Weekender. agenda a theme entitled The New Global Context - as delegates discuss

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1 Index Closing Chg Chg % Sensex , % Nifty % Auto % Bankex % Cap Goods % Cons Durables % FMCG (35.43) -0.43% Healthcare % IT % Metal % Oil & Gas % PSU % TOP GAINERS Closing Chg Chg % Bharti Airtel % Tata Motors % Axis Bank % Sun Pharma % Wipro % TOP LOSERS Closing Chg Chg % ITC (10.65) -2.96% Tech Mah (36.20) -1.29% Hero Motocorp (34.90) -1.20% TCS (28.55) -1.13% Kotak Bank (10.05) -0.72% Currency Rates Expiry Previous Chg% USDINR 28/01/ % GBPINR 28/01/ % EURINR 28/01/ % JPYINR 28/01/ % Weekender JANUARY 23, 2015 Outlook This Week: The 45th annual World Economic Forum meeting taking place at Davos, Switzerland, between January has at the heart of its agenda a theme entitled The New Global Context - as delegates discuss the effects of political, economic and social uncertainty on future policy making Highlights of World Economic forum held at Davos, Switzerland: A sharp plunge in oil prices is likely to transfer USD 1.5 trillion of wealth to consumers, bringing the US back as global growth engine while India is the most promising story among emerging markets, says a study. The secretary general of the Organization of Petroleum Exporting Countries told that oil prices were likely to remain around their current levels for around a month before rebounding. Speaking at the World Economic Forum in Davos, Switzerland, Abdullah al-badri, said it was hard to predict oil price movements given the ongoing fluctuations. India may outsmart China in terms of growth rate in a few years, global analytics and information services major IHS said on the first day of WEF annual meeting. Confident about foreign and domestic investors participating in a big way in the Indian growth story, Union Minister Piyush Goyal today said the country's power sector is set for $250 billion investment across different segments including in renewables as well as transmission and distribution segments. The International Monetary Fund (IMF) trimmed its global growth forecast for , cautioning that the boost from lower crude oil prices would be offset by dimmer economic prospects for China, Russia, the euro area, Japan and oil producers. In its World Economic Outlook (WEO) Update, the IMF projected the world economy would expand by 3.5 percent this year and 3.7 percent next year, picking up from 3.3 percent in 2014 but lower than its previous estimates. In October, it predicted global growth for this year and next at 3.8 and 4 percent, respectively. The European Central Bank took the ultimate policy leap on Thursday, launching a government bond-buying program which will pump hundreds of billions in new money into a sagging euro zone economy. The ECB said it would purchase sovereign debt from this March until the end of September 2016, despite opposition from Germany's Bundesbank and concerns in Berlin that it could allow spendthrift countries to slacken economic reforms. Together with existing schemes to buy private debt and funnel hundreds of billions of euros in cheap loans to banks, the new quantitative easing program will release 60 billion euros ($68 billion) a month into the economy, ECB President Mario Draghi said. By September next year, more than 1 trillion euros will have been created under quantitative easing, the ECB's last remaining major policy option for reviving economic growth and warding off deflation. Date Nifty Sensex 19-Jan Jan Jan Jan Jan

