Thursday, January 7, 2016

Just some facts on Lloyd Electric & Engineering (LEEL)


I was recently looking at some facts on LEEL and was interested in the company due to recent influx of advertisments on media front. I analysed the financial numbers of Lloyd Electric & Engineering Limited (LEEL) over the last 18 years and below I present my conclusions:

1. Topline has grown in all barring one year (2009) when US Housing crisis hit the world markets.

During these 18 years the best period was witnessed during 2005-8 when growth averaged

approximately 50% every year. (Growing topline for 17/18 years is no small feat and that proves

that company knows how to manage growth even during turbulent times)

Now that we concluded that the company scores top marks on growth parameters we need to

check the quality of the growth and this we do by comparing inventory & debtor growth in

comparison to sales

2. When we analyse growth in sundry debtors & inventory we notice that inventory has grown in

18/18 years while sundry debtors grew in 17/18 years. On further digging we noted that in

12/18 years debtors grew at a much faster pace than sales growth while in the other years

growth was almost similar. Now some companies use the tactics of an elongated credit period

to push sales but LEEL has shown poor quality growth for 12 out of 18 years. More so since it

started its strategy of B2C products since 2011 this ratio seems to have worsened. Such

practices makes a company very vulnerable to a slowdown in sales because short term debt

obligations are high and there is poor cash flow generation. Continuation of this practice is a

sign of a management trying to push sales just for the sake of it

Now that we know that LEEL has been trying to focus more on growing topline while cash flow

generation remains poor we will compare the profits with Free Cash Flows over the past two decades to

check the quality of profits

3. On a sidenote LEEL has generated profits in 15/18 years of available data. Also  the fact that

Profit before tax (PBT) in 2015 stands at over Rs 103 crores versus Rs 2.7 crores in 1998 is

testament to the fact that LEEL has consistently been a profitable enterprise and grown its

profits over 30 times in  18 years. I will cross check the profits against the Earnings per Share

(EPS) to check the effect of dilution and FCFF to check how much cash has the firm generated

4. As we can see EPS stands at Rs 23.11 per share versus Rs 2.17 in 1997 growing at over 10 times

in 18 years. However, compared to PBT growth of over 30 times we can understand that the

firm had to continuously dilute equity and thus comparatively less profits in the hands of

shareholders

5. LEEL has generated cumulative profits of over Rs 500 crores over the last 18 years. However

when we compare profits with free cash flows that the firm generates it stands at an astonishing

negative figure of Rs 521 crores. Also, in the last 18 years LEEL has generated positive FCFF’s just

2/18 times. So now we know that LEEL generates no money from its business and hasn’t

generated money over the last 18 years

When a company shows growth in sales and profits but actually doesn’t generates any free cash flows

on a consistent basis two things are certain that it must be diluting equity and growing its debt to fuel

this growth (a very risky combination). We already know that LEEL is a constant equity diluter. Now lets

see what is the situation with the debt of the company

1. As we can see LEEL has increased total debt in 17/18 years. The company has been consistently

growing sales without any free cash flow generation and hence to keep the growth kicking in it

has resorted to debt fuelled expansion which led to Total Debt rising from 15 crores in 1997 to

Rs 740 crores in FY15

From what it seems, yes LEEL has been growing consistently but the steps taken to fuel the growth

seems very risky. To put some things in perspective let us look at some facts

2. LEEL has seen its marketcap go up by 10 times in the last 3 years. In comparison

a. Sales have barely doubled over the last 3 years

b. Debt has nearly doubled over this period

c. Cumulative PAT over last 3 years has been Rs 214 crores while cumulative FCFF over last

3 years are negative Rs 150 crores

d. Debtors have outgrown sales by a wide margin over the last 3 years

I am also attaching the link to the excel spreadsheet which i used to analyse LEEL
https://docs.google.com/spreadsheets/d/1AGXlHhL4wzu5UoTbfhegO91AAEkWF37KZTeIS8mS9jg/edit#gid=806724614

 Disclosures:

I am not a SEBI Registered Analyst
I have merely provided facts on the company available on public sources
Please do not consider this as an investment advice. I am not advising to buy or sell the company.
I dont hold shares in the company

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