Leels Pathetic valuation – 16 Jul 18:
|PE||Price to Book value||Auditor resigned|
Price to book value < 0.5 AND
Sales > 1000 AND
Net Profit last year > 0
Note on Q4fy18 Results – 8 Jun 18:
They never issued such press release that is so detailed, seems minority share holders mails along with Porinju worked.
These guys should have given this type of press release after q1fy18 considering the current one is still vague. Share then would have moved to 500 plus levels, but they never want that.
Now, had they given press release on the 30 may 18 itself, share would have fallen max 180 levels first and max another 10/20 in the last couple of days.
They accepted receiving of 1458cr, so what is left and why they are saying gains of only 600cr? It seems either they did not receive the money fully related to Lloyd inventory and receivables or did not make entry into balance sheet or diverted the money. Though they may try to write off max amount to save tax, its difficult to understand the write offs in hundreds of crores as its not into commodity business and also Lloyd should have hundreds of distributors and its difficult to believe all of them default at once.
Look at deal from capital gains view point:
|B||Net working capital||92|
|C||Total Consideration received (A-B)||1458|
|C||Total Consideration received||1458|
|D||Capital Gains Tax||153|
|E||Capital Gains after tax||510|
|F||Total Other expenses(C-D-E)||795|
|F||Total Other expenses (G+H+I+J)||795|
|G||Unserviceable left over Inventory||?|
|I||Deal associated costs/expenses||?|
|J||E Waste Management expenses||?|
Look at deal from how they used the money they received:
|C||Total Consideration received||1458|
|D||Capital Gains Tax||153|
|L||Capital work in Progress||315|
|M||Balance with promoters(C-D-K-L)||890|
|M||Balance with promoters(C-D-K-L)||890|
|O||Deal associated costs/expenses||?|
|P||E Waste Management expenses||?|
So many questions are still left unanswered.
Coming again to press release, they mentioned about sale of Janka which is making loss on revenue of around 70cr. They also mentioned about liquidation of Noser Germany which has revenues of around 20cr. So overseas revenue will fall 100cr, but from fy20, we wont see losses from overseas.
From the interaction with other investors, it seems they already have 3 assembly lines each make around 1000 acs per day, so the capacity is around 10 lakhs. Also in press release they pointed out they are trying to put new plant near to port, to make exports easier.
Now we need to get true figure of fy17 sales eliminating all tax nos from there, and doing the same to fy18 as well to have true comparison,
Note: Annual Degrowth of 15%. If we consider increase in taxes by around 3% due to GST, then degrowth may comes to around 12%.. This may not be that bad when mgmt want low nos in a difficult yr, apart from poor pickup of new stock due to gst, demo, soft summer, change in mgmt internally and externally etc
GST date 1 Jul 2017
While calculating the above nos, Intesegment added to q1 and annual nos.
Before GST, consumer durables attracted VAT which varies from 12.5% to 14.5% depending on the state and around 8.6% excise duty including the cesses. Not sure about taxes on heat exchangers.
Post results before this press release, share got corrected to 130 levels and is still trading around 136, which makes it attractive like before when it was trading at 200 levels, considering even the new book value of Rs 322.
On std alone earnings, QoQ its huge disappointment, considering the drop from 760cr to 400cr which is 47%, profits too took huge drop considering overhead costs which remains same. YoY its not that bad, considering the 15% drop as described above table.
Hope company bounce back to 2000cr std alone revenue in normal weather conditions, book value too improves to near 400 levels as and when the books are closed related to Lloyds sale, and also inventory and receivables drop to manageable 700cr odd levels from current 1400cr. These things will help Leel to post min 100cr profit consistently and at current market cap of 550cr, deleveraged balance sheet of 2000cr makes it a good play on CD sector considering the huge scope in the sector.
Leels PantNagar Plant(Latest video considering new logo)
CD sector valuation –
Most of the nos are consolidated and on trailing 12 months basis. Leels nos are std alone, considering write offs in one subsidiary. Leels std alone nos also excluded CD sales along with exceptional gains on account of sale of of CD division to Havells.
|CD Sector||Price – 9 Jun 18||Trailing 12 mths Eps||PE||BV||P/B||Trailing 12 mths Sales cr||Market Cap||Market cap /Sales||Current Assets –||Debt||Current Assets /Debt||EV – Screener||EBITDA Trailing||EV/ EBITDA|
I think working results are ok, except promoters attitude, still they are using many ifs and buts. Now also they did not give the break up of 1550cr. While they have shown 950cr, they did not give the breakup for the remaining 600cr but they used the term subject to closing adjustments, and so there is a chance of declaring further exceptional income. But as of today with just 60k first they pulled the price to 280 and later with another 100k they pulled it all together 240 levels and I dont think they can keep it at 250 levels for long considering the value as well as very few short termers left with the leel.
On nos, topline growth of 14% QoQ is good where economy is still feeling the heat of GST and Demo. Its pertinent to note that Havell and many CD players did not report good nos this qtr, exception may be IFB.
