2Company Overview:  Lloyd Electric & Engineering Ltd is the largest manufacturer of evaporator and condenser coils for air conditioners and heat exchangers/radiators serving the entire spectrum of Heating, Ventilation, Air Conditioning and Refrigeration (HVAC&R) Industry. The company is also an ‘original equipment manufacturer’ (OEM) supplier to manufacturers of air-conditioners in India, and provides customized air-conditioning solutions for institutional clients like Railways, Metro Rail etc. Since 2011, company has also ventured into Consumer Durable Business, under “Lloyd Brand”.  Company is vertically integrated across HVAC value chain from manufacturing the heat exchanger / coils, components, air conditioners to selling to OEM’s as well as under “Lloyd Brand”, thereby providing an end to end solution in the air conditioning space.

3Lloyd Electric is the largest manufacturer of Heat Exchangers in India for the Heating, Ventilation, Air Conditioning and Refrigeration (HVAC&R) industry.  In OEM segment & Packaged Air conditioning; company is the leading supplier of Room airconditoners to leading brands like Blue Star, Samsung, Voltas, Daikin, Carrier and many other leading brands in India and overseas. The company has six state of art manufacturing facilities located in Bhiwadi, (Rajasthan), Tauru (Haryana), Pantnagar (Uttarakhand), Kala-amb (Himachal Pradesh), Ranipet (Tamil Nadu), Haridwar (Uttarakhand) in India and two Overseas manufacturing facilities in Prague, Czech Republic in Europe. The facilities at Kala‐Amb and Pantnagar Plants enjoy tax holidays upto FY 2020. The company has annual capacity to manufacture over 6 lakhs AC’s across all its Indian facilities.

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Growth Drivers

  • Revival in Indian GDP: Revival of GDP growth is the single largest driver for the industry. India is expected to grow by 7.5% in 2015 and growth momentum is likely to increase and GDP is expected to grow at more than 8% from 2016. The GDP growth creates surplus income in the hands of consumers, which is a critical factor for discretionary businesses.
  • Launch of DDUGJY and Smart cities programme: In India, although 60% of population resides in rural India, it represents only 35%of total domestic sales. The lack of electricity in rural India is key reason for the slow growth in rural market for white goods like air conditioners. There is a large vacuum to be addressed in air conditioner ownership, with only estimated around 5% penetration – in contrast to 77%. With government launching scheme like Deendayal Upadhyaya Gram Jyoti Yojana (DDUGJY) with aim of providing 24 hr power supply to the villages in remote parts of the country and setting aside huge budgetary allocation will ensure speedy electrification of rural areas which can lead to strong demand for company’s products. The launch of smart cities programme has huge potential in driving the growth for the company’s products. The increasing urbanization, growing middle class and rising income level will be positive for the company.
  • Changing Business mix: Over the years, the company has changed its business mix by venturing into contract manufacturing of ACs, ACs for railway coaches, air conditioning equipment for metro rails, etc. Over the last few years, the company has moved up the value chain by venturing into contract manufacturing of ACs for its customers and also started selling AC’s under its own brand. This foray into the segment has ensured higher topline growth and better economies of scale, resulting in higher profitability. Moreover, company is now able to provide complete solutions for its customers, who were earlier sourcing coils from them and then getting assembling of ACs from other players.

