(Current market price is Rupees 204 per share.)
Lakshmi Electrical Control Systems (LECS) makes control panels for textile machinery, primarily for its group company Lakshmi Machine Works (LMW).
Take a look at the September 30, 2012 balance sheet below. All figures on it are in Rs. hundred thousands (lakhs).
Let’s estimate the value of the current assets less all liabilities.
The cash on the books is Rs. 45 crores (Rs. 1 crore ~ Rs. 100 lakhs ~ $183,000). This is free cash, there are no customer advances or claims against this amount.
The remaining net current assets total Rs. 7.1 crores.
From the fiscal year 2012 annual report, we know that of the Rs. 10.69 crores categorized under non-current investments, about Rs. 64 lakhs is actually the book cost of 88,800 listed shares of group company LMW. These shares are readily convertible to cash in the market at the current market rate of Rs. 2200/share, so we can assign a value of Rs. 19.5 crores to this liquid asset.
This gives us a total of Rs 71.6 crores. Subtracting all the non-current liabilities, we get roughly 70 crores of free and clear current assets.
The company is available at a market capitalization of Rs. 50 crores, comfortably below our calculated value for the net current assets.
Probably because the company is part of the textile industry capital equipment supply chain, a cyclical sector, its stock is trading at low price levels currently. The company has had to shut down its low voltage switchgear division due to poor performance, and input commodity prices have been pinching its control panel business margins.
However, the company has a unique position as supplier to LMW, a financially solid group company which is far and away the market leader in its business of spinning machinery. LECS has historically earned more than a 15% return on its operating assets which is far from shabby. If the company can recover its profitability once the commodity and textile cycles allow, then the fixed assets can be assumed to have earning power value which is at least as much as their book value of Rs. 23 crores.
With 65 crores of cash equivalents and 30 crores of operating assets which can earn 15% for the foreseeable future, this is a security I like at 50 crores. Apparently, the promoters like it too. Promoter shareholding has gone up from 23.06% to 26.18% in fiscal year 2012.
Here are the risks:
- What happens to the cash – will it be used sensibly? Dividend payout percentages have been dropping steadily over the last 10 years.
- LECS’ products, in my opinion, are not special or unique and its business is only secure because of group company LMW’s patronage.
- Margins have been shrinking due to lower selling prices and higher input costs. If this is due to some recent permanent shift in business conditions I have not been able to identify, the market price is probably correct.