lloyd electric and engineering ltd - a samsung in the making

Lloyd Electric and Engineering Ltd

A Samsung in the making

Oct-13

“AC” shall herein refer to Air Conditioners“Lloyd” shall herein refer to the company Lloyd Electric and Engineering Ltd“HVAC&R” refers to heating, ventilation, air-conditioning and refrigeration

Brij Raj Punj Group *

Fedders LloydLloyd Electric and

Engineering

$ 35 mi market cap group commenced commercial production of AC`s in 1957

Company manufactures Fabricated structures, Environment control systems

and Power T&D

Company manufactures Heat exchange coils, Air Conditioners, LED TV`s and

other consumer durables

Group Profile

* Not to be confused with Punj Lloyd

Product Profile

Lloyd is India`s largest manufacturer with the capacity to produce 1.4 mn coils/annum and more than 400 varieties of coils

Heat Exchanger Coils (major component of air conditioners)

Product ProfileConsumer Durables (also produces garment steamers, hot and cold air coolers)

0.8 ton to 4 ton window and split AC`s

22 inch to 55 inch LED, Full HD, Ultra HD and 3DTV

Company sells AC`s under the Lloyd brand and does contract manufacturing for other major brands

5000 dealers and 525 authorized service centres all over the country

Product ProfileCustomized solutions and Roof mounted AC systems to Indian Railways, Metro Rail and Buses

Company qualified as Category 1 supplier to Indian Railways

Railways give 80% of orders to Cat 1 suppliers

Customer Base

Major brands only stamp their nameLloyd does the real work

Company Time Line

1988• Starts manufacturing heat exchanger coils with machinery bought from

Burroak, USA

1995• Becomes India`s largest heat exchange coil manufacturer

2004• Contract AC manufacturing for other brands

2006• Issues GDR`s (Global Depository Receipts) and raises $ 29 mi from foreign investors• Stuffed with cash, company looking to acquire foreign HVAC companies

2008• Acquires Luvata Czech, one of Europe`s top heat exchange coil manufacturers• Starts supplying roof mounted AC units to Indian Railways and Metros

2013• Becomes worldwide supplier of HVAC&R for GE, Alstom and Bombardier• Rs 500 Crs of 11.25% non-convertible debentures privately placed in BSE

Company vertically integrated : Heat Exchange Coil to Air-Conditioner

Capacity Addition

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1990 1994 1997 2002 2004 2005 2013

Heat Exchange Coils

Air Conditioners

Millions per annum

5 manufacturing facilities spread across India

India AC Manufacturing

2010 India AC Market

Imported

Indigenous

1.6 mn units

2.6 mn units

Lloyd Produced

Others

An astonishing 20% of AC`s manufactured in India are by Lloyd

Source : March 2012 Lloyd Investor Presentation (The AC market since 2010 has not seen any substantial growth hence, can expect only minor changes)

Revenues and PAT over time

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Revenue (Rs Crs)

PAT(Rs Crs)

Low PAT margins Last 3-yr PAT average at Rs 42 Crs

Quality FirstUnderwriters Laboratories USA certifies company`s end products

Company ISO 9001:2008 qualified

International Railway Industry Standard (IRIS) certification awarded recognizing itscompliance with international railway industry for design and manufacture ofHVAC&R systems, making the company eligible to bid for international contracts

The Buzzwords : Eco-Friendly and Energy Efficient

Lloyd is not just a manufacturerIt is a technology driven company

Majority of Company`s AC`s 3 or 5 star energy rated

Developing a slew of products whichuse environment friendly refrigerants

Company at the forefront of cutting edge and environment friendly Micro Channel Heat

Exchanger technology

The Global HVAC&R Player

Lloyd International Subsidiaries

Luvata Czech Janka Engineering

-Czech based manufacturer ofcommercial heat exchange coils.Expertise in refrigeration and coldchain systems maybe used in Indiaby Lloyd in the future.

- Acquired by Lloyd for Euro 15 mi in2008

- Clients include GE, Carrier, Boschetc

- Czech based manufacturer of Airhandling units, blowers, industrialcoolers , heating and cooling coils

- Acquired by Lloyd for Euro 4.5 miin 2009

- Company also supplies coolingunits to nuclear plants. Lloyd maylook at technology transfer to enterIndian nuclear sector.

Strong support provided by Lloyd to both subsidiariesHas lent a total of Rs 43 Crs worth of loans

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Lloyd has managed post-acquisition pains well and is looking to go global with Luvata Czech

Luvata Czech Growth graph (acquired in 2008)

Revenue (Euro mi)

EBIDTA (Euro mi)

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EBIDTA Margins and the Way Forward

EBIDTA as % of Revenue

Low EBIDTA margins are a spoilerCompany looking to add value and directly reach the customer to

improve this

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Improving Value Mix

Coil Sales as % of Revenue

Excellent value addition since 2005From just coil manufacturer, company has moved onto the top of HVAC value chain

Delhi Metro and Indian Railways orders expected to have 20% margins

AC Sales as % of Revenue

Brand Building

Karan Johar roped in as brand ambassador in 2011

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Advertising Spend

Advertising spend (Rs Crs)

Company marketing itself aggressivelyBecoming a familiar face in cricket tournaments

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The Biggest Problem – High Working Cap Requirement

DividendPayout(Rs/Share)

Working Cap as % of Revenue

High working cap leading to negative cash flows Company with Debt Equity ratio of 0.77 taking up enormous short term debt to finance

working cap

Working Cap = Current Assets – Current LiabilitiesInventories and Receivables are main contributors to high working cap

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The Darling Stock – Until 2008

P/E(X)Market Cap (Rs Crs)

Stock trading at massive discount to 2008 levelsMr Market has neglected and forgotten Lloyd

The ResurrectionMarket Valuation, Promoter Reputation and High Entry barriers in the HVAC&R industry are main factors

- At CMP of Rs 33 and current market cap of Rs 115 Crs, company trades at P/E of 2.3 x and P/BV of 0.2 x

- Considering the company`s near monopolistic position and the huge barriers to entry, this is a serious valuation mismatch

- Small but consistent dividend payout for last 6 years- Promoters are pioneers in HVAC&R, hold 38% stake and have been

with the company for 25 years- Promoters have good standing with institutional investors, evident

from $ 25 mi GDR issue and Rs 50 Crs NCD issue- Working capital requirement as % of revenue is the only problem.

With the company improving its value mix and reaching the customer directly, this ratio is bound to improve

A hugely underestimated stock that is bound to be re-rated to P/E of 8x: a four-fold increase from present valuation

Thank You – The Pokaran Money Manager* Source: WSJ.com, Mr Buffet and his Elephant gun