Lumax Industries

Lumax Industries, maker of automotive lighting systems, is a beneficiary of the 30 per cent growth in automobile production so far this fiscal. Investors with a two-year perspective can consider buying this stock at Rs 173. The price now discounts its trailing four-quarter earnings by 21 times.

This valuation may seem expensive for an auto-component maker. However, earnings for this 12-month period were weighed down by a loss of Rs 1.83 crore in March 2009 quarter. Moreover, a 60 per cent market share in the automotive lighting segment and broad-based customer profile have resulted in high valuations for this stock.

Investors need to set moderate return targets (between 12-15 per cent), due to the sharp run up in prices.

Lighting solutions

Lumax Industries is one of the oldest players in the organised automotive lighting solutions space and accounts for a 60 per cent market share in this segment. It has a two-decade long technical and financial collaboration with Stanley Electric Company, Japan, a world leader in lighting and illumination products for automobiles. Stanley Electric holds a 41 per cent equity stake in Lumax Industries.

Lumax Industries makes head lamps, tail lamps, stop lamps, turn indicators, lighting equipment and rear-view mirrors for passenger vehicles, trucks buses, and two-wheelers, with over 54 per of its sales coming from the head-lamp assembly units. In the passenger vehicle segment, its main customers are Maruti Suzuki, Tata Motors, Mahindra & Mahindra and Honda Siel.

The company also supplies to Hyundai India, GM India, Toyota Kirloskar Motors, Fiat India Automobiles and Skoda Auto India. Similarly in the commercial vehicle space Tata Motors, Mahindra and Mahindra and Ashok Leyland which accounts for 87 per cent of the total market share in that segment are its main customers. Hero Honda, Honda Motorcycle and Scooter, Bajaj Auto and India Yamaha Motors are its clients in the two-wheeler segment.

OEM presence

High exposure to market leaders such as Tata Motors, Maruti Suzuki and Hero Honda is yet another plus point for the company, as these companies account for a sizeable chunk of Lumax Industries' sales. Many global auto makers such as GM, Skoda, Nissan, Mercedes-Benz and Volkswagen are ramping up their Indian operations and this is another positive factor for Lumax Industries.

Sales to Indian auto companies account for over 95 per cent of the company's total sales. Over 80 per cent of sales come from the OEMs. Unlike tyres and batteries, lighting equipment don't enjoy high replacement demand.

Also, the replacement market in the lighting solutions space is dominated by the unorganised players who offer cheaper products when compared to Lumax Industries. Due to negligible exposure to replacement market, the company has seen a relatively slow paced growth in sales till the December quarter.

OEMs concentrating on exhausting the present inventory levels of components before placing fresh orders with vendors could be another reason for the year-to-date sales growth of 17 per cent.

Host of new models being ushered into the market and aggressive expansion plans undertaken by auto companies to keep pace with demand, could soon ease this situation and Lumax Industries may once again on the 25-30 per cent sales growth track.

Head lamps, tail lamps and other lighting fittings play a major role in enhancing the aesthetic appeal of today's new-generation cars and bikes. With companies focussing more on these features, Lumax Industries has the potential to improve its operating margins by selling more high-value products. Increasing focus on LED-based technology will also hold potential for the company. It now operates on moderate 7 per cent operating profit margins.

To keep costs low and maximise resource utilisation, Lumax Industries has seven manufacturing facilities spread over Haryana, Maharashtra, Uttarakhand and Uttar Pradesh.

Financial scorecard

For three years till FY-08, Lumax Industries registered 24 per cent and 30 per cent CAGR growth in sales and net profits. The numbers hit a speed breaker in FY-09, when sales remained flat and the company posted a net loss of Rs 1.62 crore. Though financial stability set in by the first quarter of the current fiscal, recovery in profitability has been relatively slow when compared to tyre, battery or forging companies.

This can be attributed to the company's reliance on OEM supplies which are slower to recover from a slump. For nine months ended December 2009, Lumax Industries has recorded Rs 457.97 crore of sales (up by 17 per cent year-on-year), while net profits have expanded from Rs 0.22 crore to Rs 7.42 crore in this period.

Raw materials, mainly plastic powder, electric bulbs and motors account for over 60 per cent of total costs. Unlike other auto-component makers, Lumax Industries may not witness cost pressures in near future, given that prices of these input materials are likely to hold steady. Therefore, improved sales volumes may translate into quicker margin expansion. Given Lumax Industries' market leadership and the robust demand for automobiles, this should not be a challenge.