Lloyd Electric & Engineering: Buy

Investors with a 2-3 year perspective can add Lloyd Electric & Engineering to their portfolio, as the stock could emerge as a proxy for increasing consumerism in the country. Niche positioning as original equipment manufacturer of coils for a number of air-conditioner manufacturers, operational efficiencies derived from a fully integrated business and strong financials are positives for the company. At the current market price the stock trades at 10 times its expected earnings for FY08.

Lloyd Electric’s operations are forward integrated, ranging from making heat exchanger coils for air-conditioners to manufacturing window/split air-conditioners.

The company’s stock may not deserve the valuation commanded by branded players such as Blue Star or Voltas, but the current valuation discount suffered by Lloyd appears to be too steep, given its forward integration. As one of the leading coil manufacturers in India, Lloyd is an OEM supplier for leading AC makers including Blue Star, Voltas and LG. With possible spikes in demand for air-conditioners in the peak season (January-June), AC makers prefer to outsource excess demand for coil.

Lloyd is equipped with high quality imported machinery and has very few organised competitors; it may, therefore, continue to derive business from branded players. Further, the entry of new players, which is reducing margins for AC marketers, is actually a positive for Lloyd as it translates into new business.

Lloyd Electric has also started receiving outsourced orders for making window and split air-conditioners for some of the branded players. To cater to this demand, the company has expanded the capacity of its Himachal Pradesh unit and set up a new AC manufacturing plant in Uttaranchal.

That the company is also a supplier of AC package units (through a tie-up with an Australian company) for Delhi Metro Rail Corporation reflects its product strengths. We also view the company’s tie-up with a Korean company for making coil for frost-free refrigerators as a product diversification move.

The company’s sales grew at 36 per cent annually over the past three years and stood at Rs 496 crore in FY07. Operational efficiencies from its backward and forward integration projects ensured a 65 per cent annualised growth in operating profits over the same period. In terms of risks, a rise in raw material cost, especially copper, can dent operating margins. Tax benefits in all its three plants would, however, lend a boost to the net profits over the next few years.