36931418 Lloyd Electric and Engineering Ltd Code 517518 HBJ Capital s ROD Unit Value Uncovered Stock...

8/8/2019 36931418 Lloyd Electric and Engineering Ltd Code 517518 HBJ Capital s ROD Unit Value Uncovered Stock for Sept 10 (1)

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RODs Value Uncovered stock for the month of Sept 2010

HBJ Capital, India

Web: www.hbjcapital.com

E-Mail: [email protected]

Call: +91 98867 36791


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Best Buying Price

Buying Strategies Suggested [Buy in two phases]

1st Phase : Bu at the current rice ran e Rs 76-82 60% of investment

2nd Phase : Add if the price falls down to Rs 64-68 [40% of investment]

Expect at least 60-100% return in next 12 months time frame!!!


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Lloyd Electric & Engineering Ltd Overview


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Basic Details..

Lloyds Electric and Engineering Limited (LEEL), a well establishedname in the Indian AC industry, is a part of the Lloyd group.

Lloyd Electric & Engineering is in the business of manufacturingheat exchanger coils for air-conditioning and refrigerationapplication, U bend and return bend for heat exchanger coils,system tubing and header line for air conditioner equipment andsheet metal items for air conditioner systems made from CNCpresses and are leaders in India.

LEEL was established in 1988 and is currently the market leader inthe Indian AC coil industry with 50% market share. It providescustomized AC coil solutions for institutional clients like railways,defense, telecom etc.

It manufactures railway ACs as well ACs for the Delhi Metro Rail

Corporation (DMRC). Its core strength lies in manufacturing coilsfor the air conditioning industry.

Company has at present an installed capacity to manufacture over1,60,000 coils for standard air conditioners and 20,000 coils for airconditioners of capacity of 15 tons


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Contd.. The company is Original Equipment Manufacturer (OEM) supplier

to almost all AC manufacturers in India, and has overseas businessof approximately 20% of its sales turnover. The company enjoys

leadership in the industry, which is growing at 25-30%.

The company has moved up the value chain by commencingcontract manufacturing of ACs for its existing clients like FeddersLloyd, Samsung, Electrolux, Voltas, Carrier etc.

The company has executed order for Delhi Metro Rail Contract

(DMRC). DMRC contracts command higher margins of 18-20%.Going forward, the company may bid for Mumbai and BangaloreMetro Projects.

Lloyd Electric has also started receiving outsourced orders formaking window and split air-conditioners for some of the brandedplayers. To cater to this demand, the company has expanded the

capacity of its Himachal Pradesh unit and set up a new ACmanufacturing plant in Uttaranchal in the past.

LEEL now provides complete solutions to its clients from itsmanufacturing facilities at Bhiwadi (Rajasthan), Kala Amb(Himachal Pradesh) and Dehradun (Uttaranchal).


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The Air Conditioning industry in India is witnessing increasedexpectations by the customers. Technology, designs, cooling capacity,

energy efficiency & Service levels are seeing new highs. Industry isprogressing from premium product image to a diversified marketdue to changes in lifestyle and rapid economic growth.

Rising income levels, declining prices of ACs, rising number of malls,multiplexes, etc are expected to continue to drive the demand forACs in the future also.

The AC industry is poised to grow at over 25% to 35% every year!.

Strong Growth In Sector to Continue..

From the last few years on account of buoyant economy the ACindustry has witnessed a surge in demand. The growth in AC saleswas largely driven by the split models which has, over the years, beenselling more compared to the cheaper window ACs.

Going forward too, we expect the strong demand scenario for ACs tocontinue. This is on account of the fact that AC penetration in India isat a lower level as against that of the developed market. With a mere2 per cent AC penetration in India, the Rs. 30,000 crore industry isexpected to grow minimum by a quarter annually for the next 6-7years.


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Financials (Annual Trends)..

Lloyd Electric & Engineering Ltd (LEEL) has been consistently reporting healthy numbers over the past five yearson account of a change in their revenue mix as well as a strong demand scenario for ACs.

LEELs revenue grows, at a CAGR of around 25%,during the FY06A-10A period. Whereas EBITDA and net profitgrew at more than 18%.

The company improved its performance drastically after suffering for a major part of last year, due to a sluggishdemand for white goods, on account of the overall economic slowdown. With a view to tackling this slowdown, thecompany had reduced its pricing towards OEMs during a majority part of the previous year.


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Financials (Quarterly Trends)..

As indicated , One can noticed the revenues has grown constantly over the last few quarter.

A buoyant demand scenario for the AC coil segment combined with LEELs foray into the AC contractmanufacturing segment has helped boost its earnings.

Increased contribution from high margin business and higher economies of scale saw EBITDA marginsexpanded. The growth was driven by increasing production volume, introduction of new line of businesses,capacity expansions, etc. Also, raw material cost as a percentage of net sales has come down.


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The company is currently available at avaluation of around 5.85 times the earnings.

