed by automation LMW’s Products cover the entire Textile Spinning Value Chain

So far the Journey has been healthy

Source: Company

Product / Categories for Textile Industry

TEXTILE MACHINERY DIVISION (TMD)

The Indian textile industry is one among the leading textile industries of the world. This sector contributes to ~14% of industrial production and ~17% to India’s export earnings. This industry provides direct employment to ~35 million people. Thus growth and development of this industry has a direct bearing on the well-being of the Indian economy. Recently, yarn exports from India have improved due to a change in yarn import policy in China.

Research Desk

Lakshmi Machine Works Ltd. 4 05-July-2013

Traditional markets like the US, the EU and Japan despite being constrained by economic recession continue to be important destinations for Indian textiles. The Indian textile industry is also blessed with a huge domestic market. However fundamental issues like inadequate power, shortage of manpower, reluctance to upgrade to contemporary technology, lack of clarity in governmental policy continue to plague the industry.

The key Prospects for this division would be:

Policy change in China to import yarn instead of cotton has created good demand for Indian yarn – which has encouraged the Indian spinners to pursue with capacity addition and modernisation.

Signs of improvement reported in the American, the EU and Japanese economies, depletion of textile inventory within the American and the European markets augur well for the Indian textile industry.

Numerous Govt. measures like removal of excise duty on readymade garments, extension of TUF (Technology Up-gradation Fund) scheme to the 12th Five Year Plan period, enhanced fund allocation for textile parks and inclusion of textiles in the Focus Product Scheme would improve the financial strength of the textile sector.

Measures announced by various State Governments in India to boost the setting up of green-field projects.

Presence of an ever-growing fashion-conscious population compels the textile mills to upgrade their production facilities continuously. This is an opportunity for LMW to upgrade the manufacturing technology and the ability to provide the complete range of contemporary textile machinery at a competitive price also augur well for the company.

Research Desk

Lakshmi Machine Works Ltd. 5 05-July-2013

LMW has a market share of 13% in lathes and 2% in machining centres Established brand name with world renowned clients like GE, Siemens, Wartsila, ABB etc

MACHINE TOOL DIVISION (MTD)

India is the 18th largest manufacturer of machine tools in the world. The Indian machine tool industry consists of ~450 manufacturing units of which ~150 are in the organised sector. Moreover, domestic manufacturers account for ~45% of consumption within the Indian machine tools market. LMW’ machine tools division has regularly participated in Indian and international exhibitions like IMTEX-2013, Bangalore, AMTEX -13 New Delhi and ACMEE-13 at Chennai and were well received. During FY13, the machine tools division introduced 10 new machines/new variants of existing machines which enhanced the value proposition for customers which should translate into healthy growth over the coming years.

During FY13, this division has achieved a turnover of Rs.144.4 Crs (has sold 704 machines) vs. turnover of Rs.227.5 Crs recorded during the previous year showing a decrease of 36.5% over last year. Decline in turnover is due to the slowdown of industrial activity in the country particularly in the automotive, infrastructure, heavy engineering and construction industries. Competition from low cost unorganised Machine Tool manufacturers, import of second hand machinery and stiff competition from high tech overseas Machine Tool manufacturers have also led to a fall in volume.

The key Prospects for this division would be:

Growth in aerospace, defence, power, power transmission, infrastructure and auto ancillary industries.

Government’s initiative to stimulate economic growth and plans to boost the share of manufacturing sector to the GDP.

Continuous R&D efforts and the ability to bring new variants that match with market requirements enable LMW to meet market demands.

