Lloyd Electric: Khushiyon Ki Guarantee‏

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Category
Name1st Reco Date1st Reco priceTargetProspero RatingReport Date*
Lloyd Electric25July2014 Rs. 115Rs. 275 – Rs. 3007 / 1029Aug2014

We first recommended to Buy Lloyd Electric at Rs. 115 on 25Jul2014. We again suggested a buy on Lloyd Electric at Rs. 137 after it announced its 1QFY14 results. After our recent interaction with the management we further recommend a BUY on Lloyd at CMP of Rs. 159 with a target price of Rs. 275 – Rs. 300.

A) Company background:

Lloyd is a premier name in the air conditioning and consumer durable goods segment. It also is an original equipment manufacturer (OEM) to major AC giants in India and exporters to leading brands in Middle East and Africa. Lloyd also provides customized AC solutions for railways, defense and metro rails.

In the past 9 years, the company sales grew at a phenomenal growth of 22% year-on-year. In FY14, the company clocked its highest ever sales of Rs. 1800 crores (consol) and at Rs. 1450 crores (standalone).

The company sales can be broadly classified as following:

 

B) Investments arguments:

1. Room AC is no more a luxury but a necessity: Soaring temperatures, power availability and increasing affordability are three main reasons for increasing demand of room ACs. Though the market had stagnated in the last 2 years, in FY14 the demand has picked up very well. Nearly, 45 Lakh AC units were sold in FY14 with organized market share of 35 lakh units. India is now at the inflection point where it will see huge demand for ACs flowing from all classes of society. Once considered a luxury, the desire for better comfort and willingness to spend will drastically increase the growth in the segment. Based on the feedback of industry players, the AC demand can reach upto 80 lakh units in next 3 years. Quality players like Lloyd who are fully integrated and whose products are available at lower prices against competition will benefit the most. Just to add to the perspective, total AC demand in China is 5.5 crore ACs against that of 45 lakh ACs in India.

2. Fully integrated AC player: Lloyd started with manufacturing of AC coils and heat exchangers. However, it has now vertically integrated into making entire AC units and has reached to the consumer directly under its own brand – Loyd.. This has helped the company maintain much higher margins as compared to its competitors who get it manufactured with other suppliers. To make sense of margins, this will help you further.

  

3. Increasing the Product Basket: Lloyd has transformed itself from a coil manufacturer to an OEM supplier of finished ACs  to a direct consumer brand – Lloyd. Nearly 50% of the total standalone sales come from consumer durables which stood  at around 15% before four years ago. Within the consumer durables space, the company is selling ACs, LED TVs and has plans to introduce products in the Washing Machine and Refrigeration space. Within 2 years, Lloyd has been able to sell Rs.200 crores worth LED TVs with good operating margins. For non-AC products, Lloyd will not invest in plants but will get it manufactured through other vendors. The bigger product basket will help it  to establish itself as a strong consumer durables player. The success shown by Lloyd LED TVs is a testimony to that.

4. Aggressive Branding: The Company now has a reputable distribution network of 6,000 dealers as against 10,000 dealers of Voltas. The company intends to expand the network further and increase the penetration with the existing network. For this, the company has been spending heavily on advertisements and brand building. The advertising costs have risen from a mere Rs. 2 crores in FY11 to Rs. 19 crores in FY14. The allocation is further expected to increase in FY15/FY16 and will nearly match the budgets of Voltas and Hitachi. This could provide significant leverage to Lloyd.  In the comparison table below, we have highlighted the advertisement budgets by large AC manufacturers.  It is important to be note that inspite of sluggish industry growth in the past, Lloyd was able to increase the sale of ACs (OEM+Own Brand) from 300,000 in FY11 to 600,000 in FY14.

5. Competitive Position:

6. Railways and HVAC, a sunrise sector: Lloyd is the only HVAC Indian player who is IRIS certified. This certification is required to be eligible for railways tender at an international level. Recently, Lloyd bagged its first prestigious order from Bombardier Transportation, a premier Canadian company, for the supply of Roof Mounted Ventilation Units (RMVU) for railway coaches. Getting a marque client like Bombardier speaks for the quality of Lloyd. Within India, Lloyd is also a qualified “Category 1” supplier for Indian Railways. As a rule, 80% of all the railway tenders are awarded to “Category 1” suppliers. With the new government focus on implementation of pending rail / metro projects, we think that Lloyd will be the biggest beneficiary.

7. Subsidiaries to contribute positively: Based on the management interaction, the subsidiary companies have all turned positive and will continue to remain so. The company is expected to post much better numbers going ahead as the restructuring of operations within subsidiaries have been completed.

8. Attractive valuations: We expect, Lloyd to post EPS of Rs. 18 at the standalone level in FY15 and further expect all its subsidiaries to contribute Rs. 4 per share (In 1QFY15, subsidiary has already contributed Rs. 2 EPS). Based on expected healthy industry growth, Lloyd’s quality products, higher margins, branding exercise and potential operating leverage, we think that Lloyd is available at very attractive valuations of 7x current year earnings. We recommend a BUY on Lloyd Electric at current market price with a target of Rs. 275-300.

Key risks:

1. Sharp increase in raw material prices.

2. Heavy working capital requirement till the brand is more established.

Stock Performance:

 

*Report Date may sometimes be different from Recommended Date as drafting of reports can take time.

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