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Monthly Archives: October 2014
Fedders Lloyd – The Other Lloyd
A part of the Brij Raj Punj group of companies, Fedders Lloyd is our previous multibagger recommendation, Lloyd Electric`s, twin concern catering to industrial customers. Engaged in the Steel Structures, Power Projects and Environmental Controls business, the company spun off its consumer durable (air-conditioning) brand and business to Lloyd Electric a couple of years back.
SALIENT FEATURES
The following have been taken from different annual reports
– Company executed 55 meter Rail Over Bridge project at Moradabad (UP) for Ramky Infrastructure Limited, power plant project for BHEL, Suratgarh (Rajasthan), Mouda (Maharashtra) and Sagardighi (West Bengal), Chennai Metro Rail Project, BGR Boilers Private Limited, etc.
– Company was chosen from among 156 suppliers and was awarded a certificate of excellence as best supplier from GE-India, for their wind turbine manufacturing business.
– Company was awarded a project worth Rs. 2409 Million by Uttarakhand Power Corporation Limited for the works of “System Improvement, Strengthening and Augmentation of distribution system to bring down AT&C Losses, establish SCADA compatibility and improve quality of consumer supply in Dehradun town to be carried out under R-APDRP Part-B scheme on turkey basis”.
– In short span of 5 years, Fedders Lloyd has become eligible and qualified with Power Grid and other utilities, to execute of 765 kV Transmission Projects up to 103 km, on stand-alone basis.
– Company’s environmental control systems division, which provides HVAC Equipment to Defense, Railways, Telecom and other specialized application segments, during the year developed tower type designer air handling units for airports, hotels and shopping mall lobbies.
– Company crossed 100 nos of air conditioning and heating system installed in armored ambulance tracked military vehicle
For 2013-14, the Steel Fabrication segment contributed to 53% of revenues, the power projects segment contributed to 43% with the remaining from the Environmental Controls segment. Railways and Defense sectors are areas which are expected to fetch substantially higher margins and toplines in the coming future.
HIGH DEBT AND WORKING CAPITAL
The company has Rs 410 Crs of short term and Rs 100 Crs of long term debt on its balance sheet. High working capital requirement is the reason for this. Currently, the company is sitting on more than Rs 520 Crs of working capital.
REVENUES, EBIDTA AND PAT
The company has crossed Rs 1000 Crs of revenue per year for the last 2 financial years. The 2 year average EBIDTA has hovered around Rs 140 Crs/year and the 2 year average PAT has been at Rs 48 Crs/year, resulting in a meager 5% PAT margin.
HIGH RAW MATERIAL COST AND THE COMMODITY SLOWDOWN
Company`s raw material cost has averaged 80% of revenues for the past 3 years. Continuing with the commodity slowdown theme, we can assume that the company`s raw material prices have peaked and in the coming future, raw material costs are likely to decline, boosting the company`s bottom line.
With the biggest iron ore producers, BHP and Rio Tinto, bringing increasing amounts of low cost ore into the market, prices are only slated to go down. With lower steel prices, Fedders`s steel fabrication segment will greatly benefit.
DIVIDEND OUTFLOW AND CASH
The company has been paying out Re 1/share dividends for the past 4 years, entailing a yearly cash outflow of Rs 3.1 Crs. The company has always been low on cash and the situation will only improve if working capital levels decrease.
SHAREHOLDING PATTERN
Promoter and FII (foreign institutional investor) shareholding have been moving in opposite directions. While promoters only held 43% in 2011-12, FII`s at the same time held 22% in the company. By 2013-14, this has changed with FII`s holding 0% and promoters holding 47%.
SIGNIFICANT ACCOUNTING CHANGE
From 2012-13 to 2013-14, the company has made a significant accounting change with respect to depreciation. Depreciation expense in 2013-14 was calculated according to straight line method while in 2012-13, it was calculated using written down value method. The company does not give any specific reasons for this change and only mentions that the guidelines of Schedule 2 of the 2013 companies act have been followed. It needs to be noted that the depreciation expense for 2012-13 was Rs 28 Crs while for 2013-14, the same expense was only Rs 13 Crs, a significant difference which will have an enormous impact on the company`s bottom line.
Click to access EY-depreciation-of-fixed-assets.pdf
Above Ernst & Young link gives an overview of the differences between previous statues and the 2013 companies act. The guideline for CPP or continuous process plant is very different between the old and new statutes. Under the old rule, CPP`s were depreciated over 8 years of useful life, while under the new notification, their useful life has been extended to 25 years. If Fedders plants are CPP`s then the lower depreciation expense for 2013-14 makes sense. As is the case with all mid cap companies, more disclosure will be very helpful for the individual investor.
CAPEX SPEND
For the past 7 years, the company`s capex spend on fixed assets has averaged Rs 48 Crs per year. The company has been adding massive amounts of capacity from its time in 2008. For 2008, the company`s revenues were only Rs 450 Crs. From there, revenues have grown by nearly 2.5x and hence this capex addition.
