LEEL Electricals : An Undervalued Player from Consumer Goods sector

This is a Guest Post from Our Regular Blog Reader Jeetendra Bhattad and his friend Ram.

About Leel Electricals Ltd.

Leel Electricals Ltd., incorporated in the year 1987, is a Small Cap company (having a market cap of Rs 1203.11 Crore) operating in Consumer Durables sector.

Leel Electricals Ltd. key Products/Revenue Segments include Consumer Durables which contributed Rs 1885.46 Crore to Sales Value (54.90 % of Total Sales), Air Conditioners which contributed Rs 936.01 Crore to Sales Value (27.25 % of Total Sales), Heat Exchanger & Components which contributed Rs 603.93 Crore to Sales Value (17.58 % of Total Sales), Other Operating Revenue which contributed Rs 8.61 Crore to Sales Value (0.25 % of Total Sales)for the year ending 31-Mar-2017.

For the quarter ended 30-09-2017, the company has reported a Standalone sales of Rs 322.51 Crore, down -65.05 % from last quarter Sales of Rs 922.88 Crore and down -36.84 % from last year same quarter Sales of Rs 510.61 Crore Company has reported net profit after tax of Rs 731.01 Crore in latest quarter.


The company’s top management includes Dr.Geeta Ajit Tekchand, Mr.Achin Kumar Roy, Mr.Ajay Dogra, Mr.AVM Surjit Krishan Sharma, Mr.Bharat Raj Punj, Mr.Mukat B Sharma, Mr.Ramesh Kumar Vasudeva, Ms.Deepti Sahai. Company has Goel Garg & Co. as its auditors.
 As on 30-09-2017, the company has a total of 40,332,260 shares outstanding.

LEEL Electricals Ltd is a publicly traded company with its headquarters in New Delhi. Leel Electricals(earlier lloyd electric & engineering ltd) got its new name, post sale its Lloyd brand and consumer durable division to Havells.

It is the leading and largest producer of Coils / Heat Exchangers (Fin and Tube type) in India, serving the entire spectrum of HVAC & R industry in the country as well as OEM’s in North America, Europe, Middle East and Australia. Heat exchangers and the component segment caters to the manufacturing of heat exchangers and the evaporator coil for the heating ventilation and the air conditioning industry and copper and brass heat exchangers for the railways, heavy automobiles and other industrial applications and the component business of sheet metal.
The company also manufactures Air conditioners for the Indian Railways, Metro Rail and Buses at its Bhiwadi factory. As an Packaged OEM player it supplies to all the leading players like whirlpool, Voltas, bluestar, Hitachi, Daikin etc.

One may take a look at its client and Plant location list from their own website;

Leel Customers – Leel Customers    Leel Plant Locations – Plants

Little bit on balance sheet:
It sold its consumerable division to Havells @1550cr and still has business which can generate revenue in excess of more than 2300cr and profit of around 120cr. With sale leel is going to become debt free, book value comes to around 450 to 500rs, eps of around 30, current market cap is just 760cr, cmp is 190.

FY17 results:

The OEM and the packaged air conditioning segment: The segment revenue and the results stood at 936 Crores and 60 Crores as against 880 Crores and 50 Crores respectively during the last year. Here I am not mentioning CD business, which was sold, but we need to add intersegment revenue of around 400cr which was earlier part of CD business. So OEM revenue for fy17 is actually around 1350cr.

Heat exchangers and the component segment: The segment revenue and the results stood at 604 Crores and 66 Crores as compared to 611 Crores and 82 Crores respectively during the corresponding quarter of the previous year.
International presence: The wholly owned subsidiary has reported a total income of 50.44 million euro (around 350cr rupees) and EBITDA of 0.51 million.
So Leels total topline without considering CD sale for fy17 was around 2300cr.

Why Leel?
The penetration level in India is still also very low as far as room air conditioner is concerned and is expected that the penetration level will go up faster and faster in times to come, because of increased power availability, its quality and the per capita income of the Indian residents.
Leel has added advantage in terms of production capability, capacity and productivity, because all critical components are made inhouse, so the cost of transportation for bringing material in the factory or packaging cost bringing from outside or even taxation part of it. Leel makes all of its critical components except compressor or motors, which gives edge to it in terms of benefit of productivity, price, quality, and cost. Except leel all other front end players either assemble the products or source directly from players like Leel.
Leel is perfect proxy for air conditioning industry and to add that its available at mouth watering levels @ 190. Just go thru the valuation part, to understand how deeply the stock is discounted in the current market, considering industry and the market.

