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Wednesday, January 26, 2011

Small Cap Stock To Buy : Fedders Lloyd

Ashish Chugh, author of Hidden Gems, recently talked about two multibagger small cap stocks to buy on CNBC-TV18. Fedders Lloyd is one of the two small cap stocks he recommended.

Below is transcript of his discussion on channel CNBC-TV18 outlining merits of Fedders Lloyd as "small cap stock to buy".

Fedders Lloyd is a Delhi based company which is primarily into three business segments. They are into refrigeration and air-conditioning, engineering and structural steel business and also operate in the power transmission and distribution business. As far as the air-conditioning and refrigeration business is concerned, they provide air-conditioning solutions mainly for commercial establishments. They cater to institutions like railways, mining, defense segments and corporate sector.

In the engineering and steel structural business, they provide turnkey fabrication solutions for large industrial projects. In the power transmission and distribution business they provide EPC solutions for power transmission and distribution projects.

If you look at the financials of the company, FY10 sales were close to Rs 700 crore which were up by 50% compared to FY09. Profit after tax (PAT) was about Rs 40 crore, up from about Rs 11 crore which the company did in FY09. The financial year for this company is from July to June. In Q1 ended September of 2010, they have done sales of close to Rs 190 crore, up by about 18% over the same period last year. Profit after tax was about Rs 11.5 crore, up by about 35%.

EPS on trailing 12 months basis is close to Rs 15 which means at a current price of about Rs 75-76 the stock is traded at a P/E multiple of just about 5-5.5. If you compare this company with their peer group namely Blue Star and Voltas Ltd, you find a significant undervaluation to the peer group. Voltas and Blue Star, both command a P/E of close to 18-20 times and they have a marketcap of about 1.5 times of their sales.

Other small cap stocks discussed recently
In the case of Fedders Lloyd, this company trades at a P/E multiple of about 5-5.5 and as a marketcap to sales of just about 0.35. The marketcap of this company is just about Rs 235 crore and does sales of around Rs 700-750 crore. If you see the balance sheet, this company is asset rich. Out of the total gross block of about Rs 150 crore, they have a freehold land of about Rs 38 crore, a five acre plot which is located at a prime place in South Delhi which maybe very valuable as of now. The main trigger for rerating of Fedders Lloyd is not going to be the property but it is going to be sustainability of earnings.

The major concern about this company is the low dividend payout. Even though this company makes an earning of about Rs 15, this company pays only Re 1 dividend to the shareholders. That is a bit of a concern. The rerating for the stock could be on account of increased investor friendliness of the company. If they are able to sustain its earnings and grow at the same pace for which it has been growing for the past couple of quarters, I think we could see a rerating of the stock.

Another hidden gem by Ashish Chugh - Agre developers

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