2 Commodity Spot Prices Closng Previous Chg% Castor seed /100kg % Chana /100kg % Coriander /100kg % Jeera /30kg % Mustardseed /100kg % Soy bean /100kg % Economic Data Date Event Forecast Previous 27-Jan Tue 27-Jan Tue 28-Jan Wed 30-Jan Fri 30-Jan Fri USD Durable Goods Orders USD Consumer Confidence USD Federal Open Market Committee Rate Decision USD Gross Domestic Product (Annualized) INDIA Foreign Reserves 0.70% -0.70% % 0.25% 3.20% 5.00% Stock Specific news: Wind turbine maker Suzlon has sold its German arm Senvion to USbased private equity firm Centerbridge Partners for 1 billion euro in an all cash deal. Suzlon said it expects the deal to be completed by the end of March. The deal will help Suzlon reduce Rs 5000 crore of debt on its balance sheet. Aviation Ministry gives initial nod to SpiceJet recapitalization plan - SpiceJet plan gets go-ahead subject to falling within FDI cap -No objection to management control change if no foreign money involved - Have asked DGCA to lift ban on SpiceJet s advance bookings and new promoters may acquire 58 percent stake in SpiceJet Telecom Minister Ravi Shankar Prasad says -Cabinet approves defence spectrum band -49 slots between 3 MHz to 40 GHz identified, 9 exclusively for defence FDA approves Novartis drug for painful skin disease injectible drug Cosentyx used to treat adults with a skin disease called plaque psoriasis Parent company Hitachi Appliances to divest stake in company Hitachi Home & Life Solutions into global JV. Hitachi Appliances is in agreement for global JV with Johnson Controls and Johnson to get 60 percent stake in parent's international AC biz ex-japan Cairn India's third quarter consolidated net profit tanked 41 percent sequentially to Rs 1,350 crore due to lower crude oil prices. Consolidated revenue declined 12 percent to Rs 3,504 crore in the quarter ended December 2014 from Rs 3,982 crore in previous quarter on account of lower realizations of USD 68.1 a barrel (down 25 percent due to the softer crude prices). "This was partially offset by 13 percent higher volumes and 2 percent rupee depreciation on sequential basis," said the company in its filing to the exchange. Outlook Next Week: Indian markets are likely to follow the momentum with limited downside on the back of improve sentiments. Infrastructure, BFSI, Realty and select Auto and Banking stocks jumped sharply on the RBI move. We expect the Week to be volatile again led by stock specific action as host of companies announce their quarterly results during the week. However, we may witness continued rally in select infrastructure and power stocks. Results slated for next week are: Idea Cellular, Maruti Suzuki, Titan, Ranbaxy, Ashok Leyland, Asian paints, Dr. Reddy Labs, HDFC, IDFC, Sesa Sterlite, BOB, Dabur, HCL Tech, ICICI Bank, JSW Steel, NTPC, Tech. Mah. 2

3 LAKSHMI ELECTRICAL CONTROL SYSTEMS Growth set to electrify Current Price 441 Target Price 635 Upside 43.99% Duration 15 months STOCK DATA BSE Code NSE Code INE284C01018 Market Cap (Crores) Face value week H/L 130/ 525 Company Overview Lakshmi Electrical Control Systems (LECS) is one of the leading manufacturers of custom engineered control panels. It also manufactures Engineering Plastic components with total expertise and facilities to deliver complete design solutions and ready to fit products. The company has strong background in R&D, Engineering, Tooling and Automation. Strong pedigree LECS is a group company of Lakshmi Machine Works Ltd., (LMW) Coimbatore, leading Textile Machinery manufacturer in India and one among the three in the world to produce the entire range of spinning machines. LECS was established in 1981, to manufacture LV Switchgear in Collaboration with Sprecher + Schuh, Switzerland. In 1984, LECS started manufacturing Control Panels and Engineering Plastics Components. Today, it has cultivated manufacturing expertise and superior capabilities to meet international standards. Its strong Engineering team works closely with customers to derive Value Engineering without compromising on Quality. Caters to wide range of industrial applications LECS is fully equipped to build Control Panel for various industrial applications such as Textile Machinery, Machine Tools, Automatic Power Factor Correction (APFC), Energy Saver, Compressors, Variable Frequency Drive (VFD) Panels, Motor Control Center (MCC), Medium Voltage (MV) & Low Voltage (LV) Control Panels etc. Its control panel division also includes designing, manufacturing and installation. It also undertakes the assignment of power study and provides solutions to control the power factor and harmonics. LECS also specializes in production of Engineering Plastic Components for Mechanical and Electrical applications. Its infrastructure facilities include a full fledged Tool Room, Electrical R & D, Mechanical testing laboratories and latest version of design software to enhance designing abilities. The need to broad-base its customer range for its existing product lines has been an ongoing effort. The management continues to be steadfast in its attempt to scan the horizon for new products, technical tie-ups and other areas of potential interest. 3

