LLOYD ELECTRIC & ENGG LTD

ROD’s “Value Uncovered” stock for the month of Sept 2010

HBJ Capital, India
Web: www.hbjcapital.com
E-Mail: info@hbjcapital.com
Call: +91 98867 36791
Best Buying Price…

Buying Strategies Suggested [Buy in two phases]

1st Phase : Buy at the current price range 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!!!

Lloyd Electric & Engineering Ltd– Overview
Basic Details..
 Lloyds Electric and Engineering Limited (LEEL), a well established
name in the Indian AC industry, is a part of the Lloyd group.

 Lloyd Electric & Engineering is in the business of manufacturing

heat exchanger coils for air-conditioning and refrigeration
application, ‘U’ bend and return bend for heat exchanger coils,
system tubing and header line for air conditioner equipment and
sheet metal items for air conditioner systems made from CNC
presses and are leaders in India.

 LEEL was established in 1988 and is currently the market leader in

the Indian AC coil industry with 50% market share. It provides
customized 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 coils
for the air conditioning industry.

 Company has at present an installed capacity to manufacture over

1,60,000 coils for standard air conditioners and 20,000 coils for air
conditioners of capacity of 15 tons
Contd..
 The company is Original Equipment Manufacturer (OEM) supplier
to almost all AC manufacturers in India, and has overseas business
of 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 commencing

contract manufacturing of ACs for its existing clients like Fedders
Lloyd, 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 Bangalore
Metro Projects.

 Lloyd Electric has also started receiving outsourced orders for

making window and split air-conditioners for some of the branded
players. To cater to this demand, the company has expanded the
capacity of its Himachal Pradesh unit and set up a new AC
manufacturing plant in Uttaranchal in the past.

 LEEL now provides complete solutions to its clients from its

manufacturing facilities at Bhiwadi (Rajasthan), Kala Amb
(Himachal Pradesh) and Dehradun (Uttaranchal).
Strong Growth In Sector to Continue..
 The Air Conditioning industry in India is witnessing increased
expectations by the customers. Technology, designs, cooling capacity,
energy efficiency & Service levels are seeing new highs. Industry is
progressing from premium product image to a diversified market
due 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 for
ACs in the future also.

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

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

 Going forward too, we expect the strong demand scenario for AC’s to
continue. This is on account of the fact that AC penetration in India is
at a lower level as against that of the developed market. With a mere
2 per cent AC penetration in India, the Rs. 30,000 crore industry is
expected to grow minimum by a quarter annually for the next 6-7
years.
Financials (Annual Trends)..

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

 LEEL’s revenue grows, at a CAGR of around 25%,during the FY06A-10A period. Whereas EBITDA and net profit
grew at more than 18%.

 The company improved its performance drastically after suffering for a major part of last year, due to a sluggish
demand for white goods, on account of the overall economic slowdown. With a view to tackling this slowdown, the
company had reduced its pricing towards OEMs during a majority part of the previous year.
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 LEEL’s foray into the AC contract
manufacturing segment has helped boost its earnings.

 Increased contribution from high margin business and higher economies of scale saw EBITDA margins
expanded. 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.
Peers Comparison..
 The company is currently available at a
valuation of around 5.85 times the earnings.

 It should be noted that this counter has never

been cheap. For most of the period before Jan
2008, the company used to trade at a range of
14 to 16 times the then current year earnings.

 Since there is no exact comparable listed firm

with same business model, we have took the
valuations of some of the large players in the
AC industry. At current market price the stock
is trading at a P/E multiple of 5.85 whereas its
peers like Voltas, Blue star are trading at more
than 19 price to earnings ratio. Also the
Industry P/e stands at 16.

 As being supplier for AC’s Coil, The

company’s stock may not deserve the
valuation commanded by branded players
such as Blue Star or Voltas, but the current
valuation discount suffered by Lloyd appears
to be too steep.
Attractive Valuation..
 As on Date its Book value stands at Rs 133 which means it is just quoting
at just 0.58 Price / Book Value, which is much below industry standards.

 The company has an arrangement of passing on any escalation in raw

material prices to its customers, However, with demand picking up and
the pricing scenario improving, we expect the operating margin to be
sustained, 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 in
comparison to industry standards.

 Most of the large OEMs like Voltas, Blue Star, etc are trading at premium
valuations of 18x one year forward earnings. On the other hand, LEEL
being a part of the same industry with similar growth prospects and
relatively better margins is trading at a significant discount. We believe
that the valuation gap between LEEL and the OEMs should reduce and
hence, there is a scope of re-rating on the scrip.

 The company has been maintaining a very conservative debt equity ratio
at just 0.5.We expect the valuation to strongly improve from the current
levels.
Shareholding Pattern..

 At the end of Jun’ 10 the Promoter holding stands at 34.62%, which is reasonable. The increase in stake
further 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 all
the purchases made by the Mr. Brij Raj Runj is made at share price closer to which it is quoting at present. So
CMP 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 raise
capital, no dilution of stake by promoters which strengthens the company’s positioning further.
Buying Strategy..

 The Chart indicate the price moment of the stock since May’10 when promoters made a purchase from cash
market 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 price
gives an opportunity to grab it & hold it tight. Any further decline in the stock should be taken as an
opportunity to add more.
Investment rationale....

 Market leader in the fast growing domestic coil business :- Niche positioning as original equipment
manufacturer of coils for a number of air-conditioner manufacturers, operational efficiencies derived from a
fully integrated business and strong financials are positives for the company. LEEL is the largest non captive
manufacturer of coils, with a 50% market share and an installed capacity of 1.6 mn units. The surge in
demand for ACs has seen the coil segment report a 25-30% growth over the past few years.

 AC’s Industry is to witness a strong growth going forward:- The penetration of ACs is very low in India, at
approximately 1.5 - 2%, compared to approximately 20% in developed countries, which will continue to drive
the Sales of ACs in India. Given the conducive demand scenario and LEEL’s 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 Janka
Radotin a.s , which would give Lloyd a foothold in Europe and add to its Top-line and Bottom-line.
Contd..

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

 Tax Benefits to Kala-Amb and Dheradun Plants :- LEEL’s has two of its plants based in tax free zones. The tax
holiday 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 passing
on any escalation in raw material prices to its customers. The company is protected against raw material
price volatility as it books its orders on cost plus margin basis.. We believe, that the stock has a limited
downside from its current level and can provide 60% to 100% return in an years time.
THANK YOU