Lumax Industries

Investors with a two-to-three year perspective can buy the shares of Lumax Industries, a leading player in the automotive lighting business. From its 52-week high of Rs 330 in mid-September, broader market volatility has seen the stock shed about 20 per cent. The current market price of Rs 266 is hence an attractive entry point for investors.



At this price, the stock trades at a valuation of 13 times its annualised per share earnings for the first half of this fiscal (that is, April-September 2010). The company's market leadership position in the lighting solutions space and its diversified clientele in the backdrop of strong demand for automobiles give good visibility to earnings growth in the near-to-medium term.

Lumax supplies head lamps, tail lamps, sundry and auxiliary lamps to the auto industry and has over 60 per cent market share.

About 60 per cent of the company's revenues are generated from the passenger car segment, while two-wheelers and commercial vehicles chip in with 20 per cent each.

In terms of client break-up, Maruti and Honda (including Hero Honda) are its main customers, which together bring in 55 per of the revenues. It also supplies to Ashok Leyland, Tata Motors and Mahindra and Mahindra .

Robust volume outlook

Since the company caters predominantly to the original-equipment market, the trend of strong automobile sales since the revival in mid-2009, bodes well for volume growth. Although moderation due to base effect is expected going forward, a few aspects favour the company. One, it caters to all segments — bikes, cars and commercial vehicles.

Hence, temperance in one segment can still be set-off with growth in another. Two, Lumax has been roped in for some of the recent launches such as the Alto K10 (for which it is the 100 per cent supplier) and the Toyota Etios, which will keep the incremental volumes trickling in.

Besides, the company is setting up a plant at Sanand for supplies to the Nano, again a high volume product.

Similar volume growth can be expected from the CV segment as it supplies lamps for sub-one-tonne vehicles such as the Tata Ace and the Piaggio Ape. With the hub-and-spoke model gaining ground, the market for these vehicles is increasing continuously. Finally, in the light of the recent parting of ways between the Hero group and Honda, the company might gain from the product-line expansion plans by both these companies.

On the export front too, Lumax has seen a promising development this fiscal. The company has added both Audi and Jaguar Land Rover to its client list for the supply of LED High Mount Stop Lamps.

Technology ramp-up

While Lumax has a technical and financial collaboration with Stanley Electric Company of Japan for about 25 years now, the company is upping the ante on in-house technology. It had recently introduced the ‘multiple shots-multiple colour' technology for achieving different colours without joints in the tail-lamp lens. These are being supplied to the Honda Jazz currently.

Lumax is getting ready to introduce new technologies in manufacturing for the two-wheeler segment, considering the increasing demand for energy-efficient, dynamic and compact lighting in this segment.

With lighting playing a vital role in aesthetics and ergonomics in addition to functionality, the company is setting up a consolidated engineering centre shortly to localise and augment its design capabilities.

Besides, it is also introducing LEDs in front-lighting for two-wheelers, and for interior and exterior lighting in four-wheelers in 2011.

Financials

For the half year ended September 2010, net sales grew 26 per cent to Rs 384 crore year-on-year, while net profits rose to 9.3 crore, showing almost 100 per cent growth. Operating margins stood around the same levels at 7.5 per cent.

Lumax is relatively shielded from volatility in input prices with plastic powder, bulbs and adjustor motors being the primary raw materials consumed.

This puts the company in a sweet spot in times such as this, where commodity price inflation is hurting margins of user industries.

Supply of high-technology lighting along with better realisations from LED supplies may help in improving margins.

via BL