4 Shareholding Pattern (31/12/2014) Category % of equity FII's / Banks 0.01% Promoters 26.18% Public & others 73.81% Impressive FY 2014 despite sluggish market conditions Indian Electrical Equipment industry witnessed a negative growth in FY 2013 and FY 2014 also faced tough situation. Despite this the company has performed well. In FY 2014 sales grew 23% to Rs crore. OPM improved a good 120 basis points from 3.4% to 4.6% taking OP up 64% to Rs 7.38 crore. PBT grew 68% to Rs 9.62 crore. EO loss due to VRS was Rs 28 lakh against Rs 30 lakh. Thus PBT after EO grew 72% to Rs 9.34 crore. Even as provision for taxation jumped 84% to Rs 2.97 crore, PAT soared 67% to Rs 6.37 crore. September 2014 quarter results - Sales grows 14% and PAT jump 155% For the quarter ended September 2014, it registered a 14% rise in sales to Rs crore. OPM improved 470 basis points from 2.1% to 6.8% which saw OP rising 270% to Rs 3.09 crore. Other income fell 2% to Rs 1.27 crore and interest cost stood at Rs 11 lakh against virtually nil. As depreciation fell 52% to Rs 27 lakh, PBT soared 154% to Rs 3.98 crore. Tax jumped 151% to Rs 1.13 crore after which PAT rose sharply by 155% to Rs 2.85 crore. Six months results Sales grows 28% and PAT jump 192% For the six months ended September 2014, sales grew 28% rise in sales to Rs crore. OPM improved 460 basis points from 2.0% to 6.5% which saw OP rising 326% to Rs 5.90 crore. Other income fell 3% to Rs 2.30 crore and interest cost stood at Rs 13 lakh against Rs 2 lakh. As depreciation fell 54% to Rs 51 lakh, PBT soared 187% to Rs7.56 crore. The useful life of fised assets has been revised in accordance of the Companies Act The depreciation for the quarter is lower by Rs lakh for the quarter and by Rs lakh for the six months due to chance in useful life of fixed assets. Tax jumped 177% to Rs 2.19 crore after which PAT rose sharply by 192% to Rs 5.40 crore. Excellent infrastructure will enable the company to scale up as user industries head for revival Control Panel Production continues to be its major activity and the company endeavored to keep itself abreast of all latest tools and techniques. The excellent infrastructure it has built in this segment will enable it to scale up as the market heads for the revival. The growth in this segment is constrained by the logistics cost of distribution. In Plastics, the company has made some initial forays in extending beyond the current products and existing customers. It is also on the lookout for new products and projects. In spite of the current state of affairs, the management retains its optimism in the long term growth potential of the country, industry and sector. OPM at rock bottom level, has scope for substantial improvement The company had been enjoying OPM in excess of 10%, however due to the challenging market conditions in the last few years, it fell to 9% in FY 2012, which further crashed to 3.4% in FY However, though yet far away from the13.5%+ range, it has started improving and stood at 4.6% in FY As the demand scenario improves, the OPM is likely to recover materially which means much faster growth in net profit. 4

5 Concerns and Risks Low Promoter holding at 26.18% Any significant deviation in the prospects of end-user industry The company s products cater to companies like Lakshmi Machine Works and Elgi Equipments. Any significant deviation in the prospects of these companies will have a negative impact on the financial performance. Proper utilisation of cash The company s strength in the form of cash in the Balance Sheet, being higher than the market-cap depends on the effective deployment of the same. Any unrelated diversification, which does not provide the expected returns, will not be taken well by the markets. VALUATION For FY 2015, we expect the company to register net sales and PAT of Rs crore and Rs crore. This gives an EPS of Rs approximately. Current market price of Rs 441 discounts FY 2015 projected earnings by times. Buy with 15 months target price of Rs 635 which discounts our FY 2015 projected EPS by times. LAKSHMI ELECTRICAL CONTROL SYSTEMS: RESULTS 1409 (3) 1309 (3) VAR. (%) 1409 (6) 1309 (6) VAR. (%) 1403 (12) 1303 (12) VAR. (%) Sales OPM (%) OP Other inc PBIDT Interest PBDT Dep PBT EO PBT after EO Total Tax PAT EPS (Rs) * *Annualised on equity of Rs crore; Face value of Rs 10 each. EO: Extraordinary items. EPS is adjusted after EO and relevant tax. (P): Projections. Figures in crore. Source: Capitaline Databases 5

6 FINANCIAL STATEMENT PROFIT & LOSS A/C- STANDALONE - RS. CRS FY10 FY11 FY12 FY13 FY14 Total Income Y-o-Y 32.5% 11.6% -24.4% 18.8% Total Expenditure Raw Materials Stock Adjustments Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Administration Expenses Miscellaneous Expenses EBIDTA Margin 14.5% 12.9% 11.3% 6.1% 6.2% Depreciation EBIT Interest Other Income PBT Tax Deferred Tax PAT Extraordinary Items Adjusted PAT Margin 7.2% 6.0% 5.4% 2.6% 3.9% Dividend Per Share(Rs) Book Value (Unit Curr.) EPS (Unit Curr.) CASH FLOW (Rs in crore) FY10 FY11 FY12 FY13 FY14 Cash Flow Summary Cash and Cash Equivalents at Beginning of the year Net Cash from Operating Activities Net Cash Used in Investing Activities Net Cash Used in Financing Activities Net Inc/(Dec) in Cash and Cash Equivalent Cash and Cash Equivalents at End of the year

