Lloyd Electric Is A “Strong Buy” With 67% Upside: Neha Majithia Of Microsec

First, you must satisfy yourself about Microsec’s stock picking prowess. The best way to do this is to check their reports of August 2009 and September 2012. In the August 2009 report, Microsec recommended 11 stocks for investment. This contained stellar stock picks like TTK Prestige (2388% gain), Hawkins (743% gain), Greenply (656% gain), etc, which have given fabulous gains.

In the September 2012 report, Microsec recommended 9 small-cap and mid-cap stocks for investment. In the two years that have passed since then, 7 of these stocks have given three digit returns. Leading the pack is La Opala with a mind-blowing 847% gain. It is followed by Somany Ceramics (458% gain), Dhanuka Agritech (358% gain), PI Industries (272% gain), Cera Sanitaryware (268% gain) etc. The average return of the 9 stocks is 294%. You can see the full list here:

*adjusted for split

So, you can be sure that Microsec knows what it is talking about when it recommends a stock. Of course, this is not to suggest that all stocks will always be successful. There will be duds and flops from time to time which you have to accept as part of the game.

Now, let’s turn our attention to Neha Majithia’s latest stock pick, Lloyd Electric.

Lloyd Electric is a micro-cap with a market capitalisation of only Rs. 430 crore. As I said earlier, it has been a top performer with a YOY return of 340%.

Neha Majithia has given 9 reasons why Lloyd Electric is a compelling buy. One of the reasons is that the company’s top‐line has been growing at a CAGR of 19.7% for last five years on a consolidated basis. The EBITDA has expanded at a CAGR of 27.5% in the last five years. The EBITDA Margins have widened to 11.7% in FY14 from 8.6% in FY09. The PAT has grown at a CAGR of 92.2% for the last five years. This robust trend is likely to continue in the years to come, Neha says. She adds that Lloyd’s ROE has significantly improved from 0.92% in FY09 to 13.93% in FY14.

On the issue of valuations, Neha points out that Lloyd has been trading in a historical P/E range of 2.2x to 24x for the last ten years. Currently, the stock is trading at an attractive P/E of 4.7x and EV/EBITDA of 2.1x, respectively. Since, the company has no peers which deal in the same business model; it has to be compared with the valuations of some of the large players in the AC industry such as Voltas, Blue Star, etc, which are trading at valuations of 16‐18x two year forward earnings. On the other hand, Lloyd, despite being a part of the same industry with similar growth prospects and possessing relatively better margins, has been trading at a significant discount.

Neha explains that Lloyd deserves a higher premium as compared to its peers because it has better margins, higher earnings visibility and improving ROE. So, if you take the 5 year average P/E and give it a premium of 25%, you arrive at a P/E of 5. If you extrapolate that to FY 2016, you have a target of INR205 per share, which means a whopping upside of 67%, she says and recommends a “strong buy”.