Wednesday, 8 November 2017

Lokesh Machines Ltd: Tooled for Growth---------------- Results Update: Kennametal India

Lokesh Machine Ltd: Picked at 74 today. It is one of the most advanced metal cutting machine tool maker in India and deals in high precision CNC Machines, machine tools, jigs, fixtures and accessories needed for precision engineering. It is one of the most preferred suppliers to automobile industry and has clients like Volvo, Eicher, Honda, Caterpillar, Mahindra, Cummins etc. It is one of the top five Machine Tool Manufacturers in India and also claims to be “the first Indian company to deliver a complete range of special purpose machines of machine Euro 6 compliant cylinder blocks & heads” to Volvo. 

So it already has one of the best technologies in place for making sophisticated machinery not nut bolts. Keeping an eye on the growth opportunities in India, it is establishing relationships with global machine tech giants. In Jan-17, it has signed a landmark agreement with Tongtai Machine and Tool Co. Ltd, Taiwan, global giant in machine tool, to manufacture hi-speed vertical machining center model EZ5 for the Indian market as well for export market along with other hi-tech machines of Tongtai. 

In other significant tie up, in jan-17, it has entered into an agreement with EMCO GmbH of Austria for the manufacture and sale of next generation multi-tasking machines to expand beyond its earlier portfolio of automotive OEM. 

Indian Machine tools sector:

At present, Indian Machine tool market is around 10000 cr (Metal cutting tool industry is around 8200 cr) with domestic production having a share of around 43% ( In metal cutting it is 48%, rising against the imports in last 4-5 years from 42%) and imports contributing balance 57% which shows the scope for further capacity expansion by Indian players. Metal cutting machine tools are used for a variety of purposes like turning, centre machining, drilling, milling, grinding and gear cutting etc. And you’ll be surprised to know the name of the company out of some 100 organized players, dealing in most of the categories of machine tools…and the company is HMT Machine tools ltd which is a 100% subsidiary of beleaguered HMT ltd with turnover of around 200 cr!! HMT is not the biggest though in terms of turnover. Machine tool is the only running business of HMT and is the future focus area of the company and company has big big plans to be a Rs. 5000 cr company in 2020 and 10000 cr in 2025!!! Plans are OK but what about the Tools!! It is worth mentioning that the promoter of Lokesh machines Mr. Lokeswara Rao is a former employee of HMT.

Lokesh machine is one of the very few in India who can produce HMC machines (Horizontal machining centre) as India meets 50% of its demand of HMC machines from imports. At present most of the demand for metal cutting tool machinery is from automotive sector but with the thrust of government on make in India, demand for newer sector like railways, defense and consumer durables etc. will present big opportunities for machine tool industry in India. However, India is a very small player in global arena with metal cutting machinery production in India accounts for less than 1% of the global production. Again the leader here is China producing around Rs. 150000 cr worth of machine tools with Germany and Japan’s production around Rs. 80000 cr!!! 

Factors to spur the growth of machine tools industry in India:

Machine tools are at the core of manufacturing and without a powerful machine tools segment, manufacturing excellence cannot be achieved because all the manufacturing processes require the use of machine tools so this industry is the starting point for high tech manufacturing. This is evident from the fact that major manufacturing global powerhouses like China, Japan and Germany are one of the best high precision and sophisticated machine tools producers. So if India dreams to be a manufacturing destination then we need to invest significantly in machine tools because high tech machines can’t be produced by hands. Moreover, high imports also present big opportunity of local producers. Actually almost 65% of Indian machine tools manufacturers cater to automotive industry so in order to meet the demand of other sectors like capital goods, engineering etc. we have no option left buy to go for imports.

Another reason for high imports is that India has manufacturing and technical capabilities to produce low to medium levels of machine tools like vertical & horizontal machining and turning centers but we are far behind in the production of multi-tasking and multi-processing machining centers which are basically CNC Machine tools with multiple axes that combine turning, milling, grinding, material handling and automation into one machine. 

Multi-tasking machine tools are required as most of the time a single tool will not suffice for part production and these multi-tasking CNC machines will finish the job perfectly. Actually in many industries where order from each customer is different (large variety) and small then it is very crucial for a firm to use its resources properly and accurately in order to meet the demand of every customer. For this one needs very flexible multi-tasking machines which handles large variety of operations and reduce the process time. These machines remove the material waiting/non-productive time which is around 30% of the total manufacturing time. Just in time (JIT) has been made possible because of these multi-tasking machines as manufacturer knew that he can quickly convert the raw material into final product so he doesn’t require to block his capital into costly inventories especially finished goods which is the costliest. Multi-tasking machines are more suitable for industries requiring a large number of complex parts like Aerospace and defense where India has high ambitions. That’s why I think Lokesh machines’ tie up with EMCO for manufacture of Multi-tasking CNC machines is a big move.