7 BALANCE SHEET (Rs in crore) FY10 FY11 FY12 FY13 FY14 SOURCES OF FUNDS : Share Capital Reserves Total Total Shareholders Funds Secured Loans Total Debt Other Liabilities Total Liabilities APPLICATION OF FUNDS : Gross Block Less : Accumulated Depreciation Net Block Capital Work in Progress Investments Current Assets, Loans & Advances Inventories Sundry Debtors Cash and Bank Loans and Advances Total Current Assets Less : Current Liabilities and Provisions Current Liabilities Provisions Total Current Liabilities Net Current Assets Deferred Tax Assets Deferred Tax Liability Net Deferred Tax Other Assets Total Assets Contingent Liabilities

8 KEY FINANCIAL RATIOS: LAKSHMI ELECTRICAL CONTROL SYSTEMS FY10 FY11 FY12 FY13 FY14 Key Ratios Debt-Equity Ratio Current Ratio Turnover Ratios Fixed Assets Inventory Debtors Total Asset Turnover Ratio Interest Cover Ratio PBIDTM (%) PBITM (%) PBDTM (%) CPM (%) APATM (%) ROCE (%) RONW (%) Payout (%)

9 PEER COMPARISON:- All figures in Crores Lakshmi Electric Control Havell's India Salzer Electronics Modison Metals Crompton Greaves Market Price Net Sales 'Mar Debt (secured + unsecured + other) Equity Reserves Total Equity Debt/Equity Market Cap Book Value Market price / Book value Operating Cash Flows 'Mar Capital Expenditure Free cash Flows 'Mar FCF per share Price / FCF per share FCF/Net Sales years avg OP margin % (lesser of avg n current) 5.25% 7.21% 8.63% 10.75% 4.54% 5 years avg Adjusted NP margin % (lesser of avg n current) 3.55% 4.29% 3.08% 6.08% 1.86% TTM EPS Company P/E Industry P/E Face Value Stock runup since last 3 months -3.50% 0.36% 30.57% 16.00% 3.74% Stock runup since last 6 months 19.51% 11.11% 84.68% 26.09% -6.73% Stock runup since last 12 months % 73.91% % 87.10% 65.81% 52 week low week high Interest Coverage ratio years avg ROE (lesser of avg n current) 8.33% 21.52% 9.04% 13.27% 16.32% 5 years avg ROCE (lesser of avg n current) 11.75% 22.58% 13.37% 18.61% 10.56% 5 years avg RONW (lesser of avg n current) 8.33% 28.72% 9.04% 13.27% 7.23% 5 years avg EV/EBIDTA (higher of avg n current) Dividend Yield 1.13% 3.57% 0.73% 8.62% 0.21% 9

10 CHART : Terms used : FCF : Free cash flow TTM : Trailing twelve months RONW : Return on net worth ROE : Return on Equity ROCE : Return on Capital Employed EV/EBIDTA = Enterprise value / Earnings before interest, depreciation, tax and amortization P/E = Price to earnings ratio EPS = Earnings per share BV = Book value PBT = Profit before tax PAT = Profit after tax OPM = Operating profit margin 10

11 Disclosures: (a) The research analyst or research entity or his/their associates or his/their relatives do not have actual/beneficial ownership of one per cent or more securities of the subject company or any financial interest in the subject company (b) The research analyst or research entity or his/their associates or his/their relatives do not have any other material conflict of interest at the time of publication of the research report or at the time of public appearance (c) The research analyst or research entity or its associates have not received any compensation for investment banking or merchant banking or brokerage services nor received any compensation for products or services from the subject company in the past twelve months (d) The research analyst or research entity or its associates have not received any other benefits from the subject company or third party in connection with the research report (e) The subject company is not or was not a client during twelve months preceding the date of distribution of the research report and the types of services provided by the research analyst or research entity or his/their associates or his/their relatives (f) The research analyst has not served as an officer, director or employee of the subject company (g) The research analyst or research entity has not been engaged in market making activity for the subject company 11

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