Lloyd Electric & Engineering Ltd (LEEL)

Stock Opportunities
103

Hi Nirav,

Thanks for reminding about the Noske-Kaeser that made me research more into the entire deal. All the data is collated from sources online and was little difficult due to it being a niche company . And well i think the shrewd guys at Lloyd might want to make this the next Lloyd AC brand.

All data is collated from online free sources and the basis are my understandings which may or may not be true

Lets get to the heritage of this company Noske-Kaeser

Formed in 1879 For more than 135 years, NOSKE-KAESER has developed innovative solutions to meet the challenges of the shipbuilding and offshore industry. We provide globally recognized leading-edge technology in the areas of air conditioning/ventilation, CBRN protection, refrigeration technology, fire protection and pipe systems, as well as comprehensive worldwide service - everything from a single source and always tailored to your needs. Whether naval vessels, merchant and special-purpose ships, passenger ships and mega yachts or offshore platforms: NOSKE-KAESER is your partner for customized solutions. ( Source Website Technologien fĂźr Schiffbau und Offshore - Noske-Kaeser)

Noske-Kaeser is a leading supplier of HVAC and fire protection technology for ships.
The company is the main supplier of the German Navy and has also participated in the
Offshore area & made a namePioneering work was done by Noske-Kaeser von
Even more than 135 years later they are Internationally recognized suppliers of air-conditioning, refrigeration,
Ventilation, piping, fire extinguishing and CBRN protection technology due to its high innovative power. Companies who were their clients include Meyer-Werft, Siemens or ThyssenKrupp. ( Source : www.vsm.de/sites/default/.../vsm-schiffbauindustrie_02-2015.pdf )

The ThyssenKrupp sold Noske-Kaeser to Naske-Kaeser to financial investors. Buyer is Titan Hunter European Investments: a company that is equally owned by the New Zealand investment companies Titan 1 and Hunter Capital during 2006 .In financial year 2004/2005, Noske-Kaeser generated sales of 53 million euros with 340 employees. During 2009-10 when the company went into liquidation it was estimating a turnover of 50 million euros.

Why did the company became insolvent ?

Dint find much data but one thing for sure would be the Global Recession impacting the sales .But apart from it
The biggest reasons if articles are to be believed was the change Management in 2006 from Thysen Group to some New Zealand based owners Hunter European Investments: a company that is equally owned by the New Zealand investment companies Titan 1 and Hunter Capital. Their vision in 2006 “The new owner of Noske-Kaeser wants to lead the company on an expansion course. David Porier, CEO of Titanhunter European Investments, said the company’s primary goal was a significant increase in sales. This also involves the creation of new jobs. “With the success of the company, which we want to achieve with a new structure, we will also need more employees,” says Porier” ( Source : http://www.abendblatt.de/wirtschaft/article107131606/Noske-Kaeser-aus-Hamburg-verkauft.html )

However maybe due to inefficiency of these Foreign Investors the debts totaled 120 million euros and the company had file for insolvency. The Directors of the Titan 1 had charges of Fraud labeled back in New Zealand and the company went out of business.

Rising from the Ashes

The rivival plan was chalked out as indicated in one of the reports (Schiffbau Industrie II/2015 - vsm) from 2010 itself whereby focus was put on innovation and technology again to the frorefront

Google Translator bare the inconvinieance
"
Noske-Kaeser has not least shown itself in the offshore-
As a provider of HVAC and fire protection
A name made. "We have been since 2010
Active in this market and one of the world 's largest
Few companies operating both climate and
Refrigeration and fire extinguishing systems
Offshore platforms and wind power plants
On the high seas from one source, "says Matthes.
"This benefits our customers, because
They not only save time but also money. "
With Noske-Kaeser at their side, Windpark-
And platform operators a competent
Contact for both segments. Nice
In the concept and design phase, the Noske-
Kaeser technology to the basic conditions
On site. "Especially in the offshore sector
Man and machine are permanently high
Exposure. Our equipment and
Customized systems for active fire protection,
Fire detection and automatic fire extinguishing
Or our air treatment plants
Are very helpful here. They create optimal operating conditions.
Downtime can be minimized
And the life of the technique is increased "

Their continued innovation CBRN Market , HyFExÂŽ ( Fire Extiguishing Systems ) & COILAN show the intent of the company on growing through Innovations

Then why sale the Railway Business

I think it was a decision taken to focus on their core products ie shipbuilding and remove the dependance on non-core assets .

