LIC Housing Finance-Scam and Life thereafter

By now, everybody is aware and discussing about how people who earn so much and have such respect in their industries can stoop to such low acts as taking bribes!!! I will not dwell on the moral low that our leaders (both in the corporate and political world) seemed to have sunk to. Our job is to look at LIC Housing Finance as a business and a stock.

So, what really has happened here? A couple of people have allegedly taken bribes and given out loans to companies. LICHF's share in this is approximately 300 crores. For a company with assets of 38,000 crores and a net profit of 662 crores (FY10), the amount is not back breaking. Also, let us not jump to the conclusion that all of the 300 crores would end up as NPA. The company is operationally sound and is unlikely to go out of business. After six months, people will forget about this scam (the sad truth is that in this country nobody gets punished for white collar crimes!!!) and LICHF will continue to do well.

The stock has come down from 1300 to around 930 in a span of 3 days. So, what should you (or I for that matter) do? Well, I would think that this might be a good long term opportunity to BUY!!

The situation reminds me of the American Express situation when Buffet bought into it. So, if you have the courage of conviction and your wallet supports you, it might not be a bad idea to be a contrarion and buy LICHF now.

Indian Markets - Crystal ball gazing: Update

On October 2, I had a post on my guess on the market direction. (To read it click here).

Here is what I had written back then:-

1. Sensex/Nifty will make a dash for the all-time high sometime soon (maybe as early as October end)
2. Either breach it or turn back just short of it.
3. A bout of profit booking follows. Indices go down 10%-15% (back to around 18K-18.5K)
   
4. Main indices remain sideways for the next couple of quarters.
5. Mid caps move up from now as the last few weeks the valuation gap has widened.
6. Sometime after 2-3 quarters, the next up move starts for the main indices. By that time, PE is down to about 22 (which is still high but certainly not hitting the roof).

I am happy that for one my sense was correct (till now that is). The markets have exactly followed the first three points. Now, it remains to be seen if the remaining points play out as I expect them to.

LEEL-Notes from AR 2010

• Acquired “Janka” - Czech based manufactures of Air Handling Units in 2009. Price paid was Euros 4.5 million (Rs 33.17 cr) for a 100% stake. This was paid from internal accruals.

• Margins have improved in 2010 and is expected to be around this level

• The 2008 acquisition (Lloyds Coil Europe) has turned around and reported profits of 1.04 cr as opposed to a loss of 16.4 cr in the previous year.

• A new manufacturing facility has been setup at Pantnagar, Uttarakhand with backward integration of major components like coils required in the manufacturing of ACs.

• Executive management salary is not exhorbitant. Mr. B.R. Punj gets 28.8 lakhs and Mr. A.K.Roy gets 41.4 lakhs as total compensation.

• Last equity dilution took place in 2005-06 due to conversion of preference shares and issuance of GDR.

• Rs 50 cr has been put as corporate guarantee given against loan taken by related parties.

• Promoters have bought 4.68% from the market in November.
  

Price Realization for manufactured Items

	2010			2009			Growth%
	Nos	Price(in lacs)	Price/unit	Nos	Price(in lacs)	Price/unit
Condenser Coils	703347	4824.03	685.87	509857	2466.77	483.82	41.76%
Evaporator Coil	438299	2329.61	531.51	283707	1457.65	513.79	3.45%
Air Conditioners	308863	22076.08	7147.53	271616	21500.66	7915.83	-9.71%
Sheet Metal	63406	34877.56	55006.72	74110	30382.59	40996.61	34.17%

Lloyd Electric & Engineering Ltd - A good value play

Lloyd Electric & Engineering Ltd (LEEL), BSE: 517518,NSE: LLOYDELENG

Market Cap = 238 cr

Book Value = 130, P/B = 0.6

LEEL is largest makers of air-conditioner heat exchanger coils in India. The company is OEM supplier to almost all AC manufacturers in India, and have overseas business of approximately 20% of sales.

Its main products are:

1. Heat Exchangers
2. Rail Coach ACs
3. Window/Split ACs

Manufacturing Facilities:

1. Bhiwadi, Rajasthan
2. Kala Amb, Himachal Pradesh

Main Customers:

1. Blue Star
2. Voltas
3. LG
4. Samsung
5. Carrier
6. Emerson
7. Hitachi
8. Electrolux
9. Whirlpool
10. Daikin
11. Indian Railways

The company has started manufacturing large ACs for MNC companies since late last year. They are mainly catering to the large (10-15 ton) category, specially in the transport sector. That is ACs for buses and railways. It has bagged orders for Metro Rail ACs. This might actually give the earnings a boost in the future are more and more metros become operational.

