Lloyd Electric & Engineering Ltd (LEEL)

(Vinoth Kumar) #21

Debt has been a concern for many.Interest coverage has been the lowest in the past 10 years.Debt has been rising due to the rising working capital needs. They are not Capital intensive, but a working capital intensive company. Also, to build a brand from scratch ( commencing consumer durables division from 2011), their working capital needs to support their expansion plans. Inventories needs to be high to ensure availability of stocks at the outlets. The creditor payments to be delayed and relaxed to form a better trust with the dealers.

Cash flows are negative owing to increases in the working capital. Since this is a company in the growth phase, these things are bound to come. What i sense is, once they have established the rapport with the consumers and dealers on their own, the necessity of working capital will come down. That would free up some cash flows for the company and reduce the debt in the future.

Also, i have been doing some interesting analysis for this company and industry, and my conclusion is both the company and industry looks promising. They currently hold 5.6% market share in A/C, and it has been growing eventhough there is a price increase. That gives us insights on the power the brand is becoming in A/C market. It has garnered 2.3% in the LED Tv market during FY 2014. Remember, it all started from nothing during 2011, when it commenced the operations into consumer durables segment. Their communication to the consumers are working fine. Even if i assume they continue to hold on to this market share for the upcoming years, the industry growth alone could be suffice to fetch better valuations for the company.

(Rajeev Jawahar) #22

Investor presentation after Q2 results.

(kapil1301) #23

Revenue for Quarter Ended Sep 15 399 (304 for Sep 14)
Net Profit for Quarter Ended Sep 15 10.48 (4.39 Sep 14)

As per me the results are ok as September is the weakest quarter for Consumer Durable comapnies.

However one Negative that i feel is that compared to Sep 14 quarter the profit in Consumer Durables segment has decreased.

@RajeevJ and other seniors tracking this company would love to have ur views on the results.


(Rajeev Jawahar) #24

Hi Kapil,

I have almost fully exited from Lloyd so am not tracking it very closely. Nothing fundamentally wrong with the story, which I think is getting better as the focus is clearly shifting from OEM segment to Consumer Durables. In the long run, this can only be good news for the shareholders as selling under it’s own brand “Lloyd” is more likely to re-rate the stock. Higher advertising spends is largely responsible for the decline in the profits from this segment. This again should be viewed positively and seen as investing for the future.

The stock has had a remarkable run over the last couple of years & it’s not done yet! It was a particularly rewarding investment for me, & more satisfying as I was consistently advised against holding on to it by most seasoned investors whose opinion I value. For me exiting Lloyd was more to realize gains & redeploying.

(Quest4Value) #25

Does anybody have the breakdown of sales from different segments?What is the weightage of consumer durables segment?Success in branding would be the trigger for rerating.However a rudimentary internet research shows many customers unhappy with customer service - might be worth noting.

(kapil1301) #26

Thanks a lot @RajeevJ for ur Views.


Segment Wise Break up: Revenue Profit

Consumer Durable Segment 191.61 Cr (154.76) 14.54 (16.05)

OEM and Packaged 81.04 Cr (130.03) 1.52 (2.6)
Air Conditioning

Heat Exchangers and 178.79 (113.30) 19.71(8.23)
Components Segments

The values in Brackets are the values in the previous years same quarter.
As you can see above it was the Heat Exchangers Segment that made the result look so good.

In Consumers durables segment although the revenue increased but profit has declined due to increased
advertising spend and competition.

Personally I think I will see one more quarter performance before tinkering with my allocation.
Will see how Diwali sales have done.

Disclosure : I am invested in it at average price of 238 and made it almost 3% of my portfolio

Thanks and Regards,
Kapil Gupta

(rajput.delhi) #27

I had also bought this stock last year but have been lucky to sell after results. My learning has been that I saw many positives like low PE, a good brand in the making, railways opportunity, supplier to OEMs, huge runway given low penetration of ACs, etc. but later realized that their main business of consumer durables is highly competitive and it will be a huge struggle for them to improve margins. I didn’t feel comfortable as I couldn’t see a long term competitive advantage which could be sustained. It can still go to 1000 and beyond but it isn’t my cup of tea.