The company in 2011 had setup a wind turbine towers and heavy precision fabrication and machining facility in Bharuch District, Gujarat. To quote Annual Report 2011-12
” The plant had an initial annual production capacity to manufacture up to 250 nos. of Wind Turbine Towers up to 3 MW and heavy precision fabrication of components up to 80 MT weight. The plant is one of the biggest precision machine shop equipped with floor boring and vertical turret lathe , sourced from UK and USA. The new facility is equipped with high end CNC plate cutting and CNC plate rolling machine imported from Germany and Italy. The facility is designed to meet with international specifications and produce components meeting with highest world-wide quality standards ”
Will this capex addition continue in the coming future? Again, more disclosure will be helpful.
VALUATION RATIONALE
The current market price of Rs 64/share values the company at Rs 200 Crs. The company has a book value of Rs 118/share and working capital worth Rs 530 Crs. Add the Rs 510 Crs of debt and we end up with an enterprise value of Rs 710 Crs. Taking an EBIDTA of Rs 150 Crs, the EV/EBIDTA comes to 4.8x.
COMPARISON WITH LLOYD ELECTRIC
For all those concerned with the company`s high levels of debt, high working capital and low free cash flows, you can take solace from the fact that at the time of this website`s recommendation of Lloyd Electric, that company also had very similar operating and financial characteristics. I see no reason why the same does not apply to Fedders Lloyd. Lloyd Electric, I believe, has become more prominent simply due to the fact that it is a customer focused business with higher visibility. The brand Lloyd, easily recognizable in air-conditioner retail stores, is instantly associated with Lloyd Electric. This visibility is fetching Lloyd slightly better valuations and more attention in leading newspapers and news channels. (Lloyd Electric with market cap of Rs 550 Crs, debt of Rs 580 Crs and EBIDTA of Rs 190 Crs trades at EV/EBIDTA of 6x, slightly more than Fedders EV/EBIDTA of 4.8x).
RECOMMENDATION
Low EV/EBIDTA, a price to book value less than 1, a net-net company that is very good at higher end manufacturing, low FII holding and promoters who have been in associated businesses for more than 50 years, Fedders Lloyd is a stock worth holding.
Disclosure: I will be buying at current levels
READERS BEWARE : Off late, the website has been receiving tremendous response. Website views, which were languishing at 8-10 per day, have averaged 100/day for the last 10 days. The reason for this, I believe, is the SKM recommendation and the stock`s subsequent surge. The website`s readers are asking me to name the next big multi-bagger in an increasingly euphoric fashion. Please note, I am not a magician and I do not have a magic wand to make recommended stocks go up by many times. My intent is not to make a quick buck. The intent is to pick small and mid cap stocks that will become tomorrow`s large caps. I have seen many ups and downs, have had to wait for excruciatingly long periods of time and have seen some big bets go terribly wrong. Do not expect every stock I recommend to be an SKM or an Avanti. You are investing at your own risk. My job is to perform extensive due diligence and come up with a reasonable basis for the valuation. I will try my best to be honest and transparent in this endeavor. Thank You and please keep the comments coming !
The end of the Commodity supercycle and the China slowdown – Sell Seamec, Tata Steel
The commodity super cycle is coming to an end, thanks to slowing growth in China.
Dr Doom, Nouriel Roubini, had predicted this 4 years back. He has now been proven right.
Commodity producers (miners, oil explorers, steel producers etc) are going to have a hard time in the coming future.
Seamec, Tata Steel and Tata Sponge (this website`s 3 previous recommendations) can be sold off.
This website will now recommend commodity end user stocks (similar to Lloyd Electric, TRIL etc)
Commodity end users (including auto companies) are going to be the biggest beneficiaries of this phenomenon.
India is also poised to reap big dividends from this effect. Already, with lower crude prices, inflation is fast coming down.
SKM Update – The When to Sell Conundrum
SKM egg products was recommended at Rs 12/share and currently trades at Rs 52/share. The stock is hitting the upper circuit on a daily basis. For all those who had bought the stock at substantially lower valuations, the question of selling will be foremost on your minds. At Rs 52/share, the company trades for a market cap of Rs 130 Crs. Assuming that the company is able to make revenues of Rs 270 Crs with 5-8% PAT margins (Rs 13 Crs – Rs 21 Crs), this would bring our forward P/E anywhere between 6-10 x (a pretty large range to work with).
The question of selling, for a company like SKM with excellent long term prospects is really about whether you have any other better investment options. The stock may go lower from here (or higher, who knows?) and may cause heartburn. Or you can sell assuming that the stock has peaked. But if it goes to Rs 100 from here, then again you will have heartburn. It is up to the investor to decide his/her future course of action.
