Lloyd Electric & Engineering Ltd (LEEL)


(Abhishek Basumallick) #1

Lloyd Electric & Engineering Ltd (LEEL), BSE: 517518,NSE: LLOYDELENG

Market Cap = 238 cr

Book Value = 130, P/B = 0.6

LEEL is largest makers of air-conditioner heat exchanger coils in India. The company is OEM supplier to almost all AC manufacturers in India, and have overseas business of approximately 20% of sales.

Its main products are:

  1. Heat Exchangers
  2. Rail Coach ACs
  3. Window/Split ACs

Manufacturing Facilities:

  1. Bhiwadi, Rajasthan
  2. Kala Amb, Himachal Pradesh

Main Customers:

  1. Blue Star
  2. Voltas
  3. LG
  4. Samsung
  5. Carrier
  6. Emerson
  7. Hitachi
  8. Electrolux
  9. Whirlpool
  10. Daikin
  11. Indian Railways

The company has started manufacturing large ACs for MNC companies since late last year. They are mainly catering to the large (10-15 ton) category, specially in the transport sector. That is ACs for buses and railways. It has bagged orders for Metro Rail ACs. This might actually give the earnings a boost in the future are more and more metros become operational.

I got attracted by the promoter buying and by the fact that it is going at a 8 PE as opposed to 18-20 PE of Hitachi/Blue Star. Not that I am comparing Blue Star with Lloyd, they are not in the same league, but I think Lloyd can be a case of PE re-rating to atleast 10. Also, its BV is 130 and its trading at nearly 40% discount to book, which I am not sure is warranted.

The negatives in the company are:

  1. Consistent negative cash flow for the last three years
  2. Very poor return on capital ratios (RoCE=10%, RoE=8.7%)
  3. OPM of 10% and NPM of 5%

With a expected year end EPS of 12-13 and a PE of 10, I am expecting a 6 month target of around 120-130. In fact, I would really expect it to catch up to its book value of 130 (for comparison, Blue Star has a P/B of nearly 8).

Also, interestingly, it has not really fallen below the 70 mark in the last few months. That added to promoter buying makes me pretty confident that the downside risk is fairly limited here.


Stocks analyzed and Rejected
(Abhishek Basumallick) #2

Notes from Annual Report-2010

  • Acquired âJankaâ - Czech based manufactures of Air Handling Units in 2009. Price paid was Euros 4.5 million (Rs 33.17 cr) for a 100% stake. This was paid from internal accruals.

  • Margins have improved in 2010 and is expected to be around this level

  • The 2008 acquisition (Lloyds Coil Europe) has turned around and reported profits of 1.04 cr as opposed to a loss of 16.4 cr in the previous year.

  • A new manufacturing facility has been setup at Pantnagar, Uttarakhand with backward integration of major components like coils required in the manufacturing of ACs.

  • Executive management salary is not exhorbitant. Mr. B.R. Punj gets 28.8 lakhs and Mr. A.K.Roy gets 41.4 lakhs as total compensation.

  • Last equity dilution took place in 2005-06 due to conversion of preference shares and issuance of GDR.

  • Rs 50 cr has been put as corporate guarantee given against loan taken by related parties.



2010


2009


Growth%


Nos

Price(in lacs)

Price/unit

Nos

Price(in lacs)

Price/unit


Condenser Coils

703347

4824.03

685.87

509857

2466.77

483.82

41.76%

Evaporator Coil

438299

2329.61

531.51

283707

1457.65

513.79

3.45%

Air Conditioners

308863

22076.08

7147.53

271616

21500.66

7915.83

-9.71%

Sheet Metal

63406

34877.56

55006.72

74110

30382.59

40996.61

34.17%



(Anas) #3

Hi,

This company is showing YoY% growth of ~40% in sales compared to previous year.

Current PE of ~6.

CMP: 111/- , MarketCap 398 Crores.

Stock has run up from 25 to 130.