(Quest4Value) #28

Agree with you that profit from consumer durables has declined due to increased advertising expenses.This can be a good thing if it creates brand value in the long run; so I was intrigued and watched all their commercials from their website.In my opinion there is no wow factor for the aspirational consumer,they seem to be going for the value for money positioning.Air conditioners and tvs are products where consumers tend to push their budget a little and go for the more aspirational product.We also need to judge the quality of the products to estimate the long term potential,so we might need to know from someone who bought Lloyd’s products.
I feel that the market got carried away with the retail tag and overpriced this.I would keep tracking this and when I am more convinced by their branding exercise I might consider it.

(Jigar Punamiya) #29

I use its split AC since more than a year. It works just fine.
According to me, all the ACs are almost of the same quality with marginal difference in features. What differentiates companies is branding and the distribution network. Price yes, but to some extent only. I see a lot of people taking advice from the local sales and service guys when buying ACs. So, distribution network and timely availability of the products is very important. Also, margins provided to retailers are very important. If you see in cell phones, Micromax and Samsung give hefty margins to retailers, which motivates them to push their products.

(kapil1301) #30

I have talked to one of my relative who has been working in this field and as per him the products of LLoyd are good in quality and he himself has two at his home.

However I do agree that this industry is highly competitive but than the same holds true for Blue Star ,
Voltas and Whirlpool but still their valuations compared to LLoyd are quite high.

But one negative that I noticed is (I am talking about Gurgaon Specifically) that only One shop had Signboard of LLoyd in the Sadar Bazar Electronics Market and you need to search for that.

Whereas Sony,Samsung,Whirpool were all over the place.

So this distribution network problem i have noticed in Gurgaon however not Sure about other Cities.

In My Hometown in Rajasthan their Distributor is in the main market with a Good Advertisement however there also it only present at one place .


(N Sood) #31

Their main markets are in the South and also Gujarat. Hence mostly they have Southern film stars for promotions. They started off with Tier2 towns as promotion expenses are lesser but now they are gaining traction with their brand and tightening terms with dealers and trying in Tier 1. They even refused Vijay sales as it’s terms were unacceptable. Their margins in ACs are among best in industry as they are backward integrated as they produce own coils. They have a 12% market share in aircon now and are doing better than industry growth. The TV and washing machine business is still in infancy and they just assemble and sell for now to test the waters. If I am not wrong they were once sole supplier to Daikin but I dont think it is so now - some players may have changed suppliers since Lloyd is now also a competitor. They also supply to Bombardier etc. So Quality of product is not an issue - but building a brand is an expensive affair, which is captured in the valuations. Air conditioners are hugely under penetrated in India ( what isn’t) and is still an aspirational product so the runway is very long. The margins in TVs have declined of late and is expected to remain the same because it has become highly competitive with online sellers burning money. I do think their ad campaigns are interesting though and are not targeted at the middle class buyer anymore. Also their website for online sales. What they are trying to push is that they will provide exceptional customer service and make it their differentiator - every customer complaint is provided with a no that the customer needs to give to the technician if he is happy. Else the matter gets escalated and the customer gets a call from the central helplines to resolve the issue. LG, samsung, voltas etc do not have this concept. In Voltas anyway customer is left to fend for themselves. The focus now will be on invertor ACs as next year Aircon star ratings are again going to be revised making them more expensive.

(Rajeev Jawahar) #32

I recently re-entered the Co., & I felt that the stock had corrected to attractive levels. I also found an exciting change happening that seems to have gone somewhat unnoticed. Earlier, bulk of its sales were coming from OEM supplies to other branded players, while the Co. was aggressively trying to promote its own brand. This is now changing with branded sales being more than OEM supplies, a trend that will only accentuate going forward. Another interesting development is that the Co. is trying to reduce the price differential with other branded players like Voltas, which means that it is gradually getting some degree of pricing power. I feel these developments are significant & if the mgt can continue to walk the talk, the stock could potentially get re-rated, though the fund flows continue to be a concern.

