IDBI Capital - Lumax Auto Technologies

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Lumax Auto Technologies: Invest

An investment can be considered in the initial public offering of Lumax Auto Technologies (LAT); it is being offered at Rs 75 per share. At this price, the stock would trade at a multiple of 15-16 times its expected per-share earnings for FY-07 — not too demanding in our view — after factoring in the expansion in equity, post the current offer.

Company background

The promoter group of LAT is also the one behind Lumax Industries (LI), the automobile lighting major. LAT's principal customers are Bajaj Auto and LI, which account for about 90 per cent of its revenues. LAT also has a 100 per cent subsidiary, Lumax DK Auto Industries (LDK), which caters to requirements of certain components for Maruti, apart from manufacturing corrugated boxes for LI.

Proceeds from the offer would be used to part-finance the expansion plans of LAT and its subsidiary. Plans include a lighting plant in Uttaranchal, a levelling motor plant in Haryana, a chassis assembly unit in Pune, expanding existing facilities at Pune and Aurangabad, and modernisation of the R&D centre at Pune.

Investment argument

While excessive reliance on one customer for a sizeable chunk of revenues poses a risk, such revenue concentration is inevitable given the swathe of component players angling for business from just three principal two-wheeler manufacturers.

We view LAT's business profile positively given that its principal customer — Bajaj Auto — has consistently demonstrated its understanding of the domestic market with a series of successful launches across product categories in recent years. We expect the momentum at Bajaj to be sustained. That should rub-off positively on the prospects of LAT.The subsidiary company, which accounted for 20 per cent of revenues but 30 per cent of earnings in FY-06, should act as a cushion in case of a downturn in the two-wheeler market.

An increase in the subsidiary's contribution would also be positive, as it enjoys better margins than the parent company (13 per cent in FY-06 versus 5.5 per cent for the parent company on a standalone basis).

For the quarter ended June, the subsidiary chipped in with about 30 per cent of consolidated revenues; as a consequence, consolidated margins have inched towards the 9-per cent mark (7.7 per cent in FY-06).

Also, given the nature of relationship that the company enjoys with leading players (Bajaj and Maruti), it could be expected that LAT will parlay the experience gathered through these engagements with other OEMs (original equipment manufacturers) as well.

Valuation and view

At 15-16 times expected per-share earnings for FY-07, the stock appears not to be too stiffly priced.

Coupled with other metrics such as a return on shareholder funds of close to 30 per cent, a market cap-to-sales ratio of 0.7 at the offer price and a consistent dividend paying record (even a dividend of 20 per cent post expansion would translate into a reasonable yield of about 3 per cent), we think there is scope for upside.

Key risks to our recommendation would include an escalation in input costs and LAT's inability to pass on the same to its customers, apart from a sharp demand deceleration in the two-wheeler segment.

Offer details: About 30-lakh shares are being offered at a fixed price of Rs 75 though an initial public offering, which opened on December 14, and closes on December 21. Centrum Capital and Bigshare Services are the lead manager and registrar to the offer respectively.

Lumax Auto Technologies Ltd.

Background:

• Lumax Auto Technologies Ltd. (LATL) was incorporated as Lumax Auto-Electricals Pvt. Ltd. in year 1981. Subsequently, it became a public company and changed its name to Dhanesh Auto Electricals Ltd. in year 1988. In year 2006 it again changed its name to present one.
• LATL is a part of the DK group of companies. It manufactures automotive components like sheet metal products and lighting systems for two and three wheelers. Its product range includes headlamps, tail lamps, blinkers, fog lamps, engine lamps, chassis assembly, petrol tank and silencers.
• The company has five manufacturing facilities. All facilities are located in Maharashtra, one each at Bhosari and Chakan and three units at Waluj.
• Its customer base includes eminent players like Bajaj Auto Ltd., Maharashtra Scooters and its group company Lumax Industries Limited. Almost 80% of its production is catered to Bajaj Auto Ltd.
• LATL has acquired 100% stake in its group company, Lumax DK Auto Industries Ltd. (LDK) in year 2006 and it became a 100% subsidiary of the LATL. LDK is mainly engaged in manufacturing and supplying of automotive parts for four-wheelers manufacturers.
• Post-issue promoters shareholding will reduce to 59.28% from existing 79.99%.

Objects of the issue:

• To invest in its subsidiary, LDK
  • To set-up automotive lighting unit at Pantnagar for Rs. 23.43 crore.
  • To set up leveling motor unit at existing Manesar unit in Haryana for Rs. 3.90 crore.
  • To enhance infrastructure at Manesar unit for Rs. 0.79 crore.
• To Set up chassis assembly unit at Bhosari for Rs. 11.87 crore.
• Expansion and modernization of existing manufacturing unit at Chakan for Rs.6.58 crore.
• Modernization of development centre at Chinchwad for Rs. 1.15 crore.
• To meet issue expenses of Rs. 2.50 crore.

Strength:

• LATL has customers like Bajaj Auto, Maharastra Scooters, Maruti Udyog, who have been associated with for quite some time.
• Indian Auto component sector has been growing at a CAGR of 16% for past 7 years and is expected to grow at the same rate.

Weakness:

• The company has negative cash flow since FY 2002.
• LATL’s major customer is Bajaj Auto Ltd, which accounts for 80% of its production. This limits the pricing power of the company.
• Upward trend of raw material like steel sheet, tubes and polymers can put significant pressure on operating profit margin.
• The unorganized sector is very large and a threat to reputed brand because of their low pricing.

Valuation:

• The net sale of the company has increased at a CAGR of 42.72% to Rs. 117.23 crore in FY06 from Rs. 40.32 crore in FY03. Net profit has also increased at a CAGR of 76.47% to Rs. 3.83 crore for the same period.
• Return on net worth has reduced to 28.92% in FY06 from 40.14% in FY05. Current net worth of the company as on 30 June’06 is Rs. 14.51 crore. Return on net worth for the same period is 10.80%.
• The book value per share as on 30th June 2006 is Rs.16.84
• Post issue annualised EPS based on 30th June 2006 is Rs. 5.39. The shares are being offered for a fixed price of Rs. 75/-. Post issue P/E multiple comes out to be 13.91. Industry average P/E is 21.50.
• However, the results of FY05 and FY06 are not comparable, as LATL has acquired LDK on Jan’06 and results for FY06 are given on consolidated basis.