H1FY17 topline 869cr VS H1FY18s 956cr, 10% growth not bad when we consider Demo and GST,
Q1FY17 topline 322cr vs Q1FY18s 282cr, a growth of 14%,
Expecting min of around 2400cr topline for fy18 vs 1950cr fy17, factoring growth of 20%.
Packaged air con 171cr vs 141cr, growth of 21%
Heat exchanger 152cr vs 141cr, growth of 8%
EBIT margins 14cr vs 20cr fy17, 30% degrowth, here we need to consider rise in raw material prices of around 20 to 50% across various commodities. Going forward hedging, good inventories , low debt should help them in this regard.
Book Value 392
Price to book value comparison –
Leel Electricals —- 0.65
Voltas Ind ———– 5.38
BlueStar ———— 6.81
Mirc Electronics — 7.35
IFB Industries —– 9.35,
Whirlpool ———– 9.89
DixonTechno —— 11
Hitachi ————– 13.04
Symphony ——— 20.49
Long term debt has come down from 59cr as of 31 mar 17 to 5 cr
Short term debt has come down from 1360cr as 31 mar 17 to 540cr, mainly includes borrowings and trade payables of 425cr and tax liabilities of 96cr. On short term debt, they can reduce further using bank balance of 280 and fy18 profits of 100cr, so we can look at short term debt of only 200cr debt by yr end.
As of 31 Sep 17, Leel has inventories of around 600cr, 280cr bank balance, 315cr(205cr increase – probably meant for advance payment towards new machinery) other current assets, receivables of 437cr its still a value buy and deep value buy if it comes to around 250cr. If they can repay all short term debt using bank balance and other current assets, still they are left with 600 cr inventories and receivables of 437c and 6 indian manufacturing plants all for 1100cr.
Background – As of 27 Sep 17
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.
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.
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.
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.
(Rs. in Cr.)
|EV / EBITDA
|Debt to Equity
Ratio(D / E)
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
|CMP / BV||Mar Cap
|M cap / Sales||ROE
|Lak. Mach. Works||6006.6||31.57||1447.73||4.15||6580.53||2.56||12.11|
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
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.
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%
Overseas developments as per q4fy17 concall:
“since January we kicked off large deliveries of heat exchangers to customer Schneider Electric, big player in the field. In railway HVAC we have been awarded first contract from customer PESA, which is a leading player in Central European region. As an outcome order book of the companies has grown by about #3 million during the last three months, which indicates that this year’s summer season should be stronger than the one a year ago.
Second highlight of the year was process of reduction of cost. These decreased by roughly #0.5 million mainly things to downsizing actions in Janka. Beside a fixed cost we have seen also slight improvement of variable margin, things to the actions taken in procurement, engineering and labour productivity; however, that potential has not been utilized so far fully and more actions will be taken in coming weeks.
As last point, during recent months we have initiated process of a gradual transformation of the business strategy towards more specialized market segment like energy, industry where the market seems to be less competitive and our margins are generally higher. In the coming months, we are going to give more sales focus to these segments and we also need to adopt internal organization to support this overall goal. As part of this activity, we would also like to cooperate more tightly with our parent company to explore possible opportunities in India as we believe there are huge prospects particularly in energy segment where we hold unique know-how certification experience and all these could be brought to India and offered to the market with the help of other holding companies.”
Notes from Leel Chairman’s fy17 AGM speech
I dont want to repeat what is already mentioned earlier, so just add some thing new.
“The Company has already started the manufacturing of inverter air conditioners and extensively working on development of Heat and Cool Split AC with R-410A and R-32 refrigerants.
Our recent acquisition of Noske Kaesar Rail & Vehicle business reflects our philosophy to enlarge and deliver significant business synergies especially through technology absorption and increased access to the global Rail & Defence market.
Your Company is also extensively working on attracting opportunities in the Defence and
Aviation Sector by designing a complete Oil Cooling System for its latest Aviation and
Defense applications and strengthening its quality systems and production processes by
becoming ready for AS9100 and NadCap certifications.
Having its core strength of manufacturing the mechanically bonded radiators, our products are supplied to international Railway for their locomotive engines. During the year, our Bhiwadi facility got approved by international rolling stock manufacturers for sourcing their HVAC needs. To accommodate the increased demand from international customers, a new test lab has been installed for testing of Railway HVAC units meeting with international standards.
In the international market, our recent acquisition of Noske Kaesar Rail &Vehicle (NK R&V) business has given us the access to the international Railway and Defence market in HVAC segment. NK R&V has designed and developed a new roof mounted air conditioning unit which eliminates the requirement for the standard type of power inverter currently utilised in our locomotive HVAC units. The unit has been through an array of performance testing with positive results and we plan to market the solution to various locomotive builders and maintainers for projects around the world.
Currently main business for Janka is Air Handling Units, the strategy will be shifting towards products with higher added value, particularly Industrial Cooling and Rail HVAC. Janka has secured large project to supply AHUs for prestige Jaguar car production plant in Slovakia. It has also secured first project from Pesa, a leading Central European rolling stock manufacturer, to deliver AC units to trams for city Bydgoszcz in Poland during years 2017-18. “