YoY Quarterly % Sales Growth

june 12 Sep 13 Dec 13 March 14

20% 42% 66% 60%

June 14 Qurater % Growth will be in same line due to heat wave and in past sales has been more than preceeding march quarter. Bottom line is also marginally improving.

Beyond june15 i.e. FY15 H2 will it maintain growth?


(Rajeev Jawahar) #4

Lloyd Electricals & Electronics appears to be an interesting story. It produces about 18% of all ACâs manufactured in India. This includes both ACâs sold under itâs own brand âLloydâ as well as for other OEMâs. The Co. enjoys cost advantages as it is present across the entire value chain â from coils to own branded ACâs. India is among the lowest penetrated markets in Asia with under 4% penetration as against countries like Taiwan & Hong Kong which are in the range of 70%. The Indian AC market is slated to grow at about 22% per annum for split ACâs & about 13% for window ACâs. The growth potential is huge when one considers that we are still importing about 35% of our domestic requirements, largely from China. Here again Lloyd is a direct beneficiary of the depreciating rupee / appreciating Yuan, as Chinese imports are not as competitive any more.

The Company has diversified into other products as well. Besides LCD/LED TVâs that are growing at about 35% annually, it has also added Clothes dryers, Chest freezers, Garment steamers etc. to its range of products. It is pursuing an aggressive marketing campaign with higher advertising spends. Recent campaigns included the IPL & the Election coverage.

The Co. is amongst the larger suppliers to the Indian Railways & this is another big opportunity with the railways ramping up their AC coach production. In addition, major expansion is also under way for Metro railway in different Indian cities, and this augurs well for Lloyd.

Lloyd has 2 subsidiaries Lloyd Coils Europe s.r.o & Janka Engineering s.r.o. Both are based out of Europe and are doing quite well. These subsidiaries could add a lot of value in the future. For the current year ending March â14, they have contributed about 336 Crs. to the top line & about 13 Cr. to the bottom line. The Co. has received a dividend of 6.47 Crs. from Lloyd coils Europe for the year.

The valuations are attractive. The Co. for the year 13-14 has done Sales of about 1800 Crs with PAT of about 89 Crs., giving an EPS of about 25. The current market price of 111 discount the Co. at a PE multiple of only 4.5 times. The Co. has grown Sales at 18% & profits at 21% annually for the last 5 years, at a time when the market conditions were not entirely favourable. For Lloyd to maintain the current run rate, should not be difficult. For a Co. selling under itâs own brand, the PE could easily expand to 10 & still be considered cheap, if one were to compare it with other players in the industry like Hitachi, Blue Star, Voltas, Whirlpool etc., all quoting at PE multiples between 25 & 50!

The promoters too have been buying aggressively, upping their stake from 47.54 in June 2013 to 49.98 in March 2014.

Disc: Invested


(manish) #5

any idea why the debt has increased by almost 200 cr you.

Also most of the promoter buying has happened at a price of around and below 50.


(Anas) #6

Particulars Mar-14 Mar-13 Mar-12

Gross Sales 1,440 1,169 902

PBIDT 190 146 93

Interest 84 51 29

PBDT 106 95 64

Depreciation 24 22 19

Tax 6 17 12

Rep. PAT 76 56 34

Interest outgo from EBIDTA seems a major issue holding back the valuation.

Interest as Percentage of PBIDT is:

'14 '13 '12

44% 34% 31%

I am not good at reading balance sheet, can some one tell what is current debt and interest cost in coming 3-4 quarters.

B’coz if a scenario emerges of interest cost reducing + inc. in profit resulting from sales growth will enable pe re rating.

With such high outgo of interest from PBIDT pe will remain subdued, inspite of good sales growth.


