Established track record in the machine tools industry and its long-term association with the clientele
The company’s long-standing presence, spanning nearly four decades in the machine tools segment has helped it develop strong expertise in design and manufacturing capabilities, enable it to provide customised machines to customers. Further, four-decade-long experience of the promoters, in the Machines Tools industry helped build healthy relationships with customers (automotive original equipment manufacturers) and suppliers, and a diversified distribution network which helps it in getting repeat orders to an extent. The company ranks in the top 5 CNC Machine Manufacturers in India. Acuité believes that the promoter’s experience, understanding of the market dynamics and established relationships with suppliers and customers will continue to support the business profile over the medium term.

Growth in operating income and profitability
The company’s order inflows improved significantly in FY2022 because of demand revival in the end-user sectors (primarily auto), procurement of CNC machines by customers for productivity and technology improvement initiatives, and consolidation in the industry. This resulted in the improvement of its revenues to Rs. 202.08 Cr in FY202 as against Rs 150.48 Cr in FY2021 with a Y-o-Y growth of ~34.29%. The EBITDA margin is continued to be reported healthy but marginally declined in FY2022 to 15.02% from 17.06 % on account of execution of better margin orders coupled with various cost cutting measures adopted by the company. Acuite believes that going forward; the margins are expected to remain at 14-17 % and revenue’s upward trajectory to continue.

Comfortable financial risk profile
LML financial risk profile is comfortable marked by healthy capital structure and moderate debt protection metrics. LML's net worth is healthy at Rs. 149.13 Cr as on March 31, 2022 as compared to Rs. 142.92 Cr as on March 31, 2021. Gearing is healthy at 0.58 times as on March 31, 2022 as against 0.61 times as on March 31, 2021. Total outside liabilities to total net worth (TOL/TNW) is comfortable at 0.97times as on March 31, 2022 as compared to 1.00 time on March 31, 2021. Its debt protection metrics are moderate marked by interest coverage ratio (ICR) and net cash accruals to total debt (NCA/TD) at 2.51 times and 0.18 times in FY2022 vis- à-vis 2.10 times and 0.18 times in FY2021, respectively. Acuité believes that the company will be able to maintain its comfortable financial risk profile in the absence of any major debt- funded capex plan over the medium term.

Working capital cycle marked by high GCA days
The company's operations are working capital intensive in nature as reflected by its gross current asset (GCA) days in the range of 275-397 days for past three fiscals ended FY2022 due to high debtor and inventory days given the nature of its operations. The inventory levels of the company have been historically high owing to the lengthy order execution cycle. The GCA underpins the high inventory levels in the range of 209-319 days and moderate debtor days of 86-109 days over the past three fiscals ended March 31 2022. Its creditor’s days stood at 94-166 days for past three fiscals ended March 31 2021. Its working capital limits highly utilised at about 95 percent over the past six months ended June, 2022. Acuité believes that the working capital operations of the company will remain intense as evident from its high inventory levels; due to the time taken to execute the orders of machine tools operating cycle takes between 4 to 8 months (SPM is 9 -12 months & GPM is 3-4 months) and for component division the operating cycle is 2 months resulting in the large working capital requirement and staggered deliverables.

Intense competition in industry and client concentration risk
LML continues to face stiff competition from domestic players in the standardised machinery segment and from imports in case of high value-added Specialised and customised products, which limit its pricing flexibility and margins to an extent. Further, the company’s margins remain susceptible to fluctuations in raw material price as its orders are fixed price in nature. Its major raw materials include steel and steel components. The company’s revenue profile remains skewed towards job work income from Mahindra and Mahindra which contributed about 33-35 % of its revenues in FY2022 and FY2021. Thus, LML’s performance depends upon the growth prospects of Mahindra, thereby exposing it to client concentration risk. Furthermore, the revenue profile is also concentrated towards auto segment; auto industry had been facing headwinds in the in the recent fiscals and thereby impacting demand for LML’s products and its profitability. However, going forward, consolidation in the industry and LML’s efforts to diversify its sectoral space are likely to support its revenues.