For a Co. that is likely to do sales of about 2400 Crs in 2015-16, a market cap of 775-800 crs looks pretty under valued.

(Quest4Value) #33

Can someone explain the discrepancy between the P&L account and Cashflow statement?There seems to be no cash coming into the firm despite profit being shown continuously.

(Ankchandak) #34

I am following this company past 6 Months.
While most of the positives are already listed I will mention few concerns :-
1 . Their overseas subsidiaries are eating up its profit.
2. They have good margins in AC, but LED tv is very competitive, and they have very less margins.
3. Their debts is keep on increasing. I guess it was because of the acquisition they made, but still interest is eating up profit.
4. They have forex loss of almost 10 crore in last quarter. And based on conference call, I don’t think they are going for any hedging now. So unfavorable fluctuations can cost them.

Disclaimer - Invested

(Rajeev Jawahar) #35

Yes, the overseas subsidiaries are a big concern for me as well. If only the mgt would hive them off into a separate listed Co. It would even reduce debt in the balance sheet to the extent of the borrowings made for the foreign acquisitions.

AC’s are the main business. The TV n the washing machine business is low margin where the mgt.'s focus is on building scale. It is striving for a 10% market share in both & hopes to get there in the next 2-3 years. Besides, the AC business is seasonal.

Yes, the cash flows are a major concern. I guess the reason for that has something to do with the fact that the Co. is still at a stage where it needs to push its products by giving favorable terms to it’s dealers. As mentioned earlier, this is beginning to change, but will be ever so gradual.

With the preferential offer / warrants conversion at a premium also happening, it’ll be interesting to see the balance sheet going forward, on how much the debt goes up by & the D/E ratio.

About the forex loses, the mgt. I guess has taken a considered view to hedge only partially due to the costs involved in hedging. With the rupee appreciating against the dollor, you might even see forex gains this qtr, but I’m not sure of that.

For me the crucial thing here is whether all these concerns are already priced in or not. The answer to that would also probably determine the future course of action for the investors.

(Ankchandak) #36

Now the positives :-
It posted good margins whenever sales contribution from AC is more. Based on that I believe Mar and Jun quarters are going to be good.
In conference call they have mentioned that rupee around 67 would be good for them, and now it’s around that only. So hoping that forex loss from this quarter will be minimal (gain would be a bonus).
The insurance claim rejection loss of 45crore was also a one time loss. Again if they win the legal battle than its going to be bonus.

To me only worries are it’s subsidiaries,and low profit margin or almost zero margin LED business(I hope they would have just manufacture ACs :P)

(saurabh shankar) #37

Interesting discussion. My big question on this thesis is that how will
Lloyd create a unique branding in the Home appliances space. Its is
crowded, dominated by players whose cash reserves are much deeper.

There product line is similar, their advertising is similar. The real
question thus to ask here is what is the ROC which home appliance business
will generate. Consider the WC cycles ( longer terms given to distributors)
not sure if this can be great.


(aashish2137) #38

Consumer appliances space is very price sensitive in India. I’ll speak from experience. For example, in residential air conditioners, you’ve Diakin and Hitachi will are considered premium brands and command premium pricing. But in my area, I think the dealers don’t get preferential treatment so they advocate against it. Then comes the likes of LG which sit in the medium range and again, don’t get much love from the dealers. The dealers tends to sway the consumer significantly. Again, a 1.5 ton Llyod AC will cost 7000-10000 less than a Hitachi. So these factors come in play. Incase of consumer appliances, more than mass advertising, it is the word of mouth that matters more. Also, for Indian consumers, more than the quality of the product, its durability matters. So Llyod targeting that lowest segment in terms of pricing and maintaining good relations with multi-brand dealers can sway the consumers off bigger brands. Over time the brand will build by word of mouth and VFM factor will come into play.

(ASPN) #39

Mr Tulsian has recommended it for 9-months price target of Rs.280.

Disc : Tracking, no holding as of now

(Ankchandak) #40

The latest discussion is around only consumer durables,Do not forget that Lloyd has presence in OEM & Packaging and HVAC segments too.And Consumer durables revenue share is around 40 % .
So we should try to evaluate it with the our all business