Lumax Industries Q4: LEDs light up the way ahead

In the quarter gone by, the company's net revenue from operations grew 45.2 percent year on year on the back of strong volume and value growth, driven by higher adoption of LED products.

On the profitability front, the company posted a 160 bps on-year expansion in earnings before interest, tax, depreciation and amortisation (EBITDA) margin and an 80.9 percent rise in its EBITDA.

The expansion in margin was driven by higher operating leverage, and a favourable portfolio of products. The company, however, compensated its supplier for higher raw material prices, which kept the expansion in EBITDA margin limited. Profit after tax grew 121.9 percent on year, and PAT margin expanded 110 bps.

On a full-year basis, the company posted a 29.8 percent increase in net revenue. EBITDA grew 33.9 percent, with margin expanding 20 bps. PAT grew 31.3 percent.

Lumax generated most of its revenue from front lighting (66 percent of the total) and from the passenger vehicle segment (68 percent of the total). After disruptions arising from implementation of GST, the passenger vehicle segment has been reporting healthy numbers, which is seen getting reflected in the company's results in the quarters to come.

What we like about the company

Strong clientele

Maruti Suzuki is Lumax's largest client, accounting for 32 percent of its revenue. At second place is Honda Motorcycle and Scooter India, Honda Motors and Honda Cars India, with shares of 12 percent, 11 percent and 9 percent, respectively in Lumax's total revenue. In all, the company's top 5 customers generate around 74 percent of its revenue.

Ahead of competition

Lumax has a strong financial and technical relationship with Stanley Electric Company, Japan, which is a world leader in vehicle lighting and illumination products for automobiles.

Lumax gets cutting-edge technology from its foreign partner, which keeps it ahead of competition. Apart from that, the company also has in-house research and development facilities and a design studio that helps it in working on innovative products.

Industry tailwinds, unaffected by move to electric vehicles

Auto companies had a bumpy ride in FY17, as demonetization and BS-IV implementation impacted sales. This was followed by GST-led de-stocking, which hurt auto companies across the board. Normalcy has returned now and augurs well for the company, as it is the largest player in the auto-lighting space.

Moreover, Lumax will remain unaffected by the electric vehicle disruption as the products it manufactures are immune to the adoption of electric vehicles.

LED – a game changer

The company's management continues to be positive on the adoption of LED lamps and has indicated that the adoption has taken place faster than it had expected. It has also pointed out that LEDs are high-margin products for the company and their widespread would unlock huge potential, both in terms of sales growth and margin expansion.

Moreover, the government's decision to mandate 'Automatic Headlamp On' (AHO) in two-wheelers from 2017 onward has started bearing fruit. Also, BS-VI norms, which are to be implemented by 2020, would require vehicles to be more energy-efficient, which would lead to faster adoption of LEDs.

The management also said that the company is aggressively focusing on LED products and that around 25 percent of its revenue in the March quarter came from LEDs. This was 5 percentage points more than LED products' share in the company's revenue at the end of FY17.

The management believes the share of LED-based products can be raised to 35 percent by the end of FY19.

New facility commissioned to meet additional demand

Lumax had commissioned a new facility in Sanand, Gujarat, last year with a capacity to manufacture 300,000 lamps a year. This facility, which started commercial operations in January this year, would supply primarily to Maruti Suzuki and Tata Motors in the passenger vehicle segment.

The company plans to increase the capacity of the Sanand facility by 100,000 units. It also plans to have a plant in Gujarat to manufacture 700,000 units, to cater to Honda Motorcycle and Scooter India and Hero MotoCorp in the two-wheeler segment. The management believes it can achieve 100 percent capacity utilisation at these facilities by FY20.

Valuation Lumax's share price has risen 66 percent in the eight months since we started covering it. The company is currently trading at 23.8 times and 18.8 times its estimated earnings for FY19 and FY20, respectively. We advise investors to accumulate the stock with an eye on the long term.

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