Lloyd Electric and Engineering Limited

Lloyd Electric and Engineering Limited is India's leading air conditioner coil manufacturer and commands a 60% market share. Lack of organised competitors in it's business gives LEEL good business from branded A/c manufacturers like Blue Star, Voltas and LG. Additionally, the company has started contract manufacturing of air-conditioners for Samsung and Haier. The A/c industry has been growing at a CAGR of 30% for some years and a recent report by IBEF has projected the industry to grow at 32-35% (slide 8, here, pdf, 288 Kb).

1. The comany has seen sales grow at a 3-yr CAGR of 43% with FY07 sales closing at Rs. 497 crores . This year LEEL is expected to close at Rs. 630 crores in sales (26% over LY). Given the projections by IBEF, I expect LEEL to continue with a 30% sales growth.

2. Profits too have risen over the years. Last year, LEEL closed at a PAT of 42.96 crs. This year, I expect them to close the year at Rs. 60 crs.

3. LEEL's OPM has been increasing through the year moving (8.2%, 9.0%, 11.6%, 12.6%). This year too, they will show an OPM of 12.7%. However, we must note here that material cost accounts for 84% of the sales value. Any change in that, like rising copper prices, can hamper the operating margins. In such a scenario, it is important to understand if the company can pass on these costs to the manufacturer. Currently, it seems passing of costs will not be a problem.

4. EPS has grown over the years (1.63, 2.1, 6.2, 10.4, 13.9). FY08 expected EPS is 19.3. If that comes out correct and at a CMP of 99 rupees (11-Apr), we are looking at a price-earning ratio of 5.11.

5. Book value of LEEL is at 96.48 (Mar-07). Price/BV is hence at 1.04.

6. Peter Lynch in an excellent article written in 1989 (here) wrote about comparing P/E ratios over the year. (read the article anyway, Lynch talks extensively about his stock picking methodology). Since I couldn't figure out EPS on a quarterly basis for all years, I used Mar-31 data over a period of 6 years including my FY08 projections. The PE ratios over the years on Mar-31, were : 1.22, 2.61, 11.5, 14.5, 10.1 and 4.6. The stock has traditionally maintained a PE of just over 10 for the last 3 years.

Given the consistency of results over all quarters in FY08, I extrapolated the growth in EPS over each quarter and was able to calculate the PE ratio at 4 dates n FY08. This comes out to : 12.1 (Jun-31) / 10.7 (Sep-31) / 11.4 (Dec-31) / 4.6 (Mar-31).

7. The free cash flow of the firm is negative for FY07 on account of a huge capex on account of a plant in Dehradun manufacturing coils and airconditioners. There seems to be no marked capex for FY2008. (annual report here, pdf, 486 Kb)

8. Not too many mutual funds are lapping up shares of LEEL. It seems they too are bit by a paralysis of not investing in mid-cap and small-cap stocks. Even world investors are now saying that the Indian equity market is available at excellent valuations.

So, here we have a company which has - a) a very dull, obscure name, b) is a leader in it's segment with a 60% market share, c) has very few organised competitors, d) operates in an industry growing at 30% per annum, e) is growing at over 30% per annum in sales and profits, f) offers a P/E of 5.1 which is an aberration from it's normal levels of 10-11.

I found three research reports on LEEL :
SKP Securities (Oct 2007, CMP: 172, Target: 317, 18 months, here)
Angel Broking (Sep 2007, CMP: 187, Target: 238, 12 months, here)
PNR Securities (Dec 2007, CMP: 178, Target: 240, 12 months, I have the report)

LEEL is available at attractive valuations. I'd suggest a BUY !