Valuation:

I dont think we can find any cheaper stock than this in the current market. Promoters indifference, play by operators, lack of fund action may be the reason for its dismal vlautaion. Stock is trading with huge discount, whether we compare oem sector or with listed ac players.  Most of the players in OEM/AC sector are trading at more than 4 BV and at around 40 plus pe multiples.
If we consider havel sale P/B, D/E will further go down. Post CD sale, networth per share will increase to around 450 to 500 levels. Its natural to expect min 10% ROE in business else no point doing the same and better to invest in FD. May Leel cant generate 10% roe in the first yr, but down the couple of yrs we can easily expect 10% returns considering the opportunities and mgmt expertise. So we can expect 50 plus eps if not more in couple of yrs.

Leel Vs Other CD players: Quick comparison as of 28 Aug 17, reveal how low its trading despite not considering the changes to its balance sheet post sale.

Company	Market Cap (Rs. in Cr.)	P/E (x)	P/B (x)	EV / EBITDA (x)	RoCE (%)	Dividend Yield (%)	Debt to Equity Ratio(D / E)
Leel Electricals	745.74	10.68	0.83	7.44	13.23	11.6	1.13
Blue Star	7158.68	55.08	9.46	28.43	19.61	1	0.42
Voltas Ltd	17239.09	31.92	5.21	22.56	18.9	0.67	0.03
IFB Ind	2820.6	59.3	6.08	26.63	11.62	0	0.09
Johnson Controls-Hitachi	5454.04	74.22	12.45	32.06	22.38	0.07	0.28
Symphony	8876.14	59.32	19.21	36.41	62.7	0.22	0
WhirlPool	14861.55	46.13	9.99	24.74	32.94	0.26	0

One may say, LEEL is now OEM rather than AC Consumer Durable player, still as a only listed OEM proxy to industry does not deserve this fate. Industry average pe is around 50, pb is more than 6 and now Leel is debt free as well.

Leel Vs other OEM players:Even if compare with other debt free engg companies in other sectors, its clear that many companies are trading around 30 pe, 4pb, 4 times sales etc

Name	CMP Rs.	P/E	B.V. Rs.	CMP / BV	Mar Cap Rs.Cr.	M cap / Sales	ROE %
Cummins India	891.85	33.78	143.01	6.24	24722.08	4.79	20.29
Schaeffler India	4225.45	31.55	939.9	4.5	7022.7	3.8	14.31
ISGEC Heavy	5892.8	19.98	1704.95	3.46	4332.95	1.07	19
Lak. Mach. Works	6006.6	31.57	1447.73	4.15	6580.53	2.56	12.11
Greaves Cotton	145.25	20.49	39.4	3.69	3547.1	2.16	17.28
Timken India	722.55	54.13	94.09	7.68	4913.34	4.58	16.92
Kirloskar Indus.	1463.3	18.89	910.72	1.61	1420.86	1.25	8.88
LEEL Electricals	184.9	9.98	209.02	0.88	745.74	0.25	12.47

Info about OEM companies that plans to raise money thru IPO:
Take a look at Dixon Technologies, planning to raise 599cr (60cr fresh issue and 539 OFS). Issue size represents 30% of post issue paid up share capital. Though not perfect rival to Leel, Dixon comes closer being OEM of TVs, washing machines, mobile phones, lighting etc. The company reported revenue of Rs1,645.6 cr in fy 2016-17 vs Rs1,253.6 cr in fy2015-16. It reported a profit of Rs46.4 cr in 2016-17 as compared to a profit of Rs36.4 cr in the previous year, its fy17 EBITDA margins are just 3.75%.
Post ipo @ upper price band of Rs1766, Dixons will have 250 cr networth, 2000cr market cap and 2009cr EV. Also with FY17’s EPS of Rs 42.64, Dixons P/E will ve 41.41x, P/B will be 8, EV/EBITDA will be 32.  Only positive indicator for Dixon is RONW is 24.4%.
Coming to Leel, post sale, Leel estimated networth will be around 2000cr and EV may be 2500cr but current market cap is just 850cr odd(4 Sep 2017). So Leel is trading at just 7 forward PE, half P/BV, 3.5 EV/EBITDA. Refer the following links for more details.

