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Our Take:

Lumax Industries has been consistently evolving in its product innovation with its in-house design and development capabilities by introducing new generation LED products. Lumax Industries enjoys ~50% market share in domestic automobile lighting business. The company has gained access to new platforms of clients, thus enabling it to retain its market share. Company has a very strong partnership for almost 38 years with Stanley Electric. Both Stanley, Japan and Jain family has 37.5% stake each in the company. It supports completely on the technology transfer as well as the global relationships which they enjoy with customers. Stanley is in the top 2 lighting players in Japan and in the top 5 in the world. Company has been a preferred supplier for many key models of the OEMs.

The company is fairly insulated from any electric vehicle (EV) disruption as it has no exposure to engine and related parts in its product portfolio. Lumax is expected to be a major beneficiary due to its robust presence in automotive lightning with a strong clientele base. Company spends 2-3% of its revenue in R&D, which is likely to continue given need of continuous innovation in the business. In 2W segment, Honda Motorcycle (HMSI) and Hero Moto (HML) are top clients while in PV segment, Maruti Suzuki (MSIL), Honda Cars, M&M and Tata Motors are key clients for the company.

It derives ~75% of revenue from top-6 clients. Its 63% revenue comes from PV followed by 31% from 2-wheelers and 6% from CVs. OEMwise MSIL is its largest client contributing 36% of revenues followed by HMSI (14%), HML (11%), M&M (9%), Tata Motors (8%) and others (22%). It has incurred capex of about Rs 250cr in the past two years towards setting-up a manufacturing facility for electronic components and maintenance of existing units, besides expansion for select OEMs.

The collaboration with Stanley Electric, Japan, has helped the company progress very well. Further, the strong partnership with SL Corporation, Korea, specifically for Korean OEMs in India, has given Lumax a strong competitive advantage. The other key players in the industry are Minda Industries, Fiem Industries, SL Lumax and Lumax Auto Technologies etc. Company is also expanding its product line to include Heating, Ventilation and Air Conditioning (HVAC) panels and electronic cables in collaboration with SECL, which would aid in diversification of product portfolio over the medium term.

View & Valuation:

Lumax Industries has registered 7% CAGR in revenue led by strong volume growth over FY15-20. EBITDA has grown at 22% CAGR on the back of better product mix (higher LED business) and cost control measures. Healthy topline and strong margin resulted into 34% CAGR in net profit over the same period. Company has been able to reduce the rejection rates from 5-6% in FY14 to 1.5% in FY20 and it further plans to reduce to less than 1% in the next couple of years.

Overall performance of the auto industry was strong during first half of FY19 and thereafter it started deteriorating on account of a series of factors like revised axle load norms, liquidity issues and general economic slowdown and Covid-19. During the last 4-5 years, the company has significantly focused on cost reduction and process improvement initiatives.

We estimate EBITDA margins to improve by 290bps over FY21-23E on better product mix and cost optimization initiatives. We expect topline to register 6% CAGR during FY20-23E. LED constituted around 34% of the company’s overall business in 9MFY21. We expect LED lighting contribution in the company’s revenue mix will be ~40% in the medium to long term. Healthy revenue coupled with margin expansion would lead to 8% CAGR in net profit over the same period. At CMP, Lumax trades at 16.1x FY23E EPS. We feel that investors’ can buy the stock at LTP of Rs 1570 add more on dips to Rs 1418 for base case fair value of Rs 1708 (17.5x FY23E EPS) and bull case fair value of Rs 1855 (19x FY23E EPS) over the next two quarters.

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