‘Textile industry is unclear about the new policy changes’

R Rajendran, the chief financial officer of Lakshmi Machine Works, the textile machinery major that is among the top three global manufacturers of spinning machines, says demand has improved significantly in the last one year. He gives DNA his outlook on the industry.

Has the revival in the textile industry translated into more orders for your company considering you are the biggest player in this space? Give us a broad outlook on how the demand has been in the last one year?
We have seen an increase of around 30 to 35% in the last one year. The textile industry is performing well and its profitability has also improved, coupled with better cotton yarn realisations for the spinning industry. Thus, all of them are planning to increase
capacity, while some of them are also going for greenfield projects. We have seen greenfield and modernisation orders in the ratio of around 60:40.

Going forward, what is your demand outlook?
The two main factors that will determine future demand are
government policies and cotton prices, which are high at the
moment. It would be difficult to give any demand expectations since both these factors will have a huge impact on the textile industry. If the textile industry is negatively affected, our business will obviously be impacted too. The companies may defer deliveries or may wait before creating additional facilities, depending on what looks favourable.

Right now, even the industry is unclear on what the new policy changes would be.

With this 30% increase in demand, how has the financial improvement been? What are your expectations for the coming quarters?
There has been an improvement in both turnover and profit volumes, along with our cash performance. The turnover has increased about 35% yoy and profits by about 30%. It would be difficult to predict the coming quarters, but it should be in line with our second quarter performance.

Prices of raw materials such as steel have been quite volatile in the last six to eight months. How has this volatility affected your production cost and have you been able to pass on the same to customers? With expectations of another price hike, do you plan to increase prices?
Steel prices obviously have an impact, but we have also taken a number of cost-cutting initiatives to control rise in input costs. We hope we can contain the price rise. There has been no hike since April 2009. If there is market acceptability, we might go for a price hike. But it will all depend on how the input cost behave, it is a wait-and-watch mode.

Given you have not hiked prices since April 2009, how much has this self-absorption of prices affected margins?
With our cost-cutting initiatives such as reducing scrap and changes in manufacturing methods, this price absorption has not affected margins significantly. Also, we are focused on increasing volumes rather than worrying about a slight dip in margins.

Does the company plan to expand capacity to contain this growth in demand?
There are no immediate plans to expand, as our focus is to increase the utilisation levels of the existing capacity. The current utilisation level is around 75 to 80%, we can go upto 90%.

Updating machinery and technology is a continuous process, which entails an investment of Rs 90 to 100 crore every year. We have been doing this for the past few years, except for last year. We will now be able to continue with this yearly investment.

How has business been for the company’s newly started subsidiary in China?
The company just started and the response has been good, as the product has been well accepted. In a certain period of time, we would be able to have a good business in this market. We cannot avoid China as a market. Our plan is to take the 0.5 million per annum production or market to one million per annum. We would like to confine us to this size of market exposure.

How has exports to the neighbouring countries been?
Overall, the spinning industry has been good across the globe. A revival, similar to what was seen in India, has been witnessed in these markets as well.