It should be noted that this counter has neverbeen cheap. For most of the period before Jan2008, the company used to trade at a range of14 to 16 times the then current year earnings.

Since there is no exact comparable listed firm

with same business model, we have took thevaluations of some of the large players in the

Peers Comparison..

AC industry. At current market price the stockis trading at a P/E multiple of 5.85 whereas itspeers like Voltas, Blue star are trading at morethan 19 price to earnings ratio. Also theIndustry P/e stands at 16.

As being supplier for ACs Coil, Thecompanys stock may not deserve thevaluation commanded by branded playerssuch as Blue Star or Voltas, but the currentvaluation discount suffered by Lloyd appearsto be too steep.


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As on Date its Book value stands at Rs 133 which means it is just quotingat just 0.58 Price / Book Value, which is much below industry standards.

The company has an arrangement of passing on any escalation in rawmaterial prices to its customers, However, with demand picking up andthe pricing scenario improving, we expect the operating margin to besustained, going ahead.

Its EPS based on forward earnings estimate for this financial year(FY11E) is expected to be 16-18 , which makes it to trade at P/e of 4.5

(FY11E). Whereas its EV/EBITDA is only 3x. This is much lower incomparison to industry standards.

Attractive Valuation..

Most of the large OEMs like Voltas, Blue Star, etc are trading at premiumvaluations of 18x one year forward earnings. On the other hand, LEEL

being a part of the same industry with similar growth prospects andrelatively better margins is trading at a significant discount. We believe

that the valuation gap between LEEL and the OEMs should reduce andhence, there is a scope of re-rating on the scrip.

The company has been maintaining a very conservative debt equity ratioat just 0.5.We expect the valuation to strongly improve from the currentlevels.


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Shareholding Pattern..

At the end of Jun 10 the Promoter holding stands at 34.62%, which is reasonable. The increase in stakefurther reflects the confidence of the management in the prospects of the company.

One can find in disclosure submitted to bse (Insider Trading), that Promoter (Brij Raj Punj, Chairman cum

Managing Director ) are regularly buying the shares from cash market purchases. The positive side is that allthe purchases made by the Mr. Brij Raj Runj is made at share price closer to which it is quoting at present. SoCMP provides the opportunity to Grab & Hold it for descent gain going forward.

There has been no equity dilution, which is very impressive. There is no issuance of new shares to raisecapital, no dilution of stake by promoters which strengthens the companys positioning further.


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Buying Strategy..

The Chart indicate the price moment of the stock since May10 when promoters made a purchase from cashmarket directly. Since than the stock is in consolidation phase and its trading in the range. The counter has

been gradually forming a base at around 73 levels and is highly unlikely that it will be broken. On the upper

side it has resistance at around 93.

The positive side is that the promoter has increased the stake at around these level only. So current pricegives an opportunity to grab it & hold it tight. Any further decline in the stock should be taken as anopportunity to add more.


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Market leader in the fast growing domestic coil business :- Niche positioning as original equipmentmanufacturer of coils for a number of air-conditioner manufacturers, operational efficiencies derived from afully integrated business and strong financials are positives for the company. LEEL is the largest non captive

Investment rationale....

, . .demand for ACs has seen the coil segment report a 25-30% growth over the past few years.

ACs Industry is to witness a strong growth going forward:- The penetration of ACs is very low in India, atapproximately 1.5 - 2%, compared to approximately 20% in developed countries, which will continue to drivethe Sales of ACs in India. Given the conducive demand scenario and LEELs market leadership. It is expected

to be a major beneficiary of the strong growth in the coil industry.

Expansion :- Further, the company has acquired a plant in Czechoslovakia, from Luvata & recently JankaRadotin a.s , which would give Lloyd a foothold in Europe and add to its Top-line and Bottom-line.


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Attractive Valuation :- At the CMP, Its EPS based on forward earnings estimate for this financial year (FY11E)is expected to be 16-18 , which makes it to trade at P/e of 4.5 (FY11E). Whereas its EV/EBITDA is only 3x.This is much lower in comparison to industry standards.

Promoter are Buying directly from market :- The Brij Raj Punj, Chairman cum Managing Director has

Contd..

increased the stake in May at around these level only. So current price gives an opportunity to grab it & holdit tight. Any further decline in the stock should be taken as an opportunity to add more.

Tax Benefits to Kala-Amb and Dheradun Plants :- LEELs has two of its plants based in tax free zones. The taxholiday is for the next 15 years for its Dehradun plant and 10 years for Kala Amb plant.

Ability to pass on the impact of raw material price volatility :- The company has an arrangement of passingon any escalation in raw material prices to its customers. The company is protected against raw materialprice volatility as it books its orders on cost plus margin basis.. We believe, that the stock has a limiteddownside from its current level and can provide 60% to 100% return in an years time.


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THANK YOU

36931418 Lloyd Electric and Engineering Ltd Code 517518 HBJ Capital s ROD Unit Value Uncovered Stock...

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