Sunday, April 26, 2015

Lloyd Electric & Engineering (Rs 198)

Lloyd Electric & Engineering (LEE) is the largest producer of Coils/ Heat exchangers in India. Fully backward integrated, LEE also serves the entire spectrum of HVAC&R (Heating, Ventilation, Air Conditioning & Refrigeration) industry in India as well as exports to some OEMs in US, Europe, Middle East and Australia. ‘Lloyd’ brand has become more familiar in recent years with many new launches of consumer durable products (mainly ACs and LED TVs) accompanied with a high(er) advertising spend (Khushiyon ki guarantee campaign) on TV.

Thanks to restructuring/reorganising of businesses within group entities undertaken 2-3 years ago (Between Fedders Lloyd and LEE and then merger of some privately held companies into LEE), the entire HVAC&R interests and capabilities of the group are now aligned in LEE. LEE is the OEM for many other AC brands available in the domestic market as well as for some brands in Middle East and South Africa. It also manufactures ACs for the Indian Railways, Metro Rail and buses.
While the other segments (Heat Exchanger and OEM) are also providing double digit growth, the fastest growing segment for the company is the branded AC business which can help drive growth as well as margin improvement. Over last nine months topline has growth by almost 25% - led by a much higher growth rate in the branded consumer durable segement (40-45%). In its conference call after six month results held on November 11, 2014 company indicated a growth of 30-35% for overall business should be doable.
Even assuming growth numbers conservative than management indicated, LEE stock trades at very reasonable valuations, in our view. LEE ended the year FY14 with an EPS of Rs 25 on consolidated basis (Rs 21 standalone). For the first nine months while the revenue is higher by almost 25% the profits are slightly lower YoY. The best quarter for their business is March followed by June (almost two third of revenue as well as profits for the year are contributed by these two quarters) – so next six months numbers will matter more than what they have reported in the last two quarters.
While FY15 profits will probably be at similar level to last year, we think company should be able to do EPS of more than Rs 30 next year (FY16). At Rs198, the stock trades at a PE of less than 7x. EV/ Sales works to approx 0.5x and EV/ EBITDA of under 6x – on all parameters it is much cheaper than almost all other consumer durable plays.
In March 2015, the promoters have issued 60 lakh warrants to themselves and their group companies at Rs152 per share. This itself will bring in over 90 cr which should help reduce debt and save on the interest cost as well.  We also believe a commitment to put 90 cr new money by the promoters into a company which at that time had market cap of 500 cr (now 700 cr) is a positive sign and affirms the growth expectations management indicated over the conference call. We believe this stock could see significant upside over next few years.

Saturday, September 20, 2014

Archies Limited (Rs 32)

Time for Archies Unlimited? (

Potential returns in this stock in our view are dependent only on one parameter. How much can Archies sell online?
Why Archies? 1) Well recognized brand across the country 2) Products which cater to and appeal to youth (which contributes largely to online orders and sales) and 3) Gift items and products which are most amenable to be ordered and sold online... small ticket size, no fitting and return hassles etc.

And Archies gains hugely in the process through a) additional sales and b) much better margins as its traditional sales have to bear the cost of expensive store rentals and other overheads. Of course the stores (Archies has about 240 of them across the country) help in terms of brand reach; more so through company’s recent focus on big malls but Archies must capitalise on these to sell more online.
Is Archies ready for this opportunity? We don’t think so... its taken a few small steps... revamped its website (we think there is huge scope of improvement still)... has appointed Mr Deepak Thakkar of a Digital Media Agency ( as Non Executive Director and has tied up with Flipkart, Snapdeal, Indian Gifts Portal, Ferns n Petals and a few other online stores. But a lot more needs to be done to get its own portal and apps (could only find one ill designed loyalty app) working, while tie-ups with Flipkart and Snapdeal give the initial impetus.

So how much can Archies really sell online? Archies reported on Sept 15, 2014 that it received 5281 orders online in August 2014 vs 3058 in August 2013 and 2531 orders in July 2014 vs 960 last year. These are small numbers, in our view and if Archies can get its digital strategy right, it should get ready for much larger numbers. Projecting these numbers can be challenging but in our view if Archies cannot get 10-15% of its sales from online channels in two yrs, it probably hasn’t done things right!
Besides an extensive product line (for gifting) and brand awareness the company has a strong balance sheet with negligible debt. It has been profitable (EPS of Rs 2.07 in FY13 and Rs 1.55 in FY14) and dividend paying (Rs 0.4 in FY13 and FY14). For a well recognized brand, a significant potential ecommerce opportunity and almost 200 cr in annual sales,, the stock is available at a market cap of 110 cr which we believe is cheap.

Just because a company is sitting on a big opportunity does not ensure its success. But the potential upside if they are able to even partly capitalise on this opportunity can be huge and warrants some exposure to this stock, in our view.


Sunday, March 23, 2014

HCL Infosystems Version 2.0 (Rs 38)

HCL Info Version 2.0 | HCL Infosystems is going through a major overhaul - In ownership, in business profile, in its board. I think stock price will likely follow....

