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

Variant Perception or Dis-conforming Evidence

Variant Perception can be explained as the difference of opinion between you and the market. That is, when your perception of a situation is different from that of the general market.

To make serious money in the markets, it is important to be able to take a position that is opposed to the general market view. A "margin of safety" is only available if the majority of market participants believe that a particular stock is not worth buying or is actually worth selling. In those instances, where the majority view is in one direction, and you believe that exactly the opposite is true, that the stock is worth buying into, then you have a contrarion viewpoint or a variant perception.

In any transaction in the markets, there is a buyer and a seller. Both are transacting at the same price. So, it is very important to think form the opposite point of view. Why is the person on the other side of the transaction selling to you? If your logic for buying is better than what you can think of for that of the seller, then you have a good case.

This ties in with the concept of "dis-conforming" evidence as popularized by Charlie Munger. [Note: There is no such word as dis-conforming and I think Munger wanted to mean nonconforming.]

Looking for dis-conforming evidence requires that before taking a position you list down points that is opposing to your existing view point. For example, if you are about to buy a stock of a company, think of why you would not want to buy it, what can go wrong in the business, how the business can be ruined or can go bankrupt and other such points.

If you force yourself to think in these terms, it usually brings sanity and rationality to the overall-thought process and helps clarify the decision in your own mind.

Measuring Portfolio Performance - Do it like a mutual fund

There is an old Chinese saying which says "what cannot be measured cannot be improved". I have thought about how I invest in the markets. As I get a monthly salary, I tend to put money into the markets also in monthly tranches. After a while it is difficult to measure the returns that I have got from my portfolio as a whole and not from individual stocks. All the websites that are out there that I have used does not really give a true picture of portfolio performance because it tracks the current holding and provides the percent gain or loss. I looked at various softwares, websites and did not find anything that actually helps me in doing this. So, I built a rudimentary spreadsheet in Microsoft Excel which helps me track my portfolio as a mutual fund on a NAV basis.

If you want you can use a similar concept. The concept is fairly simple and straightforward. The initial amount you start off with, say, Rs 1000 is your initial capital. Take an arbitrary face value (I chose 10 more out of convention, you could take 1 or 100 or whatever number takes your fancy). The number of "portfolio units" you allocate yourself are calculated by the total portfolio value divided by the face value (in this case, 1000/10=100 units).

Once you have the basic framework in place, it becomes easier from here. Every time you put money in your stock account, just calculate the number of "portfolio units" you would get. For example, if your initial capital of Rs1000 has grown to Rs 1200, your NAV would be 1200/100=12 (portfolio value divided by units equal new NAV). So, if you add Rs 60 to your portfolio, you will get 60/12=5 more units. So, you will have 100+5 units. So, your portfolio would be now 105*12=1260.

Keep track of a benchmark index if you are interested to know if your stock picking skills are good enough for you to continue at it. Over a period of time (not less than 3 years) if you are not doing better than the index, it is probably better to get out of managing your funds and hand it over to a mutual fund or an exchange traded fund (ETF).

A New Blog

I started an all-new blog just to focus on the stock markets (typically Indian) and my thoughts and learning related to value investing and contrarion investing.

I expect this to be my single repository where I will put everything related investing that I consider important at that point in time.

I will also migrate the most important posts from my other blog holdyourthoughts.blogspot.com that are related to investing. I will continue to post non-investing articles to that blog.

I hope you enjoy this blog.