As soon as the brand was reviving in the international market they planned to hive of their investments in the Railway and Vehicle business and thats where Llyod stepped in .

Well is it a 50 million euro business ?

No not at all . Even if i am to assume that their core business is generating even 20 mIllion Euros today the business might not even be 10% of their total revenues . Llloyd has entered 5 continents with this acquisition if I am not mistaken but out that only the New Zeland Australia belt and Germany operations seem to be up and running . The brazilian subsidiary is taken it has no meaningful business at the time being and dint get any idea on what their operations are like in US .

interestingly found good and promising information about their New Zealand operations which Llyod has bought .

The last 12 months ended was Sept 2015 . To Match with Lloyds financials the financial year ending was changed to March and 6 months from Oct 2015 to Mar 2016 is available on public domian (New Zealand Companies Register ) . The below screenshot will give u a brief idea about the performance of the company

Lloyd.PNG1082×590 19.8 KB

Note

  1. the business taken over by Lloyd comparables are for 12 month but the latest AR has only 6 months so for a meaningul comparision we may need to wait for this years AR to be out

  2. The loss in the last 6 months is attributable due to the items marked in red

  3. Revenues and Expenses of Discontinued Ops are identified using Sept 2015 AR values and reducing the Revenues & Exps Reflected in AR of March 2016 Comparables column

4, GP Margin for the businesses are provided in Blue

  1. Though discontinued business revenues appear nothing much has been taken from Assets apart from some Human Resources and Repayment of Advance from Holding Company. FA remains with business taken over by Lloyd

  2. The company shows sales to NZ/Aus Marine Company still held by Norse-Kaeser

Detailed ARs for all years can be found here

https://www.companiesoffice.govt.nz/companies/app/ui/pages/companies/872210/documents?backurl=%2Fcompanies%2Fapp%2Fui%2Fpages%2Fcompanies%2Fsearch%3Fq%3Dnoske%2Bkaeser%26entityTypes%3DALL%26entityStatusGroups%3DALL%26incorpFrom%3D%26incorpTo%3D%26addressTypes%3DALL%26addressKeyword%3D%26start%3D0%26limit%3D15%26sf%3D%26sd%3D%26advancedPanel%3Dfalse%26mode%3Dstandard

Silverlings for the company

  1. Great Brand
  2. Huge demand upcoming for Metro and A/C Rail Carriages in India
  3. Increase in Global Operations
  4. Lloyds intension to get into Defense and Shipping sector
  5. A good 17cr investment ( 2million Euro bet)
  6. AR of the NZ subsidiary has been growing since 2012 except the loss in the last 6 months

The tie-up may have started to bear fruits already .

5 Likes
104

the biggest challenge in a german co is getting the Labor issue solved. How would it move its Plant and Machinery into India from Germany (presume the infra is in Germany?)

Disc: Not invested

105

Moe than infra and plant and machinery its what this company offers in terms of its relation with other german companies . Lloyd itself has the manufacturing abilities for railways and also has stake in Janka Engineering which is also in HVAC supplier for Railways based out from Czech Republic . This purchase for a mere 17 to 20 cr gives it the exclusive right over the 135 year old brand and improves the probability of Lloyd fetching contracts from Global players with the Noske-Kaeser brand for railways and other vehicle business . No doubt the OPM for this kind of specialized business will remain better than commercial air cooling and way better than the OPM of Consumer Space due to less competition and specialized services . Even though the acquired company might not be having the best of the times , but surely they have experiences and good relations which is what Lloyd might look to consolidate on in the coming days . In the slump sale concall the Lloyd management in addition to defense also stated that they are also looking into shipping hvac segment which if in real could be all the more interesting cause Noske seems a big player of the Shipping Space . Also to note that in the Noske Kaeser Railways AR of 2016 sales worth 5 lacs NZ $ was shown to Noske Kaeser Australia Marine ( not acquired by Lloyd ) .