HCL Infosystems was formed in 1976 and has played a key role in the computer industry (both hardware and software) from the time the first computer was sold and first software applications developed in India. It formed a JV with Hewlett Packard in 1991 (bought back HP stake in 1998), set-up STP’s in Chennai and Coimbatore way back in 1990s and set-up subsidiaries in US, UK and Australia (also in 1990s). In Early 2000’s company was best known for its range of computer products (top PC vendor in India). During early 2000’s HCL Infosystems also tied-up with Sun Microsystems and Toshiba for distribution of their products in the Indian market. In 2006 the company signed up a long term distribution agreement with Nokia and this saw a big boost to its financials over the next few years.
After recording its best performance yet in 2007/2008 with annual revenues near 12,000 crores and net profit over 300 crores and a dividend of Rs 2 per quarter (yes a total of Rs8 dividend for FY2008), the company has been downhill with each business presenting its own challenges. Systems integration business in telecom faced receivable issues especially in government contracts, Hardware competition increased and margins vanished, Nokia distribution territories were diluted, Nokia’s business share started declining. Revenues witnessed a decline and company reported net loss in FY13.

HCL Info Version 2.0 - Business
Recent steps indicate a total revamp of the company’s business focus which started almost 12-18 months back and is starting to show results now (and could help improve financials significantly over the next 1-2 years). In short company wants to reduce focus away from hardware and hardware based systems integration business, and focus on Distribution (with increased contribution from non-telecom part) and Services.

Winding down of hardware products and inventory liquidation has resulted in some charges which company expects will continue for another quarter. Some other hardware related SI projects could take another 12 months as they are completed and money recovered. So the transition could well take another 12 months but we believe improvement in results will start showing from second half of 2014 onwards.
HCL Info Version 2.0 – Ownership
There have been changes in ownership of HCL Infosys over last 2-3 years. Not all these details are in public domain. First the promoter entity till few years back was ‘Guddu Investments (Pondi)’. A search on google helped figure out some restructuring of this entity and a subsidiary of HCL Corporation and as a result HCL Corporation has been the main promoter entity for last few years. Our best guess is this resulted in more control in hands of Mr Shiv Nadar, though all details are not available in public domain. Over the last fifteen months HCL Corporation has also increased its stake in the company from 42.85% to 49.97%... by buying shares from the market. It is rare to see such consistent promoter buying which started in March 2013 at price of around 39 and has continued even till last week. The recent buying has been in another entity Vama Sundari Investments (Delhi) Pvt Ltd. which is one of the promoter entities of HCL Technologies. Meanwhile AKM Systems Pvt. Ltd., another promoter group entity (belonging to Malhotra’s) disclosed selling some shares (on 17th Feb 204). Overall promoter stake has gone up by over 7% over last 15 months with almost the entire 5% creeping limit for FY14 being used. Should not be an issue as new limit will be available from April 1, 2014!!

HCL Info Version 2.0 – Board
Various changes to the board have also been announced over last few weeks. Latest changes announced on 21st March include Mr Nikhil Sinha has been appointed as the non executive chairman of the board. Mr Sinha is the founding Vice-Chancellor of the Shiv Nadar University and a Senior Advisor to the Shiv Nadar Foundation and HCL Corporation. Mr Ajai Chaudhary, one of the founders of the company had stepped down from this position in 2012.

Three Non-Executive Directors, Mr. S Premkumar, Mr. D.K. Srivastava and Mr. Pawan Kumar Danwar also joined the Board of HCL Infosystems Ltd.  Three existing Directors - Mr. J V Ramamurthy, Mr. D.S. Puri and Mr. E A Kshirsagar has stepped down from the Board.  Mr. S Premkumar is presently the Group CEO of Apollo Hospitals Enterprise Ltd., where he works closely with the Board and is actively involved with the transformation agenda across Strategic Go- to-Market initiatives, Customer Experience, Strategic Partnerships and Globalization. Mr. D.K. Srivastava is responsible for the Human Resources function of HCL Corporation & Shiv Nadar Foundation and is driving strategies around talent, culture and organizational effectiveness. Mr. Pawan K. Danwar is the Executive Vice-President & CFO of HCL Corporation and Shiv Nadar Foundation. He brings over 24 years of vast experience to HCL.
Earlier in February 2014, the Company had announced the appointment of two new Independent Non-Executive Directors, Mrs. Sangeeta Talwar and Mr. Kaushik Dutta on its Board.

HCL Infosys has also recently gone through a composite scheme of arrangement which was approved by Delhi High Court in Sept 2013 in which the Hardware Solutions business, Services business and Learning business have been transferred to three wholly owned subsidiaries HCL Infotech Limited, HCL Services Limited and HCL Learning Limited respectively.
HCL Info Version 2.0 – What to Expect
With various actions suggesting control and involvement of Mr Shiv Nadar in HCL Infosystems, a comparison with the only other listed entity he owns is very interesting. HCL Infosys market cap today (Rs850 crore) is less than 1% of that of HCL Tech. Total floating stock value today is less than the dividend Mr Nadar receives from HCL Technologies in a single year. Agreed they are different businesses and can’t be compared. Yet if Mr Nadar gets involved to the extent seen so far, he has the experience and the resources to change the face of this company.  

