Panic Solution

LMW was recommended as a medium term investment in The Smart Investor issue dated May 26, at a price of about Rs 7,600. But unexpectedly, the scrip price dropped sharply just after the company declared its results on May 28.

For 1996-97, the company declared a 45 per cent fall in net profit to Rs 23.78 crore on a net turnover of Rs 538.93 crore, which was lower by Rs 62 crore over the previous year. The company board also recommened the merger of India Precision Bearing Manufacturers (IPBM) with LMW. The 1:1 bonus issue, a harbinger of a good year ahead, did little to enthuse the market. The scrip fell sharply from Rs 7,500 levels on the day of the results to close at Rs 5,865 in the next two trading sessions.

 

However, the fall in the stock price was not just an over-reaction. Though it was known that 1996-97 was going to be a bad year for the company, a mere Rs 23.78 crore profit was not expected. The market also did not expect the board to announce a merger of IPB. Also, post-results there were rumours in the stock markets that Siscol, a group company manufacturing pig iron is also being merged. This would have been negative for LMW but since it never materialised, the stock price has recovered to Rs 6,500 levels.

While the 1996-97 results are history, and present a good buying opportunity, the merger with IPBM is also not expected to have much impact on LMW. IPBM makes textile machinery components to meet LMWs requirements. It has an equity capital of Rs 3 crore and accumulated losses of Rs 5.81 crore as of 1995-96. Company sources confirmed that the impact on LMWs equity capital will be negligible. IPBM had made a profit of Rs 0.37 crore on a turnover of Rs 12.72 crore in 1995-96. It has also clarified that the authorised capital increase is mainly to accommodate the bonus issue and that it has no plans to raise any equity in the near future.

At Rs 6,500, there is a trading opportunity in LMW as it should be doing well in the current year. But timing will be of crucial importance. LMWs pending orders as on March 31, were Rs 1,850 crore.