Disclosure: I plan to hold this company for the long term. I am impressed by the company, management and its growth prospects and I see no reason why the stock needs to be sold. Remember, some of the Pokaran Money manager`s picks that are tiny and small cap today, may turn into the large caps of tomorrow. Happy Investing!
Engineers India Ltd – The Hidden Ratna
Started in 1965 as a joint venture between GOI (Govt of India) and Bechtel, Engineers India Ltd (EIL) is India`s best engineering consulting services company. Part owned by GOI (70% stake), EIL is active in Refineries, Petrochemical complexes, oil and gas pipelines, Power plants (thermal, nuclear, solar) etc. Its latest FPO (follow on public offer) was brought out at a price band of Rs 140-150 (current market price is Rs 240), was over-subscribed by more than 2 times and was done by GOI to sell a 10% stake in the company.
INDIA`S MOST TECHNICALLY ADVANCED ENGINEERING CONSULTANT
EIL has worked on setting up 19 of 22 crude oil refineries working in India, on 7 of the 8 mega petrochemical complexes, on 10,000 km of oil and gas pipelines and several oil well platforms. The company currently has 16 live and 13 pending patents, has been awarded the strategic crude oil buffer storage project by GOI (in underground rock caverns) and has recently been awarded the engineering consultancy contract for a 400,000 barrels/day refinery cum petrochemical plant in Nigeria for $ 139 mi, making this the single largest engineering consultancy contract awarded to EIL, till date.
With the technical capability to work in Oil and Gas (onshore and offshore), Ports, Power Plants, Pipelines, Mining and Metallurgy, Urban Infrastructure etc, EIL is by far the most technically advanced Indian engineering services company. The company has a technically qualified workforce of 3400 people.
REVENUE STREAMS
The company`s 2 divisions include Engineering Consultancy and Engineering, Procurement and Construction (EPC). The past 3 years, from 2011-12 to 2013-14, have seen revenues at Rs 3700 Crs ($ 615 mi) , Rs 2500 Crs ($415 mi) and Rs 2100 Crs ($ 350 mi) respectively. While revenues from consulting services have remained stable at Rs 1200 Crs ($ 200 mi) during all 3 years, the EPC division has taken a hit, due to the overall stalling of industrial growth in India.
Other than these 2 divisions, the company has been consistently earning Rs 250-300 Crs ($ 40-50 mi) each year as interest income from its massive cash pile worth Rs 1800 Crs ($ 300 mi). The profit before tax (PBT) of the consulting division has averaged a mouthwatering 40% in the past 3 years while the EPC division reports a humble 10% PBT in the same period.
VALUATION
With a market cap of Rs 8100 Crs ($ 1.35 bi) , 3 year average Profit after tax (PAT) of Rs 580 Crs ($ 95 mi), cash of Rs 1800 Crs ($ 300 mi), marketable securities worth Rs 720 Crs ($ 120 mi) and zero debt status, the company`s enterprise value (EV) stands at Rs 5600 Crs ($ 940 mi, Market Cap minus Cash and Securities).
EV/3 year avg PAT works out to 9.65 x, a puny valuation for a company that has been hitting ROCE`s (Return on Capital Employed) of 54%, 49%, 40% and 28% for the past 4 years. While the downward trend in ROCE may alarm analysts, this trend, I believe, has been caused due to the general industrial downturn in India and is bound to pick up in the near future.
FREE CASH FLOW GENERATION
The company has been paying out healthy dividends in the range of Rs 6/share/year with cash outflows totaling nearly Rs 250 Crs/year, uninterrupted for quite sometime now. The consulting division is the company`s cash cow and only has employee expense to pay for. It is only in the last 2 years that the company has spent Rs 80 Crs/year for purchasing capital equipment (believe this will be for the EPC division). The company`s working capital requirement is meager with the only flag being the Accounts Receivables, which stand at Rs 300 Crs or worth 52 days of receivables outstanding.
GOVERNMENT HOLDING WAS THE ONLY CONCERN
With public sector companies sitting on truck loads of cash, there was a fear among investors that the previous central government may pay itself very high dividends to improve its worsening fiscal condition. With a new business friendly government in place, such actions are unlikely to happen. Also, the new government is looking to divest stake in public sector companies, which is a positive sign for investors looking to invest in them. In 2008-09, the government held a 90% stake in EIL compared to the current 70%. The trend seems to downwards and hence, investors can be assured that the cash pile will be used responsibly by the company.
Currently, FII`s (foreign institutional investors) hold 8.5% stake in EIL.
CONCLUSION
Navratna refers to an ornament with 9 (nav) gems (ratna). India`s best public sector companies are called Navratna, akin to the historical practice of referring to the kings poets and noblemen as navratna.
As this recommendation`s heading points out, EIL, at current valuations, is not just a Navratna, it is a Hidden Ratna.
Disclosure: My family own shares in EIL at Rs 240/share
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