(Rajeev Jawahar) #7

@ Manish, the combined consolidated debt (long term + short term) as on March 31, 2014 is 646.25 Crs. The Debt / Equity ratio on the same date is 1.02 (646.25/630.90). The last purchase made by the promoters was closer to Rs. 60, but the average purchase price may be lower. I feel that Promoter buying is just one of the many factors to be considered in evaluating a stock.

@ Anas, the figures mentioned by you are stand alone numbers. The consolidated numbers are more impressive.

For me, a cause of concern is a certain lack of transparency in the accounting practices followed by the Co., but the current valuations are so attractive that the stock could easily double in the next 9-12 months. Being invested, my views may please be taken with a pinch of salt!


(manish) #8

Hi Rajeev,

I agree that the D/E ratio is manageable but the biggest concern in such companies is mgmt integrity and competency.

I could not find any expansion plans in their AR fy 13. So , in view of increased profits don’t understand the reason for increase in debt. Their roe / roce is low .

They have been in business for quite some time and the fact that they are OEM suppliers to many big players goes to their credit. So the competency part seems to be OK.

Also as per AR of FY 13 they were working on Inverter AC’s and I can see on net that they have already launched same. How they weather out competition is to be seen.

I don’t know what kind of brand recall Lloyd has.


(Rajeev Jawahar) #9

The latest AR is available on the Co. website. The tone is decidedly bullish. Both the 100% owned foreign subsidiaries were affected by floods last year, but still managed to come out with creditable performances. The Co. is desperately trying to shed the legacy issues of the past, by pursuing a very aggressive advertising campaign “Khusiyon Ki Guarantee” n projecting itself as a player in the “branded” segment, rather than an OEM supplier.

Talking of legacy issues, Morgan Stanley has finally exited the counter, so the supply of shares is likely to come down going forward.

Disc: Invested


(Rajeev Jawahar) #10

Lloyd came out with an impressive set of consolidated numbers for Q1. Sales are up 40% at 639.68 Crs & PAT is 28.88 Crs as against 16.02 Crs. At current market price of Rs. 145, the trailing 4 qtrs EPS is 28.87 & PE is about 5. The stock is under going a correction after it’s recent run up. Considering that it’s a branded player in the white goods segment, there seems plenty of scope for a PE re-rating, in addition to the regular EPS growth. Gather from industry sources that it’s TV sales have also been doing quite well. It seems like a safe bet, but the beauty of stock picking is that there are always those lingering doubts about whether ones hypothesis is correct or not! Would appreciate feedback on this one.

Disc: Invested


(Varadharajan Ragunathan) #11

Rajeev

I did not follow Q1 results but looked at AR, but operating cash flows are poor and AR are pretty high - so it looks like that a lot of sales growth is coming at the expense of receivables.

Did’nt feel comfortable with that. So, will pass


(Rajeev Jawahar) #12

Vardharajan,

Your concerns about poor operating cash flows are valid, but they could be seen in the back drop of a tough economic environment & growing sales. We’ll get a clearer picture when we get the half yearly results, when we get some idea of what the debtor situation is like n the debt as a whole. Besides, the current valuations probably factor in your concerns. Unlike some of the companies in the news recently, this Co. owns the “Lloyd” brand, n there are no loyalty issues here. I am actually planning to buy a “Lloyd” AC to satisfy myself about the quality! I’m not sure if the markets are giving any value to the brand that has been around for at least the last 2 decades that I am aware of. Having said that, I must confess that the markets have a knack of humbling me!!


(Varadharajan Ragunathan) #13

[ Comment too short ]


(seshukumar) #14

Promoters have stopped buying after 1st April. Last purchase was at around 60 Rs.

Negative Cash Flow from operating activities is a negative (!). Both inventories and debtors are on the higher side as compared to industry. Outcome of its dependence on arge brands and railways which have a better bargaining power. Any idea of what is their institutional sale versus Retail sale to consumers .

They launched DVD players about 5 years back and had to pull back stocks due to consumer complaints.