106

Thanks for the update. I shall review the financials later. But now I am super confused on what industries they are trying to address. I thought they were into defense too. (I was assuming the acquisition of Noske Kaeser also gave them the technology to manufacture the HVAC systems for Air and Marine. Why does their chairman state that the acquisition would give them a strategic advantage in Rail and Defense? https://www.lloydengg.com/pdf/Press%20Release-%20Acquisition%20of%20Noske%20Kaeser%20Rail%20&%20Vehicle%20Global%20Business.pdf
http://economictimes.indiatimes.com/industry/cons-products/durables/lloyd-buys-noske-kaesers-rail-vehicles-business-in-select-markets/articleshow/51552678.cms ) Reading this I thought they would be entering all the segments and was valuing the deal higher than it is actually meant to be. On reading your post I went deeper and found its only covering rail in the acquisition. They already had Janka and now Noske Kaeser. I think this is mainly for industry consolidation and gaining greater market presence to drive higher margins. Though the consolidation is always good they still have some high-level competition in the sector. http://www.railway-technology.com/contractors/hvac/. The margins are definitely expected to be higher than consumer business but not sure how much impact can they drive. More Info http://www.nk-rail.com/files/lrs_profil_v2_web.pdf

Also, I read they had acquired world’s second largest company for HVACR in 2008 which gave them a presence in Russia and EU. (http://www.thehindubusinessline.com/todays-paper/tp-corporate/lloyd-electric-buys-czech-company-luvata/article1624234.ece) I don’t hear about this one as yet too. I am not sure where are they placed and how are Fedders Llyod which also market Rail and Defense products different from them. Is Fedders Lloyd only a holdings company?

110

stop pasting promotional link on each and every page…its irritating

111

If Lloyd does indeed retire debt through the proceedings of the sale, then its a company that will have the same bottom line, no debt, another ~500 Cr in cash (dividends or acquisition?) and another large consumer to supply in the form of Havell’s. Looks like a pretty good deal!! Am I missing something here? All this assumes they indeed retire the debt (but then why wouldnt they atleast partially do so).

1 Like
112

Alls right, just that market does not trust the management.

113

Lot of confusion has been created to corner stocks. It is destined to move up. Whatever u have written us absolutely correct. I am invested from 90 levels. With revised business model, company will constantly grow at 10-15% topline & healthy 15-20% bottom line. B2C segment is heating up as we see lot of new players coming in. To some extent this decision looks in interest of share holders. Let’s wait for management commentry post deal. I feel this should be kept for longer.

115

Lloyd has completed the sale of its consumer electronic business for a total of Rs. 1550 cr - I view this is a huge positive for a company with an EV of ~1700 cr and most of it remaining preserved as the sales and growth would remain almost the same.

1 Like
116

The company at present is undervalued. However is any indication given about how the cash will be utilized? I would not be suprised if the company does not retire the debt and pursues a new venture. However the clarity and vision of the promoters need to be clear on the matter.

1 Like
117

Do we have any update from the management? I believe all the shareholders are waiting eagerly for the update from the management?

118

Huge dividend, but not nearly enough considering size of sale, so I’m hoping we can see some kind of buyback after debt paredown. Anyway you slice it though, market will love the huge YoY growth and special dividend - should see some fireworks soon.

119

I don’t think that the business numbers has anything to cheer about:

YoY numbers are bad, EBIT margins have fallen across all lines of businesses significantly, with stand alone 4Q17 EBIT margins (7.3%) being down more than 500 bps (12.1% in 4Q16) and Full year margins also down by almost 200 bps (from 9.7% in FY16 to just 7.9% in FY17). Other subsidiaries which were marginally profitable till 9MFY17 are in the red. I think outside subsidaries had EBITDA of ~+10 cr in 9MFY17 and have negative EBITDA of 8 cr in full year FY17 which means an EBITDA oss of 18 cr in last quarter.

Growth in consumer division slows down materially from 48% in 9MFY17 to under 25% in Q4FY17. Growth in other two businesses is at 10% overall for FY17 with significant fall in margins in the gone quarter.

Net working capital days have worsened from 157 days to 164 days despite the fact that almost all growth for the company came from consumer division which operates at significantly less number of working capital days. This means the WC days for the residual business has worsened significantly.

