There are very few listed companies who diversify into unrelated business territories and flourish. One such company is Fedders Lloyd Corporation(FLC) that has not only diversified into one, but two different businesses in the last two fiscals and is doing well in both the businesses. 

This is reflected inits financial results of FY10 where sales grew by 47 per cent and net profit more than doubled on a yearly basis. The fact that the scrip is available at a single digit PE and provides a dividend yield of 1.3 per cent at current price makes it a more attractive buy. 

FLC, which started its business in 1957 as a manufacturer of heating, ventilation, air-conditioning and refrigeration (HVAC&R) equipment, remained in the same business until a couple of years ago. FLC is present in both the commercial and retail segments of the a-c market and has a market share of six per cent and 1.8 per cent respectively. 

However, in FY08 it entered into steel structures wherein it provides customised turnkey solutions related to fabrication and pre-engineered buildings to power plants, metro stations, commercial complexes and cold storages. Thereafter, in FY09 it further diversified into power transmission and distribution wherein it carries out power T&D and sub-station business as an EPC contractor. 

In terms of revenue HVAC&R still has the highest share of 60 per cent, followed by steel structures and the power projects division that contributes to 25 per cent and 17 per cent of the revenue respectively. FLC has a good clientele in all its divisions, including Indian Railways, BSNL and the Defence sector. Currently FLC has six manufacturing facilities spread across the country. Looking at the growing demand for its products FLC is undertaking a capex of approximately Rs 93 crore. New plants are being set up at Bharuch (Gujarat) for precision fabrication and at Ranipet (Tamil Nadu) for steel structures.

The company is also upgrading its existing plant at Secunderabad. The capex for the Bharuch plant is `46 crore, for Ranipet Rs 20 crore and that for the Secunderabad plant is Rs 27 crore. These plants are expected to commence operations in FY12. This capex will be primarily funded by debt. This will take the debt equity ratio to more than 1.25 times from the current 0.94 times. It has the potential of increasing the interest burden for the company that currently stands at 2.9 per cent of sales. 

Coming down to the financials for the first half (its financial year ends in June),the company has posted sales of Rs 364 crore, that is, 21 per cent higher than the same period last year. What is worth noting is that historically in the second half of the year the company posts almost 1.2 times the first half year sales.This is primarily due to better sales in HVAC&R division during summer.

Therefore, assuming that this year the company continues its performance, we expect it to post sales of Rs 800 crore and a profit of Rs 50 crore. This discounts company’s current share price by 5.3 times, which is very low compared to its peers. Therefore, looking at the lower valuation, de-risked business model and better financials, we advise our readers to DS take exposure in the counter with a target of Rs 110 in next one year.