18 March 2019

Lumax Industries Stock Analysis

Lumax Industries is an auto component maker. It is India’s leading manufacturer of front and rear lamps used in motor vehicles. The company’s clients are the manufacturers of two-wheelers, four-wheelers and commercial vehicles. The company’s promoters are the DK Jain family and the Japanese company Stanley Electric. Both hold a 37.5% stake in the company. The company started in 1945 as a trading house and today it has 28 manufacturing units.

Business Model

The company makes ~ 65% of it’s revenues from front lighting systems and ~ 25% from rear lighting systems. Other accessories make up 10% of the revenues. Passenger vehicles contribute 67% of the revenues and 2-wheelers contribute ~ 27% of the revenues. The company’s top customers are Maruti Suzuki (34%) and Hero Moto (15%). Also, other major clients (Honda, M&M and Tata Motors) have a healthy revenue share.
Raw materials are ~ 60% of the revenue and any fluctuations in the prices of raw materials can have a major impact on margins.

Industry

The fortune of the Auto-ancillary industry is tied to the fortune of the vehicle makers. In developed markets, the auto ancillary market is 100% to 200% the size of the OEMs, but in India it is just 66% to 70% of the OEMs. India has a very low penetration of vehicles as per global standards. There is a good opportunity for the passenger vehicle industry to grow. This would also present growth opportunity for auto ancillary companies. However, the number of components that go into the making of a vehicle will reduce over the next few years. Moreover, the pricing.
Of the 42 major auto ancillary companies (Market cap > Rs 300 Crores), only 17 have made a ROCE > 15% in atleast 7 out 10 years. OEM’s make up 54% of the demand, exports make up 29% of the demand and the balance 17% demand comes from the replacement market. However, there is a lot of competition from the Chinese and the counterfeit products in the market. There is usually a 3-6 months gap in the negotiation of price with OEMs when the raw material prices go up.

Financials



  • In the last 10 years, the company has recorded double digit growth in revenues in 6 years. There was no de-growth in this period.
  • While revenues have almost doubled in the last 5 years, the net profit has shot up from Rs 7.7 Crores to Rs 63 Crores.
  • The interest cost has reduced amidst a rising margin period.
  • The company invests ~ 3% of it’s revenues into R&D.
  • The company paid Rs 58.33 Crores as Royalty, Management support fees and drawing charges to related parties (Stanley Electric). The company pays ~ 2% to 3% every year under these heads to Stanley
The company enjoys a negative working capital requirement. The improvement in margin has led to an improvement in the return metrics (ROE, ROCE and ROA). However, in the last 10 years the company has made a ROCE of more than 15% in just 4 years (including 3 in the last 3 years). The company’s main raw material is polycarbonate. The company imports 40% of it’s raw materials.

Outlook

The share of LED is at ~ 35% and the management’s forecast is that this proportion will increase to 50% soon. The share of LEDs has already gone up from 8% to 35% in the last 2 years. Bharat Stage VI emission norms will come into force from April 2020 and the industry is gearing up for this transit. LED is becoming the first choice of customers and OEMs. The revenues of Lumax Industries have grown in-line with the growth in passenger vehicles. However, the company has been able to give margins a push. The management says that they have focused on lowering costs by reducing imports.
The cost of an LED is 3x to 10x more than that of a conventional headlight. This has resulted in the margins improving along with the rise in share of LEDs. There is also a threat of Chinese LEDs which are cheaper in cost and this will hamper the prospects in the replacement market.
The expected revenue growth over the next 3 years is ~ 8% p.a. However, the margins cannot be predicted here. Although, the last 5 years have been positive for the margins, which have gone up from ~ 4% to ~ 8%. In Q3FY19, the margins rose to 10%.

Valuations

For a business that generated Rs 71 Crores in FY18 and now trades at a market cap of ~ Rs 1,650 Crores, the PE ratio works out to 23. For auto ancillary stocks, we would not recommend investors to invest at such valuations. The margins in the industry are very volatile and a slowdown in the passenger vehicle industry can hit the growth rate. The pricing power is low as it takes time for the company to negotiate pricing. Moreover, the company imports a significant part of it’s raw materials. Thus, any adverse movement in the currency can hit margins.
The LED migration is a reality but the prices of LED lamps will come down to increase in competition. There is not much scope for margin expansion from the current margins. Though we wouldn’t recommend investing in Lumax Industries Stock at current price, long term investors can put the stock on their watchlist.

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