FOUNDRY DIVISION

The Indian foundry industry consists of 4,600 units capable of manufacturing 9 million tonnes of castings per year. Recently, the foundry industry has been facing hurdles like inadequate power supply, non availability of skilled manpower, lack of government support towards pollution control measures among others. The general economic slowdown has also impacted the overall Foundry Industry. In FY13, LMW’ foundry division has sold 5,500 MT of ductile iron and grey iron castings valued at Rs.90.5 Crs as against Rs.91.7 Crs recorded during the previous year showing a marginal decrease of 1.27% over the previous year. This Division

Research Desk

Lakshmi Machine Works Ltd. 6 05-July-2013

Combined output capacity of ~54,000 TPA. Out of which 2 units representing ~36,000 TPA supply for captive use.

has exported castings worth Rs.65.2 Crs as against Rs.52.5 Crs made during the previous year. The export turnover constitutes 72% of the division’s turnover.

The growth in exports is mainly on account of growing demand for locomotive castings due to the growth of railway locomotive business in North America and Europe. Commencement of infrastructure projects like metro rail in major cities of the country, constant growth of renewal energy segment, setting up of factories and/or International Procurement Offices (IPO) in India by MNCs manufacturing OE equipments, will give fillip to Foundry industry in India. The foundry division is expected to perform well in the current year given the world class manufacturing technology and focused approach in servicing customers in India and across the globe.

Prospects:

Development of metro rail projects in major cities of India, growth in power and power transmission sector is expected to boost demand for castings.

LMW has a well established brand image of having the capacity to manufacture high quality heavy castings.

Adoption of LEAN manufacturing techniques has enabled LMW to manufacture cost effective castings.

Recognition of LMW’ foundry as a non-polluting facility increases its business opportunities.

WIND ENERGY DIVISION & ADVANCED TECHNOLOGY CENTRE

LMW continues to tap the non conventional and renewable resources of energy. In an era of acute power shortage, wind energy occupies the centre stage in the energy policy. So far the Company has installed 28 wind mills with a total installed capacity of 36.80 MW. During FY13, this division has generated 945 lakh units as against 647 lakh units during the previous year.

The Company has established the Advanced Technology Centre to manufacture and supply high precision parts and components required for the Aerospace Industry. For this purpose, LMW has created infrastructure and capabilities that are accredited with the AS 9100 Rev B certification and the NADCAP approvals. During FY13, this division has commenced commercial production and has achieved a maiden turnover of Rs.57.2 Lakhs. Product supply agreements have been concluded with leading original equipment manufacturers / sourcing intermediaries. A number of products are currently under customer validation process. These products are expected to bring more volumes for this division in the years to come.

Enjoys highest market share in Yarn spinning

In India, the company has a high market share of ~65% in yarn spinning and preparatory machines. The company has been able to sustain this market share on the back of strong after-sales service coupled with providing the world’s best technology to customers at reasonable rates. LMW has service centers at all textile hubs across India, which gives it a strong advantage over its Global peers. LMW also enjoys an edge over competition as it caters

Research Desk

Lakshmi Machine Works Ltd. 7 05-July-2013

to ~1,300 domestic textile players, out of the total universe of ~1,600. The company has been innovating on technology for the past 15 years. In terms of prices, LMW’s products are at least 10% cheaper than its European peers, who have a manufacturing base in India.

Plans to expand in China

LMW plans to expand the range of products manufactured at its subsidiary LMW Textile Machinery (Suzhou) in China. The China subsidiary had made profits in FY13 because of better price realisation. Moreover, the manufacturing facility was functioning out of a ready-built factory now and land has been allotted to have its own premises. LMW would invest totally US$12.5 mn in China, and the subsidiary would meet the remaining expenses for expansion through loan or internal accruals.

Textiles sector has witnessed a spurt in investment during the last 5 years

The textiles sector has witnessed a spurt in investment during the last five years. The industry (including dyed and printed) attracted foreign direct investments (FDI) worth Rs 5,674.45 Crs (US$ 1.04 billion) during Apr’00 to Feb’13. Some of the major investments in Indian textile industry are:

Swedish retailer Rusta plans to import Indian textiles and handicraft worth Rs 200 crore (US$ 36.53 million) annually over 3-4 years.