Debt which was down 100 cr yoy in September balance sheet is now up 200 cr yoy in March balance sheet.

Effective tax rate for the company which used to be in early twenties have spiked up to 29% for the full year and 33% for the quarter.

Not commenting anything on the deal, but there are two many questions for management to answer on the business front.

120

Lower margins were expected due to significantly higher metal prices, IMHO only transitory until costs are passed on by all players in the market. Besides, this a business that we are getting for ‘free’, so I’m not going to complain about profitability when revenue is growing 25% YoY.

121

Does anyone has details about the concall that happened Yesterday

122

Check researchbytes.

Summary is out of rs 1550 CR from sale of Lloyd’s.

  1. Rs 350 will go to tax
  2. Rs 1000cr will go towards debt reduction.
  3. Rs 100cr to dividend.

Company to focus on defence and railways project and other supply to OEM project. Reason for exit from CD is low margins and limited capacity for expansion to support volumes.

5 Likes
124

If the company wants to go for expansion or start a new line of biz they will take on debt again…no cash left from the sale of CD biz

125

As they won’t have debt anymore, they can generate cash going forward which can be used for expansion etc.

126

After listening to the management’s latest conference call and reviewing financial statement as at 31 March 2017 - I believe the LEEL story at this point of time is really interesting -

  1. Looking into the segment reporting for the year, the revenue from the residual business after sale of consumer durable (i.e., OEM, Heat exchangers and others put together) is approximately 1500 Crore(including the inter company revenues which the management confirmed that will get added to top line as the same will be sales to Havells going forward).
  2. The management has confirmed on the conference call that the EBIT of the remaining business is expected to be between 9 to 11%. Lets take a conservative view and assume the margin ends up at 9% - so we end up with an EBIT of about 135 Cr.
  3. Management confirmed that all debts except for working capital debts will be paid off - With the current cash balance of about 100 Cr along with net cash generated from the sale of division(1550-23% tax- say, 5% sales related expenses) of 1115 Cr we have a cash balance of little about 1215 Crore. Now if we deduct the dividends for the current period of about 100Cr - The net cash balance would be 1115 Cr.
  4. Total debt as at 31 March is 1131 Cr(51 Cr worth long term and 1080 Cr short term debt).
  5. If the entire long term debt and say about 75% of current working capital debt gets paid off we are looking at about 270 Crore worth working capital debt and about 255 Crore cash in books. This cash in books can be used as growth capital.

The interest cost for the year be be say 10% of 270 being 27 Crore.

Now lets look back at the P&L and the PBT for the year would be about 108 Crore(135-27).

Assume tax @ 30% and the PBT would work out to 75 Crore.

Lets stop here - what i have put together above is possibly the worst result the company can announce going forward.

You may also take following into consideration -
a. the cash which the company would generate during the current year and
b. the book value of the company which would be easily above 1200 Crore.

I have also not taken into consideration the expected growth of about 10% for the current year along with the possible turn around of foreign subsidiaries.

So to conclude, I would say a net debt free company with a well established business and ample opportunities for growth is available at a conservative forward PE of less than 12.5 and book value above 1.3 times market cap.

Risk:

  1. Inadequate disclosures and lack of transparency from management.
  2. Poor working capital management(inventory level to be specific look abnormally high and the debtors balance is almost 5 times the accounts payables).

Disclosure: Invested in LEEL.

2 Likes
127

The analysis is very good and pretty accurate, I had also done a pretty similar calculation for analysis.

The key point going ahead would be the P/E multiples. It has historically traded for 8-10 P/E range only even when it had the Consumer Durable Buisness growing at 30% and more ( from my memory ).

  1. Markets have taken a very pessimistic view on the stock. It should be trading at higher multiples given the potential. Perception of Management is not that shareholder friendly. I have got burned earlier on this stock as management have announced sale all of a sudden.

Later I thought management have taken a right decision to focus on less competitive segments and improve the margins. If the margins improve going ahead the stock can give decent returns.

Its a long term hold and doesn’t seem to get much attention until it shows some decent 2017 Quarter results.

disc: Invested

1 Like