Post listing as of 18 Sep 2017, Dixon got listed around 2700 and is trading around 2972 commanding market cap of around 3270cr, implies Dixon with networth of 250cr is trading 13x its networth and 70x its earnings. While leel is just trading at half its networth and 8x earnings.

Bloomberg - All that u need to know on Dixon

DSJ - IPO Analysis - Dixon Technologies

SPTulsian – Dixon IPO review

Another company which is real competitor to Leel, in Packaged AC OEM sector is Amber Enterprises.  Amber made a profit of 18cr with networth of 250cr, debt of 460cr as of 31 mar 2016. For fy17, its revenue may be around 1500cr with 9 to 10% EBITDA margins, . Also Ambers networth as of fy17, may be around 400cr(considering fresh equity infusion of 100cr and fy17 profit of around 50cr). Considering that it want to raise 600cr may be @ 25% equity dilution market cap may comes to around 2400cr. So with this limited info I am expecting Amber may come to ipo @ 40 pe, 6 p/bv.
Even on these parameters, lloyd should command 4000cr market cap. Refer the following links related to Amber ipo.

Moneycontrol – Amber, maker of ACs and washing machines for LG, Voltas, plans IPO
Crisil – Amber Enterprises
India Ratings - Amber Enterprises

Concerns: On the negative side, promoters indifference is clear. They did not conduct concall for this qtr nor they did not disclose the profit made in Havells sale as a part of q1 results. May they do not want increased market attention, as slump sale profit and updated balance sheet, will make it one of the cheapest stock in the whole market.
Business model of B2B business, have high level of inventory as major raw materials like copper, steel and aluminum are imported which involves high lead time.

Excerpts from q4fy17 concall:
“Bigger OEM customers used to think that in the market place we are competing with them and they were not very keen or very interested to do business. Some customers openly told us the same, but now after sale of Lloyd Brand we expect all those customers to work with us closely and that will enhance our business prospects as far as OEM business is concerned. OEM business had been supplying the products to almost all major Indian brands in the India and also havs good presence now in overseas market where we are exporting the product in Korean Brands to neighbouring countries like Nepal, Sri Lanka, and entire Middle East including Iraq and also do a couple of African countries. The products have been developed by us locally in India and got international accreditation that is safety certification, EMI/EMC certification as also demarked, which is necessary for selling the products in the gulf market. Successfully our products got approved and are doing pretty well and we are getting repeat orders from almost all the customers. Apart from these two segments we also want to enter in European market over the next one to two years’ time by selling the air conditioners in OEM brands to their collective months requirement.”
“We have almost ready with almost all the products meeting the requirement of 2018. The new product that is inverter air conditioners have been developed by us successfully and has been put in Indian market and it is quite encouraging that we are getting repeat orders from the customers and the inverter ACs are doing pretty well in Indian market. The product development activity is going in a very fast pace because challengers are too many. The global business is changing in terms of energy conservation, the change of refrigerant because of Montreal agreement. Globally two refrigerants mostly used in the air conditioner getting phased out and new refrigerants are coming. The new refrigerants are 401A, R32, R290 are getting popular and we have decided to go for R32 refrigerant effective January 18, 2018 as one of the refrigerant to increase the efficiency of these products and also meeting the global environmental requirement. Both of the products are underdevelopment and partly have been developed and we still have couple of months to put the product in the Indian market as far as new refrigerant is concerned.”
“The present plant capacity is around 7 lakhs and with the enhanced capacity what we have planned to do by way of balancing the equipment and adding equipment it can go about 9 to 10 lakhs.”
“The Havells set for big plans for increasing the Indian postioning of the product in terms of volumes, market share and that should give growth to us also for increasing the supplies to Lloyd for the next three to four years every year. The plant capacities, machineries, equipments are getting augmented, added, balanced taking care of the new regulations as well. Till now we have been operating the dayshifts, but now we are planing to operate in nightshifts also.”
“currently only 40% of Indian Railway coaches are built with ac, which is likely to be increased to about 60% over the next few years. This definitely gives an interesting opportunity to the company. In metro segment, the company has made foray into manufacturing of HVAC to be used by DMRC through technology transfer with Toshiba, Japan. Access to Toshiba technology will help company into bidding favorably for metro projects for times to come, and also Make in India initiative, would further strengthen future prospects in the segment. Now on the defense segment, Indian corporates are set to bag large defense orders and then Make in India program of Government of India. This will bring additional opportunity for participating into defense segment through our existing product portfolio.”