Computerized  numerical  control  (CNC)  machines were introduced in  the  1960s, which  utilized  digital  controls  technology  and  computers  to  control  the  movements  of  the machines  for  performing  the  metal  working  process.  CNC  machines reduced  the  human interaction and the need  for manual  work  to  make  complicated  mathematical  calculations  required  to  produce shapes with  high complexity and accuracy. These are now being paired with automation systems and simulation software to increase production. The growth of 3D printing has also increased the demand for CNC machines as CNC machines are used for the surface grinding and finishing of the 3D printed products.

All in all, I feel stage is set for Lokesh machines to grow big and fast in the future. It is having gross assets base of 185 cr with 41 cr in capital work in progress but turnover is always in the range for 120-130 cr which shows the underutilized capacity. This capital work in progress figure is regularly around 30-40 cr for last 4-5 years. Inventory is also high at 95 cr. Both these always appear suspicious to me but as Lokesh is into the manufacturing of high valued machines which take around 3 months for completion so inventory (especially work in progress which is at 73 cr out of 95 cr) is bound to be high. Also capital work in progress figures are although at same levels but they are continuously moving each year. Lokesh machines have entered into tie ups with EMCO and Tongtai for manufacturing of new age machine tools and as per my understanding these new machines will be manufactured at a new manufacturing facility at Kallakal near Hyderabad so this work in progress may be related to this new facility although I have to recheck this one. At present the company has six manufacturing locations; five in Hyderabad and one in Pune.

Turnover is around 130 cr in last 4-5 years with interest (16 cr) eating out all of the PBIT of 19 cr resulting in low NP of around 2 cr. Still, It has paid dividend regularly from 2006 to 2016 only to miss 2017. However last June-17 quarter topline growth was good at 38 cr vs 28 cr in June-2016; this may be due to recent tie ups with EMCO and Tongtai and we can expect decent show in Sep-17 quarter results. It has invested big in 2011-12 for new auto component plant (cylinder blocks) in Pune. It has also invested in new auto component and machine tool manufacturing unit in AP. It is yet to see the full impact of these expansions into its top as well as bottomline.

Promoter holding is at 51.26% out of which around 38% is pledged although debt of the company is secured by the raw material and assets of the company so I think shares are pledged by promoters for their personal issues. Not a good sign but I have seen even the reputed group pledging and releasing their shares all the time like Zee and Tata group although there is no comparison between Lokesh and them. Still, pledging is more dangerous in companies which are heavy into losses and high debts. Pledging of shares is not that serious issue for companies which are reasonably profit making with low debt and Lokesh is just one like that. But still I would like to devote some more time in assessing the promoters although to me the company is looking reasonable in corporate governance and worth taking the chance. I have invested today at 74. Will update later on if anything material is found. But still a risky one so invest only risky part of your portfolio.

Result Update Kennametal India: However our another pick in the machine tool sector, Kennametal India, has started showing good growth in both topline and bottom line for last 2 quarters. Earlier advised around 570 ((click here for earlier post) This quarter, its topline is at 183 cr vs 163 cr last year, PBIT at 15 cr vs 6 cr. I have done good buying around 600 levels and just 2-3 days back added at 660. Today in falling market, it was up 8% to 708. A re-rating candidate and I feel can still be bought at these levels for long term.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post).


  1. Dear Sir,
    Do you track or own TRF India, a tata group company.Recently Group taking initiative to revive the TRF by posting experienced personnel from tata steel etc. strengthening the marketing team. seeing the pedigree do you see revival anytime soon.

    1. Yes Dear, it is under my watch and i am tracking it regularly to have a glimpse of something material coming into it. It is a Tata group so at market value of 200 odd crore with turnover of more than 1000 just can't ignore it

  2. Dear Sir,
    Ashish Kacholia is on selling spree in this counter. Continous seller in last one week. Disposed major chunk of his holding. Any thing which he knows better than us.

    1. Hi Dear...This only Kacholia Sahab can answer :)
      As far as i am concerned i think there are any red flags as far as management is concerned. It is already trading at low valuations. However this QTR results were great. It has given good results which i think went unnoticed by the market due to addition of Excise duty in last year's results. Turnover this qtr at 40 cr vs 33 cr (Excluding ED of 8 cr)...PBT at 1.44 cr vs 75 lac. So i have done some more buying at these levels.

    2. As far as i am concerned i think there ARE NOT any red flags as far as management is concerned.