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 !
thepokaranmoneymanager 
Sir,
Thanks for detailed analysis. However, one thing came to my mind.. why has the stock price came down 30% since its recent high in Aug this year ?
Hello Sahil
Saurabh has asked a similar question for Fedders. My answer is the same as the one I gave for his query. I am clueless as to why this happened.
Hi,
First of all congratulations for increasing views of the blog. It is an evidence of your good work.I would urge you to recommend only those stocks which you have considerable amount of conviction even if it comes down to 1stock in 2months. More important are the frequent updates of previous recommendations.
Now coming to your latest recommendation- I too have been tracking this stock for 6-7 months. Can you enlighten us what was the trigger behind its sharp correction from rs 90s to rs 60?
Unfortunately Saurabh, I am as clueless as you are. I am not really good with charts and technical analysis is not my forte. I have tried checking up news sites if any bad news has come out regarding Fedders. I have been unable to find any.
Really great sir.. i read the full reserch report of fedder lloyd.. thanks sir
Hi Pokaran, how did you arrive at ‘net-net’ status for this company : Net current assets = Current Assets (404 cr. inventory + 332 cr. trade rcvbl + 7 cr. cash + 49 cr. advances) – Current liability (412 cr. ST borrowings + 97 cr. LT borrowings + 114 cr. trade payable + cr. 64 others + 20 cr. provision) = 85 cr.
Thanking you in anticipation of reply.
Hi Pratik
Current liabilities do not include short and long term debt. If you take those 2 out of your equation, your working capital number will be way higher. Current liabilities will only include the debt repayment that will happen in the coming year(current maturities of long term debt)
EXCELLENT analysis. Newbie to this blog. Hearty Congratulation on greater hits. regards..
Thank you
Hi Arun,
good to c your ur blog readers increasing, i am in huge profit after buying skm at 20…hope you continue the good work without any expectations.your picks helping small retail investors.keep up the good work..
Hi sir,
I am new to this blog. Thanks for ur stock picks. Today i entered in Fedders Lioyd @ 71.30.
Regards
Raj
Thank you Sachin. Even I have made a lot of money with SKM. Would love to know who is taking the stock up so much. FII`s or some big bakery/FMCG player (with large egg powder requirements) who wants to have a controlling stake in SKM.
Hi Sir,
CD business ( ACs, Washing Machines , LED TVs) belongs to Fedders lloyd ? Or Lloyd Electric ? Because I visited Fedders lloyd website http://www.fedderslloyd.com/ , under products sections we can see CD business products. Kindly provide your inputs ?
Thanks
Venkata
AC`s and Washing Machines will be Lloyd Electric (although I have never seen Lloyd brand washing machines in big retail stores). Not sure about CD business. It will be insignificant anyway
Sir your view on cairn india please. Is it not a value buy at cmp?
This is in-line with global crude prices. Try googling goldman sachs and crude oil, you will find that crude oil is facing a massive bear rally. Immense amounts of American crude production is coming online, driving down the price of crude. So, a P/E of 10 may look great for Cairn but the fact is that if crude ends up at $ 60/barrel, then you will see Cairn making big losses on every barrel of oil they produce, forcing them to reduce production which will hit revenues and earnings.
Very true sir. Dont know where crude prices will settle. But it is good for india. Cairn may loose but India will gain.
Sir would like to know your views about Vst tiller, excel industries and ramco system??
Hi Arun, Thanks for the excellent work. Do you think one can enter SKM even at these level of around 74 for long term investment. Regards…
Hello. I am currently suffering from price anchoring bias. SKM was recommended at Rs 12/share. I do not have the stomach to re-recommend it now, after it has gone up by 6x
Respected Sir,
Nice and True Unbiased answer along with Moral responsibility towards Your Followers.
With warm Regards. We Salute you .
Mahesh Vakharia
Thanks for your excellent work. By the way what is your opinion about Nath Bio genes future prospectus.
Let me get back to you. Give me some time.
Sir, Your view on Super Tannery please.
the peers like liberty, relaxo, bata, super house are trading at extra ordinary valuations . Do you think this one also deserve atleast half of what others are claiming??
Looks interesting. Let me dig deeper
Dear Arun,
Great work from you. I don’t find any words express my gratitude. However I owe you something where I earn from all your heard works. May GOD bless you everything. Thanks again for your all works.
Regards,
Hegde.
Thank you
Dear Sir,
Thanks a lot for such nice article…………
Promoters have been increasing their holding which is good sign. But, in latest share holding pattern I see that FII have reduced their holdings to zero. Any view why FII have reduced their holdings, I find out in the year 2012 FII holdings was more than 20%. and they have reduced their holding continuously and now it is zero. so is it not a concern ?
Thanks,
Neeraj
This is not the concern neeraj. This is the opportunity. Get into good stocks before FII`s and you will make a lot of money.
