On the move

IPO REVIEW

Lokesh Machines is expanding business on the back of growth in auto and engineering sectors.

The increased activity in the engineering sector has had a direct impact on the machine tools industry. The mushrooming of small players in the sector has increased the offtake of machine tools.

Hyderabad-based Lokesh Machines is tapping the capital market in the price band of Rs 130-140 to raise Rs 40 crore to part-fund its expansion and modernisation needs.

The company caters to many automobile majors. It exports machines to Europe and Japan. At present, it has a capacity to manufacture 1,20,000 units of cylinder blocks and heads per year, which it supplies to Mahindra & Mahindra. It will use the proceeds of the issue for its upcoming facility of 40,000 cylinder blocks and heads to supply to Ashok Leyland.

M Srinivas, vice-president, Lokesh Machines, says, "We have acquired land for the facility in Hyderabad and the construction has started."

The auto components project is expected to commence production by August 2006 and machine project would be over by October 2006.

The company plans to upgrade the technology for which it has placed orders for Japanese machines. Part of the proceeds will be used to raise working capital.

However, the lead-time for manufacture is relatively long. Srivinas says, "For CNC machines, the lead-time is two-three months and for SPMs, it is 12 months. The company is trying to reduce it to eight to 10 months."

The company was promoted by a first generation entrepreneur, M Lokeswara Rao. It is now engaged in the design, development and manufacture of custom built SPMs (special purpose machines) and general purpose CNCs (computerised numerical controls).

It has till date built over 500 SPMs for companies such as Ashok Leyland, Tata Motors, Escorts, M&M, John Deere, Hindustan Motors, Honda Motor and Bharat Forge. CNC machines contribute 50 per cent to the sales turnover, SPMs contribute 15 per cent, while auto components account for 35 per cent.

Financials & valuations

The company reported a net profit of Rs 3.79 crore for the six months ended October 2005, while its net sales were Rs 40.18 crore. Net sales for FY05 jumped 61.04 per cent, while operating profit zoomed 123 per cent. Net profit shot up by 455 per cent on account of the effect of capital expenditure made during FY04 in machinery business. The debt equity ratio for the year was 1.91.

In the SPM segment, it faces competition from the public sector major HMT and Bharat Fritzwerner. In the CNC segment, its competitors are Ace Designers, Batliboi (trading at 27.07x), Ace Machinery Systems, Laksmi Machine Works (trading at 34.03x) and Jyoti Machineries.

On an EPS of Rs 2.71, Lokesh Machines' P/E at the lower end of the price band is 14.92x and at the higher end is 16.07x, which is comparable with its peers. The issue will remain open during April 7-10. The book running lead managers are Karvy Investor Services and UTI Securities.