Lloyd Electric & Engineering

Sustained growth in the production of white goods, as suggested by the consumer durables index (in the IIP) indicates that air-conditioners (ACs) are back in demand, after a slump last year. This provides a good case for investing in the stock of Lloyd Electric and Engineering, a manufacturer of AC coils and fully-built AC units, mostly on a contract basis. Jump in the company’s sales and operating profit margin in the September quarter also suggesta recovery, after a lacklustre FY-09. Lloyd Electric’s clients include leading brands such as Samsung, Voltas and Electrolux.
Investors can consider the stock of Lloyd Electric with a one-two-year perspective. At Rs 56, the stock trades at eight times its trailing one-year earnings.
While the discount to larger players such as Voltas and Blue Star may be justified given Lloyd Electric’s smaller size, the company’s earnings growth is likely to outpace the valuations currently awarded.
The company
The company’s sales grew at a compounded annual rate of 24 per cent over the last five years to Rs 585 crore in FY-09. Lloyd Electric’s heat exchanger coils now go into all major branded ACs such as Voltas, Blue Star, LG Electronics and Samsung.
This apart, the company is also into making of AC units for rail coaches and the normal window and split-type AC units for the retail market.
Last year, the company set foot in the European coil market with the acquisition of Luvata Czech. Luvata Czech sells heat exchangers for AC and refrigeration units. This acquisition has not only helped mere geographic diversification but also provided access to high-end technologies in coil manufacture.
Sales drivers
After a blip in FY-09 (with sales down 12 per cent), the company has seen a significant recovery in sales in the last two quarters, coinciding with the revival in the consumer durables index — a constituent of the Index for Industrial Production (IIP). The pick-up in demand for air-conditioners from the household segment has worked well for Lloyd Electric.
Though the company’s direct share in the retail market isn’t high, its sales have been growing as a result of coil demand from branded AC players. After a 6 per cent decline in the March quarter and a flat growth in the June quarter, the company’s sales grew 30 per cent in the September quarter.
The company’s European operation is also expected to gather steam once slowdown worries subside and corporate spending resumes. This would provide further traction to sales growth.
In the domestic market, the lull in demand in the office space — a key driver for the company’s revenues, appears to be making a slow revival especially in the metros. Industry reports suggest that the demand for office space is likely to be higher by 53 per cent in 2011 compared with 2009.
Lloyd Electric has benefitted from the increased government spending. The company has large metro rail orders from the Government. More metro projects/addition of metro rail coaches can be expected to translate into higher orders for Lloyd Electric, given its prior qualification in this segment.
Profit derives support
Lloyd Electric has been making efforts to reduce costs.But the unprecedented rise in commodity prices swallowed the savings made in FY09. Besides, lower demand for its product may also have forced the company to lower prices. Lloyd Electric’s operating margins fell 3 percentage points to 9 per cent in FY-09.
The company’s contract business, however, appears less vulnerable to cost increases as majority of contracts have been booked on a cost-plus margin basis. Lloyd Electric’s business of manufacturing AC units for OEMs also support overall profit margins, given its backward integration of using coils produced in-house.
FY-09 was a bad year for the company with profits eroding by close to 60 per cent to Rs 20 crore on fall in sales and rise in commodity prices. However, between 2004 and 2008 profits after tax grew 70 per cent annually.