Price is low but should look at operating parameters such as inventories and debtors and Cash flows before one can conclude that the organisation has turned around


(Rajeev Jawahar) #15

Prospero Tree has come out with the following research report after interaction with the mgt.

http://prosperotree.com/investment-ideas/16-prospero/investing/stock-updates/194-lloyd-electric-growing-brand-at-low-valuation


(Varadharajan Ragunathan) #16

Rajeev

I am quite skeptical of using only management interaction alone to build a buy thesis. technically, if you give loose credit terms, you can sell a lot more and on paper book great margins. But every single good company got into trouble because of debtors - think opto circuits, suzlon.

I have never seen a lloyd AC even getting stocked in most large show rooms at all (south india). May be things are different in Delhi and elsewhere.

If their branded presence is increasing, operating cash flows should be getting better - but numbers indicate otherwise. What are we missing here ? In any case, the market is also moving towards better quality ACs like daikin, hitachi from voltas - so lloyd looks like a tata nano story to me - priced lower than voltas aka maruti. This I gathered from my friend who does EPC for daikin’s industrial projects

I think an AC buyer has matured enough to understand that power bills and maintenance are also big factors in the total cost - so being a price warrior does not seem that great an idea. In any case, cash flows are not supporting this thesis. Blue star also tried to compete in the room AC space but got washed out - my sense is that just like in TVs, the Indian market is steadily moving towards better quality products like samsung, daikin, hitachi, general. Look at what happened to videocon - they played the price war in LCD TV market but an aspiring buyer looks beyond just the price IMHO.

As always, I am open to counter arguments.

Link: http://prosperotree.com/investment-ideas/16-prospero/investing/stock-updates/194-lloyd-electric-growing-brand-at-low-valuation


(Rajeev Jawahar) #17

Hi Vardarajan,

One of your main problems with Lloyd relates to it’s perceived sub standard quality, which does not quite match with that of Hitachi & Daikin. The fact is that the so called superior Hitachi & Daikin AC’s could both have been manufactured in the Lloyd factory. Lloyd supplies, or at least did till very recently, to both these brands. The numbers for both branded & OEM supplies speak for themselves. Lloyd’s quality was never an issue. Your cash flow concerns are valid, but look at the valuations at which the stock trades, in a market where valuations don’t seem to matter any more.

Perhaps, I am biased in my views. Lloyd for me has been a huge winner. I started buying from Rs. 42 levels from Feb 2014, & have continue to add at every stage. I am comfortable with the Co. n see much higher levels going forward. But who knows, I have been wrong in the past, n the story could always take a turn for the worse. We all have to take responsibility for our decisions n should certainly not invest in a Co. one is not happy with.

Attaching an investor presentation available at the Lloyd website, which first got me interested in the Lloyd story. It’s dated March 2012, but it’s the same story playing out beautifully!

Unable to attach the presentation due to it’s size, but would strongly recommend that you go through it with an open mind.

Regards,

Rajeev


(Varadharajan Ragunathan) #18

Rajeev

Will do - have you done any scuttlebutt with any dealer to check if Lloyd is indeed gaining market share ? To me, kicking the tyres is such a critical part of a thesis.

Dalal street always reflect what the main street knows, if only a little later. The other thing that worries me is that I do not see the Lloyd management as a visionary/value compounders - in the last decade or so, shareholder value creation has been nothing. Because of that I classified them as a “barsaati business” - a frog that croaks when it is monsoon - good times and goes silent otherwise.

That said, let me see the numbers again with a fresh mind.


(Rajeev Jawahar) #19

The production of room air conditioner increased a robust 58.33% in July 2014 compared with a 33.48% fall in July 2013. Colour TV sets production increased 27.31% in July 2014 as against a 16.88% fall in July 2013.

Looks like a good Q3 for most consumer durable companies.


(Rajeev Jawahar) #20

http://www.lloydengg.com/investor-updates.html

Link to the transcript of the conference call post Q2 (Dec Qtr.) results