I got attracted by the promoter buying and by the fact that it is going at a 8 PE as opposed to 18-20 PE of Hitachi/Blue Star. Not that I am comparing Blue Star with Lloyd, they are not in the same league, but I think Lloyd can be a case of PE re-rating to atleast 10. Also, its BV is 130 and its trading at nearly 40% discount to book, which I am not sure is warranted.

The negatives in the company are:

1. Consistent negative cash flow for the last three years
2. Very poor return on capital ratios (RoCE=10%, RoE=8.7%)
3. OPM of 10% and NPM of 5%

With a expected year end EPS of 12-13 and a PE of 10, I am expecting a 6 month target of around 120-130. In fact, I would really expect it to catch up to its book value of 130 (for comparison, Blue Star has a P/B of nearly 8).

Also, interestingly, it has not really fallen below the 70 mark in the last few months. That added to promoter buying makes me pretty confident that the downside risk is fairly limited here.

"Breaking News" as a friend of the long term investor

The "breaking news" screamed "South Korea returns fire from North Korea". The world markets, or atleast those which were up and running at the time of day, tanked dutifully. The Sensex was down around 450 points at one time. For the rational long term holder of good companies, this was a manna from up above. Load up on your favourite picks, screamed the voice inside me. And so I did. Picked up a some of the stocks that were on my buy list. It is improbable that a full scale war breaks out in Korea. This probably, (and I reserve the right to be wrong), was more of a border skirmish and a bit of bravado shown by troops on either side, which resulted in a good opportunity.
The lesson from all this is:

1. Be ready with cash. You never know, when "breaking news" happens and you get a bargain on a platter.
   
2. Be ready with your buy list for such opportunities. You cannot start looking at which stocks to buy when the opportunity arises. By the time you make that decision, the chance may have already passed you by.

Hope there is peace in Korea :-)

Portfolio Update:9 Months of Performance

After 9 months of NAV based tracking, the portfolio performance has been reasonable. The fund is up 53.96% (versus 24.79% of the Sensex).

The portfolio composition at this point in time is as follows:-

Notes from Investor Presentation dated 12 Nov 2010

* Supreme Industries Ltd (SIL) owns 29.88% of Supreme Petrochem. PAT of SPL was Rs. 60.58 crores in 2009-10, thus SIL's share of the PAT is 18.10 crores.
* Supreme Petrochecm is one of the largest single site Polystrene ( PS )producer accounting for 2% of world capacity. It owns 60% of domestic installed capacity.
* Sales volume to grow at CAGR of 15.60 % and likely to reach 3,24,000 MT by 2014-15
* Debt-Equity ratio has reduced from 0.8 to 0.6
* Positive cash flows at its operating as well as net level every year
* Even during tough times of FY09 company has made investment towards future

Supreme Chambers (Andheri Commercial Complex)
* Total Saleable Area : around 2,75,000 sq. ft.
* Total Project Cost : about Rs. 155 crores .
* Already sold about 40000 Sq.ft. with revenues of Rs 60.20 Crores.
* Plan to sale entire complex excluding one floor.
* Estimated total revenues from Sale about Rs. 375 Crores.
* Entire sale likely to fructify by Dec.2011

2015-15 Plan
* Capacity Expansion: The existing capacity to be enhanced to 595,000 MT by 2014-15 with Rs. 1000 crores of capex. This is to be funded by sales proceeds of the commercial complex and internal accruals.
* Diversify Product Portfolio: Focus on technological innovations
* Increase Share of Value Added Products: Enhance the overall contribution of VA products from 25% to 30%
* Widen Distribution Network: Increase channel partners and widen as well as deepen the distribution network

* Aim to become a Rs. 4500 crore turnover company
* Maintain 15% operating margins
* Overall growth of 17% y-o-y

Plastic Industry
Current Per Capita Polymer Consumption
US - 71.46 Kgs
Brazil - 22.71 Kgs
China - 30.74 Kgs
India - 5.66 Kgs