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  • Metro Rail Projects: After the success of Delhi metro in expanding the connectivity and decongesting the roads; other state governments are also investing heavily in Metro rail projects. There are about 10 cities across India where metro rail projects are under development. Lloyd Electric will be one of the major beneficiaries of the Metro projects with their previous track record with Delhi Metro. Their margins on such projects are likely to be higher than their average margins. The projects executed for Delhi Metro earned margin of 16-18%. It is a regular OEM supplier of AC manufacturing units on turnkey basis to Indian railways. Indian railways which has been announcing aggressive capital outlay for development of Railway and ministry inclination towards adopting the PPP (Public – Private partnership) route for investment in railways is envisaged to help Lloyd Electric as it is a preferred candidate of Indian Railways.
  • Launch of new products: Company has recently launched new products such as Refrigerator, room heater, pop up toaster, sandwich maker, Halogen oven, CCTV camera and washing machine. The launch of these new products along with strong marketing campaign in last one year will help company to enter new markets and gain market share in Air conditioners.
  • Recovery in Europe: Company has 2 subsidiary operating in Europe. Lloyd Coils Europe and Janka Engineering were acquired by the company in order to expand their reach in European markets. The contribution of those companies has remained subdued due to European debt crises. The stimulus plan of European central bank aimed at boosting inflation and reviving economy has started showing the results. Eurozone is likely to grow modestly in next year and pick up in investment cycle will benefit the company.

Financial Performance:

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Lloyd Electric & Engineering Ltd reported strong quarterly performance for 4Q 2015 due to strong performance of OEM and packaged Air conditioner. Revenue for the company stood at Rs 618.3 crores, up by 21.1% YoY.  EBITDA for the quarter was at Rs 102.2 crores and EBITDA margin stood at 16.5%. EBITDA margin increased from 11.8% in Q3 to 16.5% in Q4 on account of higher revenue and lower cost. The fall in prices of commodities like Aluminium, copper and Crude oil has reduced cost for the company.

Consolidated revenue for the year ended March 2015 stood at Rs 2,172.6 crores, up by 22.3% over previous year. The growth in consolidated revenue was lower than India business due to de growth in European subsidiaries. During the current financial year company has spent heavily on advertising and marketing of their newly launched consumer durable products and for room AC’s. Company has spent about Rs 35 crores on the marketing campaign. The campaign was successful in brand building and company was able to penetrate into newer markets and increase its market share in room AC’s.

For FY 2015-16, company is likely to witness strong growth across all its segments.  The consolidated revenue for the company is estimated to increase by 18%. The consumer durable segment and room Ac’s growth will be the key revenue driver for the company. The company is likely to get new orders from Indian railway and also from the Metro Rail projects across the cities like Kochi, Mumbai, Gurgoan, Hyderabad and Chennai. The European subsidiaries are likely to benefit from the recovery in Eurozone; with Eurozone GDP estimated growth of 1.7% for 2015 and 1.9% for 2016.

The further fall in commodities prices will be big positive for the company. The commodities like Aluminium copper and crude oil are trading at their multi years lows and the outlook is even bleak with Chinese economy slowing down and lowers projected demand for those commodities. The consolidated EBITDA margin for the company is likely to increase to 13% from 11.1% currently. The expansion in margin will come from lower commodity cost and lower advertisement spending as compared to previous year. The sharp depreciation of rupee can impact the margins negatively as more than 50% of raw material is imported.  While there will be some increase in the interest expenses on account of higher working capital loans. The total debt in company’s balance sheet stood at Rs 741.92 crores which will increase further o account of higher working capital loans requirement as business expands. The Eps for the Lloyd Electric will increase to Rs 33.62 per share, a growth of 34% over previous year.

Valuations:

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The stock is currently trading at an attractive FY16 P/E of 6.4x and EV/ EBITDA of 4.4x respectively. Since there are no exact comparable peers with same business model, I have looked at the valuations of some of the large players in the AC industry. On comparison, it is observed that most of the large OEMs like Voltas, Blue Star, etc are trading at premium valuations of 16-21x one year forward earnings. On the other hand, Lloyd Electric being a part of the same industry with similar growth prospects and relatively better margins is trading at a significant discount. I believe that the valuation gap between the company and the OEMs should reduce and hence, there is a scope of re-rating on the scrip and stock should trade at the Forward P/E multiple of 11x. With FY16E EPS of Rs 33.62 and P/E multiple of 11, the fair value for the stock is Rs 360 with Six Month to Twelve Month Time Horizon.

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(* Prices are Adjusted Market Prices. Source : Yahoo Finance) 

Lloyd Electric possess the Characteristics of both GROWTH & VALUE components.

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