“We would like to bring to your attention of our foray into aviation segment thereby we are L1 in helicopter oil cooler segment and oil coolers for about 100 helicopters will be supplied by us. So this will be an interesting slot for the company thereby we will be participating into the initial segment. We are already supplying HVAC air conditioning unit for heavy vehicle factory, which is an ongoing business and also we are participating into other different equipment opportunities, which are presenting themselves, so in this regard we are also looking for our other opportunities through participating along with other bigger players either through joint venture.”

“Except compressors all other parts like coils, all plastic parts, all sheet metal, powder coating, all copper fitting and parts are made inhouse. Compressors are purchased outside because they have different technology and the volume of business what we are doing that does not permit to invest. To make compressors one need to have volumes of around 35. India has got now one compressor company setup in Ahmedabad by the name of Highly-Hitachi, their capacity is about 2 million and other compressor companies are going to come by 2018 last quarter, which will be another about 3 million, so we can say about 50 lakhs of compressors will be made in India, which presently is being sourced from other countries and things is special technology. The only compressor manufactures are investing presently and the other Indian companies like LG and all that are also exploring to make compressor in India.”

“We have started doing the indoor unit, which is a part of the split air conditioners from last quarter of last year, which earlier we have been importing from foreign countries. Last quarter of last year after getting the moulds and tools made we started doing it and that is giving a very good result to us and that also helps us in terms of developing the air conditioner with new energy efficiency and also inverter air conditioner, so our plans are to invest on indoor unit in time to come so that we become self-sufficient as far as split air conditioner is concerned in Indian market.”
“EBITDA for the residual business which is a B2B is in the range of 8% to 10%
Recent Developments :

Amber Enterprises IPO to be launched on 17th January at 855 price band commanding 66 p/e with an FY17 eps of 12. Leel on the contrary trading at 12 p/e with 500+ crore of cash on books.

Flipkart enters into agreement with LEEL for manufacturing of Air Conditioners for MarQ brand(owned by Flipkart).

In all the future is bright, without CD business the topline is going to grow and due to reduction in debt the increase in bottomline is going to be exponential Hence on any parameters this is a must buy Stock.

Is LEEL Electricals still cheap?

Great news for investors – LEEL Electricals is still trading at a fairly cheap price. I’ve used the price-to-equity ratio in this instance because there’s not enough visibility to forecast its cash flows. The stock’s ratio of 16.85x is currently well-below the industry average of 29.9x, meaning that it is trading at a cheaper price relative to its peers. However, given that LEEL Electricals’s share is fairly volatile (i.e. its price movements are magnified relative to the rest of the market) this could mean the price can sink lower, giving us another chance to buy in the future. This is based on its high beta, which is a good indicator for share price volatility.

What does the future of LEEL Electricals look like?

NSEI:LEEL Future Profit Dec 25th 17

Future outlook is an important aspect when you’re looking at buying a stock, especially if you are an investor looking for growth in your portfolio. Buying a great company with a robust outlook at a cheap price is always a good investment, so let’s also take a look at the company’s future expectations. With profit expected to grow by 88.33% over the next couple of years, the future seems bright for LEEL Electricals. It looks like higher cash flows is on the cards for the stock, which should feed into a higher share valuation. 

What this means for you:

Are you a shareholder? Since LEEL Electricals is currently undervalued, it may be a great time to accumulate more of your holdings in the stock. With an optimistic outlook on the horizon, it seems like this growth has not yet been fully factored into the share price. However, there are also other factors such as financial health to consider, which could explain the current undervaluation.

Are you a potential investor? If you’ve been keeping an eye on LEEL Electricals for a while, now might be the time to make a leap. Its prosperous future outlook isn’t fully reflected in the current share price yet, which means it’s not too late to buy LEEL Electricals. But before you make any investment decisions, consider other factors such as the track record of its management team, in order to make a well-informed investment decision.
Price is just the tip of the iceberg. Dig deeper into what truly matters – the fundamentals – before you make a decision on LEEL Electricals.

Short Term Target 360 in Six Months , Medium to Longterm 500+ above 1 year.

Note : Views mentioned above are personal to GuestPost contributor Jeetendra Bhattad and his Friend  Ram.

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