Sir, sorry for again asking same question but I am asking for my understanding. I want to understand why FII reduces their holdings even though this is good company to invest.
That I believe Neeraj, has more to do with the general pessimism revolving around India. Corruption, scandals and the negative image that the country was going through in the past few years. Dont think low FII holding has anything to do specifically with Fedders. The company is still very good
Sir,
It is paying dividend since 2o years continuously , though in small amount.
Promotor holding > 58%
Long term debt around 4 crs.
Only working capital loan is availed. (I am not that good at reading balnce sheet , i amy be wrong).
Sales of > 350 Crs.
Market cap 7
PE< 5.
International presence. has offices abroad.
This comany needs in depth anlysis . Sir kindly dig in full depth .
I am ready to buy for long term if it is going to provide some good returns.
Looks like a neglected stock .
Awaiting your reply…….
Sorry. Typo error. in case of Super Tannery
Market cap 350 crs.
sales to Market cap > 7
Please check those numbers. Moneycontrol says that Super Tan has Rs 42 Crs market cap. Book value is very low at Rs 6.
Yes sir.
Typological error.
Market cap 42 Crs.
sales > 350 Crs
Sales to market cap ratio > 7
waiting for your analysis comments sir.
Sir….
New to your blog… Already invested in your OTHER LLYOD… missed out the rest 😦
anyhow i really appreciate the way you analise the script…thumbs up for that.
I would really appreciate if your next tips would be of a lower price range like SKM , then it can bought is numbers for small investor like me.
Best Wishes
Saurav
Once stock valuations move up, it becomes very hard to recommend Saurav. I suggest you look at Fedders or TRIL etc and not SKM which has moved up so much.
I cimpletely understand sir….there are 1000s of small cap scripts and choosing a gold fish from the pool of fishes is very difficult job but you having performing that task superbly . My request to you is just for your next recomendation , please suugest us something that can be bought is ample numbers. Like SKM was justa 12 rs stock 😉 anyjow … i already invested in fedder …
Thanks
That is very tough to do Saurav. Will try my best
Hi sir u r view on vidhi dyes at cmp for long term…plz reply earliest
Pratik. It looks good. Low P/E, excellent dividend payout, net-net etc. But I am unable to access the company`s website. Can you?
here is the co’s site http://www.vidhifoodcolours.com.I till now i found it ia a undervalued stock ……..only concern is about promoters integrity since no much data available in public domain…Plz dig inside ur expert advice required before investing.
Meanwhile it is locked to 20% uc on friday
The website says that Account Suspended. Are you able to actually enter the website? I am not able to
Sir, did you analyse super tannery, what is your view?
Sort of. Not fully. But I believe there are better stocks to choose from. Fedders is just 1 example. Super does not seem to be a big brand. Most importantly, I dont really see Super as a turnaround stock. Its PAT margins have been historically low and nothing suggests that things are going to change in the business model. Remember, not every penny stock is SKM. SKM is a turnaround stock. I dont see any similar potential in Super. I maybe wrong and Super may go up from here. But frankly, I would not indulge too much of my time in this script. I still believe that there are many other great companies to pick from. Fedders, TRIL etc are just a few examples
after searching i found this address.& also its working http://www.vidhiindustries.com/index.html
It is a net-net company so the stock is surely not overvalued. But is there a turnaround story that will take the stock higher? SKM was a turnaround story. It moved from making big losses to substantial profits. This was the trigger for the stock. There seems to be none in Vidhi
the address has been changed just recently….i opened the earlier address just few days back
ur viw on archidply… @36.5…….since its peer greenply,etc has been revalued…..
Poor corporate governance. Not a fan of that company even if it is cheap
Hi, what are your views on Q2 2015 results of Fedders? Q-o-Q operating margins have dropped, infact halved from 17% to 8%! Lower interest cost and tax salvaged the situation.
1) If you look at Jun-14 quarter expenses there is a – 12.43 Crs expense indicating something more like a revenue than expense. That seems very odd and is obviously an exceptional item. 2) I agree that finance costs have really helped the company this quarter. From Rs 34 Crs, it has reduced to Rs 14 Crs. 3) Not sure if tax can actually salvage earnings. Taxes are calculated from EBITDA and hence are not independent of earnings unlike finance costs which are dependent on the loans taken up and are hence independent of EBITDA. 4) Very interestingly, if you look at Sep 13, Dec 13 and Mar 14 quarters, raw material costs have been at 90-100% of revenues. Extraordinarily high which will surely not continue in the future
i am holding fedder since 33 rupees and will hold the script for another 10 to 15 years. its going to be 4 digit price stock and have very good long term story. as rightly said by you sir net operating profit margin will bring huge difference and also all expansion is over and time has come to reduce on debt and enhancement of opm.