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Monday, January 15, 2018
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;
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
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.
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.
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.
About Leel Electricals Ltd.
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