Lloyd Electric has been growing steadily over the last several qtrs., gaining substantial market share in the process. From a market share of about 8% of the Indian room AC market about 2 years ago, it has taken it up to about 14%. This is huge, particularly considering the fact that this market share increase has come at the expense of established brands like Daikin, Voltas, Hitachi, Godrej etc.
The stock has gone up 6 times in the last 3 years, but continues to be available at a multiple of under 10 for FY 16-17. It is pertinent to note that this growth in market cap has been purely on the basis of earnings growth with almost no re-rating premium having been accorded to the stock. With itâs ever increasing market share, it is only a matter of time before before that happens. The Co. has disclosed its intention to restructure its business, which could be the trigger. A hive off its subsidiaries into another Co., could mean substantial de-leveraging of its balance sheet leading to a marked improvement to itâs return ratios.
One of the criticisms often levied against Lloyd was that it was âpushingâ sales, leading to mounting receivables, & as such it could not be treated as a regular âBrandedâ player. With the brand gradually gaining traction, this too is changing with debtor days gradually declining. The debt itself as mentioned by @Ankchandak in the above post is also declining appreciably. The current debt equity ratio as on September 30th stands reduced to .72
Brand is getting big traction, specifically in Rajasthan and Gujarat. I have seen new ac installs of lloyd at few of my relatives. Also in my office building I have seen lloyd acs getting installed. But still Lloyd is missing in big branded electrical retail players. I havenât seen Lloyd acs in Vijay sales stores. And in stores like Reliance digital also, I hardly found Lloyd ac. No sign of tv, washing machine.There is no doubt lloyd has increased its distribution network and build a good brand name in recent years , but to get a good brand visibility it has to harness good relationship with big retailers. There might be a possibility that Lloyd is not able to get good negotiations with these stores, and if itâs true that means these retailers are fine without Lloyd, which under scores Lloydâs brand and value.
I would very well agree with you that the growth in market cap has been entirely due to the core earnings growth without any P/E rerating. The company has worked hard over the past few years to grow its market share in the highly competitive consumer durables space.
A few goodwill gestures to the investing community in the form of restructuring of subsidiaries, tight capital allocation , and higher dividend policy could certainly propel the P/E to respectable levels.
ABout NEw product launch from the sa,e link I posted above : -
.The main thrust in 2017 is the focus on Energy efficiency with a wide variety of offerings in 3 star, 5star and Inverter ACâs with WIFI. The wifi products will provide connectivity of the AC to the Internet and will enable the customer to operate the ACâs from a smart phone , get operational data like power consumption and usage hours, and also create Artificial Intelligence to directly communicate with the Lloyd Service Centres !!
Besides the 21 Wifi Models the company has also launched a 4D Cooling 5 star AC and a 21000 Btu 1.5Ton Heavy Duty AC that will provide better cooling than even the leading Japanese Brands in the market.
The company has 15 new models with Inverter compressors including a few higher capacity models for the very high ambient conditions all developed with COPPER CONDENSORS for better product life.
Here is a quick calculation of the remaining business (ex-consumer), based on fy16 numbers (just to be conservative)
Minus consumer business, we get the remaining business with around 1400 Cr sales
Operating profit of 120 Cr on consolidated basis
Assuming entire 900 Cr of debt is retired by the cash coming in, there will be zero interest paid
Assuming 30 Cr taxes (20 Cr depreciation), we get close to 100 Cr free cash (hope I am not over estimating this)
Now, 1300 Cr mcap minus 500 crore cash (left after debt repayment), we get EV of 800 Cr
So, at a broad level, we are getting a business with 1400 Cr sales and which generates 100 Cr free cash at 8 times free cash. Interesting point is the OEM segment will continue to supply to Havells and it will be an assured business.
IMHO, this is not bad for minority shareholders
Would be important to know what management plans to do next with the remaining business.
Views invited
While the loss of the brand âLloydâ does change the investment thesis somewhat, the selling of the brand to Havells may still be value accretive to Lloyd . Hereâs why:
In FY16 Lloydâs consumer durable business made a PBIT of 105 crs while the total interest cost for the company was also 105 crs. Assuming the company uses the cash from sale (1550cr) to pay down all the debt (880cr) and distributes the rest after paying taxes to shareholders, the loss of PBIT due to sale of CD business will be fully compensated by the fall in interest cost. Which means the overall PBT of the company will remain the SAME after sale.
The Press release says post the sale of Consumer durable business, Lloydâs OEM business will continue to supply Air conditioners to Havells, on which it will continue to make money as it did while making supplies to other OEMâs. In fact it will be wrong to reduce the sales of branded goods from Lloydâs turnover going forward as a bulk of it would get reflected under sales to OEMâs. As mentioned in one of the con calls that the Co. made earlier, itâs margins are pretty much same whether it supplies to OEMâs or under sells under its own brand.
In FY16, the OEM business and the Heat Exchanger businesses had revenues of 850cr and 590cr. So what you are left with is a company with 1440cr of revenue, 132crs of EBIT, no debt and 650 crores of cashâŚ. a base case valuation of Rs. 2000 crs.
It will however be interesting to see how the stock trades tomorrow.
I got attracted to Lloyds in search of a strong Consumer Brand available at cheap valuations. The likes of Havells/Bajaj Electricals/Voltas etc. continue to trade above 30-40x, while Lloyd continues to trade at a PE of 10-12 (screener 12.41 as on 17-02-2017).
Now here was a branded player with a (not-so-household brand YET) which is
= steadily rising the market share charts, doing good marketing activities
= the industry has got sizable addressable market potential
= coupled with urbanization, increasing rural electrification, increasing disposable income etc
So the investment thesis was, with this kind of future potential, growth and re-rating would happen in a couple of years. However, with the Lead Actor (Brand LLOYD) out of picture, I donât know how to value it. But one thing is for sure. The OEM business is just like any other industrial B2B business, which will not enjoy premium valuations. Views invited.
Please note that management does not plan to distribute the excess to shareholders. They had stated that they plan to invest it in the existing (what remains) business.
They are also talking about investing the proceeds in new high margin B2B business. They must have clarified if they have decided which business they intend to start.
The management denied such talks and a sudden disclosure is not minority friendly. The cash could be deployed anywhere and there is no clear direction. On account of these uncertainties, I felt compelled to exit my position. Thankfully liquidity was not an issue and was able to sell it.
I think it would be premature to assume that the promoters will retire the debt with the cash. As with many other poor capital allocation enterprises, the debt will probably remain on the books while the management goes about investing the proceeds into ventures that are not necessarily prudent.
