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 