India plans to set up a textile training institute in Kaduna state, Nigeria, as per Dr Milan Sharma, Head, Africa Initiatives and Industry Research of IL&FS Cluster Development Initiative Ltd.

Invista, owner of Lycra fiber brand, would give the Indian women perfect clothing solutions in the near future.

British clothing brand Superdry plans to open 20 stores in India over the next five years, as per Mr James Holder, Founder, Superdry.

American apparel-maker, Tommy Hilfiger plans to add 500 stores in India over the next five years as part of their expansion spree. Currently, Tommy Hilfiger operates 58 franchisee outlets and over 60 shop-in-shops in other department stores

Textiles Ministry is contemplating offering sops to the sector

The Textiles Ministry is contemplating offering sops to the sector and initiating measures to boost outbound shipments by a targeted 30% in 2013-14 as set by a PM-led panel. Measures like flexible labour laws, availability of raw-material at reasonable prices, better quality of products and improved marketing and branding techniques will make the industry more competitive. Recently at the meeting of a High-Level Committee on Manufacturing, chaired by Prime Minister Manmohan Singh, a road map of measures was laid out to raise textiles exports by 30% besides increasing steel output capacity to 300 MTPA to tackle plummeting Rupee. The major markets for textiles exports are the US, which is showing recovery and Europe which is still witnessing weak economic growth. To reduce dependence on these markets, exporters are also exploring new opportunities in Latin America, Australia and Japan.

Research Desk

Lakshmi Machine Works Ltd. 8 05-July-2013

Other Key Positives

The company had orders for Rs.3,700 Crs and it got orders to the tune of Rs.1,100 Crs during the last fiscal.

The company has been a debt free company since FY05.

The company has issued bonus in 1981 (3:5), 1989 (1:2) and 1997 (1:1).

Cash Flow from Operating activities has been positive since last 5-6 years.

Cash Per share and Book Value per share (BVPS) stood strong at Rs.757.34 and Rs.852.10 respectively as on date.

In last 5 years the company has paid Rs.150 Crs towards Dividend to shareholders.

Strong Dividend history

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Impressive Shareholding

Source: Capitaline, LMSPL Research

Research Desk

Lakshmi Machine Works Ltd. 9 05-July-2013

Key Risk

Regulatory concerns and Textile industry is very prone to sharp down-cycles.

Increase in costs of raw materials like pig iron, aluminium, brass, etc High transportation and warehousing costs Infrastructure bottlenecks like power shortage, labour issues

VALUATIONS

At the CMP of Rs.1860, the stock is trading at 14.6x FY14E and 12.5x FY15E consolidated EPS of Rs.127.43 and Rs.148.41 respectively. We recommend BUY on the stock with a 12-18 months target price of Rs.2226, providing an upside of 20%.

Source: Company, Capitaline

This document is for information only and is meant for the use of the recipient & not for circulation. The information contained in this document has been taken from publicly available information, trade and statistical services & other sources. While the information contained herein is from sources believed to be reliable, we do not hold ourselves responsible for its completeness and accuracy. All opinions and estimates included in this report constitute our judgement as of this date and are subject to change without notice. Investors are expected to use the information contained in this report at their own risk. This report is not and should not be construed as an offer or the solicitation of an offer to buy or sell any securities. M/s Latin Manharlal Securities Pvt. Ltd. and its affiliates may act as market maker or have assumed an underwriting position in the secure-ties of companies discussed herein and may sell them to or buy them from customers on a principal basis.

Registered Office: 124 Viraj, S,V.Road, Khar (W), Mumbai 400 052. Tel. (022) 4082 4082, Fax (022) 2649 7997. research@lmspl.com www.latinmanharlal.com, LMSPL Network: Fort, Mahalaxmi, Parel, Bandra, Santacruz, Vile Parle, Andheri, Malad, Kandivili, Borivali,

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