We expect lesser focus on hardware and hardware solutions business to help reduce losses over the next few quarters. In addition the working capital released from these businesses should help pay off much of the loans and hence reduce interest cost. If this transition proceeds as planned and outlined by the company, we could see the company back in black by end of 2014.
HCL Info has enormous brand equity and reach to grow its Distribution and Service business – the new focus areas. Just in the last quarter the company has signed up barnds like Canon (Printers), Lenovo (YogaTablet), Huawei (videoconferencing), Datacard (IDcardprinters), Hamilton Beach, Braun, DeLonghi, HarmanKardon. Little surprise then, that the non-telecom distribution business has grown 60% in the last quarter while telecom distribution (Nokia) declined by 7%.

For the company overall this transition is likely to see further decline in revenues (as hardware solution business drops further) but should help the company return to profitability by end of 2014. And hopefully those days are not far when it can reinstate its policy of quarterly dividends!!

Friday, January 24, 2014

Heidelberg Cement India (Rs 39)

Heidelberg Cement India is 69% owned subsidiary of Heidelberg... the German cement and building materials major and one of the largest cement companies in the world. Heidelberg (the parent) acquired a majority stake in Mysore Cement (Now Heidelberg Cement India) in 2006 through a preferential issue followed by an open offer at Rs54 per share which worked to an EV/ton of just under US$100 per ton. Some of the other acquisitions of Indo Rama and Cochin Cements were consolidated in this entity and an expansion to capacity was completed last year (2013).     

Having taken expansion at its capacities in Jhansi (U.P.) and Damoh (M.P) which came to stream during 2013, Heidelberg Cement India now has a total capacity of 6mt. Financials have been lacklustre for many quarters, with sluggish demand and increasing cost pressures (especially power and freight costs). For Heidelberg performance in 2013 got further affected by higher depreciation and interest costs due to capacity expansion resulting in a net loss.
Investments made over last couple of years in brand and capacity will help marked improvement in performance for Heidelberg Cement when the cement cycle improves, we believe. The stock currently trades at an EV/ton of US$55 which we believe is cheap for an MNC major. Not surprising then, that the parent has recently been increasing stake through creeping acquisition route. The parent has bought over a million shares (1.42m till 14th Jan) from the market over the last three months at a price between Rs 37-40 per share. With just over a 69% stake now, they could continue to buy shares from the market. Insurance Companies and FIIs together hold another 11% of the stock. Limited float, also being further reduced as parent increases stake is also positive for the stock, in our view.

Friday, May 17, 2013

Hitachi Home (Rs 150)

Hitachi Home & Life Solutions India (HHLI) is the Indian subsidiary (owned 74.25%) of Hitachi Appliances Inc. Japan and is a leading player in air conditioning and refrigeration market in India. HHLI has gained market share over the last few years and today has over 8% market share by volume and over 10% by value in the Indian room air conditioner market. The financials have been lacklustre over the last two years due to many challenges – low growth phase for the industry, floods in Thailand last year impacting the refrigerator business and more recently (July 2012) a major fire in its AC plant in Kadi in Gujarat.

Much has changed for Hitachi and there are multiple factors favouring the company today which we believe should help performance going forward. First, depreciation of yen by almost 25% over the last six months will result a significant saving in import cost and make Hitachi much more competitive in the Indian Market. While it is difficult to ascertain the exact amount of imports denominated in yen, even if we assume one half of its approx 300 cr imports gain from yen weakness the gain will be significant. Results for 4Q announced on 15th May 2013 show a 53mn forex gain for the quarter. These gains should continue since the yen has continued to depreciate further. Second, the company inaugurated its re-built AC plant with a capacity to manufacture 6,00,000 units in a year at Kadi, Gujarat in January. Mr. Motoo Morimoto (MD, HHLI) also detailed new inverter technology split AC models which will be rolled out of this facility. Third, the prices of copper which account for almost 10% of total cost have seen some correction in recent weeks. Fourth, the company recently concluded its rights issue (at Rs130 per share); much of the issue was taken up by Hitachi Appliances thereby increasing its stake in HHLI from 67.7% to 72.4% and total promoter stake (including Hitachi India which owns 2.18%) to 74.25%. This should also help reduce some borrowings taken recently presumably for rebuilding its plant.

First quarter (AMJ) is also the biggest quarter for AC and refrigeration companies, and contributes to almost 40% of the full year revenues as well as a better margin performance. HHLI has grown ahead of industry even in last two years; however the margins got impacted due to multiple factors mentioned above. For FY13, revenues grew over 16% YoY and EBITDA margin expanded to 4.9% from 3.2% in FY12. EBITDA margins were much higher in earlier years (8.5% in FY10 and 7.2% in FY11) and we believe they could get closer to those levels in the current year. EPS for FY13 stood at Rs6.7

Early anecdotal data suggests a good pick-up in AC sales as summer season sets in. Perhaps due to a good AMJ quarter, these stocks have also historically performed well in May to August period. We recommend buying HHLI for a significant appreciation over a 3-4 month period.