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Lloyd Electric & Engineering Ltd – Holding strong support !!!

LLoyd Electric and Engineering a value play for long term Investors
Lloyd-Havells Deal received a big thumbs down by the investor with the stock nearly tanking 30-40% after the deal was announced. But this deal is a big win for Lloyds for the following reasons

Investment Rationale
i)The company had a highly leveraged balance sheet with the closure of the deal the company is virtually debt free with only a miniscule working capital debt remaining of Rs 300-400crores
ii)The company OEM business is expected to grow as previously major consumer durables players refrained from purchasing Lloyd A/cs as it was in direct competition with them now with Lloyds having exited consumer durables business the company will see huge demand for its OEM business with multiple big brands showing interest
iii)Margins for consumer durables were low at 6% which was a drag on overall margins due to high marketing costs now the management has indicated EBITDA margins of 10-11% going forward due to low administration and marketing costs
iv) Management Expect Foreign Subsidiaries to turnaround and become profitable this year and start adding to bottomline
v) As it was operating in excise free area it is confident no gst will be levied and is expecting a State and central govt refund of 58% and 42% of its initial gst outflows

i)Delay in revival of overseas subsidiaries
ii) OEM business has a higher working capital days of around 90days

Valuation and Views
We have assumed a conservative growth of 10% on sales in FY17-18 and improvement in EBIT margins to 8%(rather than 10% indicated by management). Currently the company is trading at a dirt cheap EV/EBIT multiple of 2.77times(FY17-18). We have assigned a conservative multiple of only 5times FY17-18 and arrive at a price target of Rs408

Technical Aspects

Based on positive fundamental and cheap valuations. Looking at Weekly technical chart, stock shows trading in sideways channel and every peak and bottom has been formed near lower end and higher end of the channel. Recently stock found resistance at higher end of range and witnessed profit booking which led price again to drop at lower end of channel. Previous week stock rebounded from the same and formed bullish hammer candlestick pattern which also collides with Long Term 200WEMA thus shows strong support for the stock. RSI as well has dropped near previous bottom reading and now has been moving higher form there. Hence one expect decent rally from this levels in upcoming few weeks.

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