Equity Research: Lumax Industries

Summary

Lumax Industries has been consistently evolving in its product innovation with its in-house design and development capabilities. Company enjoys about 50% market share in domestic automobile lighting business. It caters to a variety of customer needs through endto-end automotive lighting solutions for four-wheelers, two-wheelers applications, commercial vehicles, and tractors/Farm Equipment Segment (FES).

ABOUT

• Lumax Industries has been consistently evolving in its product innovation with its in-house design and development capabilities. Company enjoys about 50% market share in domestic automobile lighting business. It caters to a variety of customer needs through end-to-end automotive lighting solutions for four-wheelers, two-wheelers applications, commercial vehicles, and tractors/Farm Equipment Segment (FES). The Company is strengthened by almost 40 years-old strong association with Stanley Electric Co. Limited, Japan (a world leader in vehicle lighting and illumination products). Thereby, extending world-class products and solutions to India.
• Backed by innovation and R&D, Lumax Industries launches new products each year, focusing on industry trends. Thereby, expanding the Company’s addressable market size.
• The R&D team is dedicated to creating cutting-edge designs. These designs align with the dynamic industry requirements and aid in offering services/products backed by the best-in-class technology

SHAREHOLDING PATTERN

AUTOMOTIVE INDUSTRY

The Automotive industry remained slow in the first quarter of FY 2021-22 due to rising incidences of the Covid-19 Pandemic. In the second quarter, the semiconductor chip shortage impacted the industry’s demand for automobiles. The third quarter saw hyper-inflationary pressures influencing the growth in steel prices and raw material costs. The fourth quarter witnessed the Russia-Ukraine conflict, which impacted the global economy, slowed GDP, and raised prices. Despite all these factors, the economy is anticipated to witness a faster rebound in the second half of 2022.

Despite the industry’s instability and slump, Lumax Industries – as an entity – outperformed the industry. They successfully commenced an electronics facility at the Bawal plant and commercial production at new Sanand manufacturing plant. As a company, They are continually putting efforts and delivering premium products to customers, even amid a challenging external environment. 

AUTOMOTIVE COMPONENT INDUSTRY

• As one of the key components in automotive vehicles, lighting is among the most crucial elements for ensuring automotive safety. Premium quality lighting on the vehicles are beneficial for increasing visibility in dark, bad weather conditions and reducing probability of road accidents.
• The Indian Automotive Lighting industry witnessed significant growth on account of increased automotive sales and economic growth. Additionally, factors like rising population and vehicle safety concerns, triggered by Government regulations, are driving the industry.
• The Auto Component industry, in spite of the third wave of pandemic, remains optimistic. India is emerging as a global hub for auto component sourcing and the industry exports over 25% of its production annually (Source: IBEF). While the auto component exports are expected to grow at 23.9% annually it is estimated to reach USD 80 Billion by 2026. (Source: IBEF).
• The investments from FDI received during July-September 2021 stood at USD 19.77 Billion is a testimony of its emergence as a global player
• Moreover, increased focus on deep localization in the Auto Industry and the recent announcements of PLI schemes on Advanced Chemistry Cell (ACC) Batteries and Auto & Auto Components will facilitate creation of state-of-the-art automotive value chains. Thereby, helping India develop into an attractive alternate source of high-end auto components.  

SEGMENTS: (4 SEGMENTS)

Diversified Product Range

• 4-wheelers

• 2-wheelers

• Commercial Vehicles

• Farm Equipment Sector (FES)

COMPETITIVE ADVANTAGE 

• Partnerships

With more than three & half decades of partnership with Stanley, Japan, the only global auto lighting company to manufacture LED worldwide, having presence in Japan, America, China, Asia Pacific and Europe

• Product Portfolio

One of the few players with largest range of lighting solutions & Electronics

• In-House Design

2 R&D centers & 2 Overseas Design centres to stay ahead of the curve in design trends

KEY HIGHLIGHTS:

• Access to technology from key shareholder, Stanley Electric

Stanley Electric Corporation (SECL) is one of the leading suppliers of automotive lighting solutions globally and it developed the first LED high mount stop lamp for the automotive sector. Strong technical support from its collaborator helps Lumax in evolving trends in the 5 Lumax Industries Ltd. lighting industry, such as LED. Lumax is also expanding its product line which include HVAC panels and electronic cables in collaboration with SECL. The product will be localized and manufactured at the newly set up electronic facility at Bawal, Haryana. With the introduction and emphasis of localization by OEMs, Lumax Industries is investing in the upgradation of its existing manufacturing facilities and also setting up Electronics manufacturing facilities. It will help in successful localization of technologically advanced products thus giving the customers immunity from supply chain risks with best quality products. 

• Shifting Preference Towards LEDs

LED lamps have become a preferred choice over Halogen lamps over the past few years. Despite higher prices, Original Equipment Manufacturers (OEMs) have been shifting to LED lamps, as they are more efficient, and improve the style and appearance of vehicles. Manufacturing LEDs requires significant technical expertise, and the company gets strong support from Stanley. Better visibility, superior design, and higher energy efficiency have been key drivers for it. Sighting a structural demand shift in the industry, the company expects contribution to reach around 40% in FY24 and it would further improve to 45-50% over the long term. LEDs are prospective high-margin products for the company. The Electric Vehicle (EV) market in India is expected to register about 45% CAGR between the year 2020 and 2027. It is expected to hit 6.3 mn unit annual sales by 2027. The EV industry is projected to create huge direct and indirect job opportunities by 2030. The growth in EVs will help expand the automobile industry, and in a way, benefit players like Lumax due to transition to LEDs.

KEY RISK

• Dependent on OEMs

The e-mobility push, BS–VI norms compliance, rising input and insurance costs led to sharp increase in overall vehicle price. Auto industries spending is discretionary which makes it cyclical in nature. Overall sales are highly dependent on sales by OEMs. Therefore, any slowdown in Auto sales can dampen their revenue growth.

• Higher dependency

on few clients Major part of revenue comes from few OEMs. Company remains vulnerable to different risks associated with OEMs, such as: losing out a major customer, significant decrease in order volumes, decreased sales volume of the overly exposed vehicle models. This could impact operational and financial performance.

• Competitive Intensity

Strong long-term industry outlook has led to new players entering the market, resulting in intense competition. In case, the company doesn’t focus on its R&D and deliver at a reasonable price, then this could impact its revenue and profitability. Company faces competition with Minda Industries (PV and 2W), FIEM (2W), India Japan Lighting (PV) and Marelli Motherson Automotive Lighting India Private Limited (PV) among others.

FINANCIALS

• For the Financial Year 2021-22 on consolidated basis, the profit before exceptional items, income tax and share in profit of associates stood at 6,328.70 Lakhs as compared to 3,151.98 Lakhs in the previous year witnessing a significant increase of 101%. The PBT after exceptional items and share in profit of associate stood at 5,281.93 Lakhs as compared to 3,306.07 Lakhs in the last year registering an increase of 60%. The Profit after Tax (PAT) stood at 4,072.47 Lakhs as compared to 1,815.23 Lakhs registering a significant increase of 124%. The Total Comprehensive Income increased to 3,785.45 Lakhs as against 1,957.35 Lakhs in the last year registering an increase of 93%. The Basic and Diluted Earnings per share stood at 43.57 registering a significant increase of 124%. 
• Board has recommended a Dividend @ 13.50/- (i.e. 135%) per equity share having face value of 10/- each for the FY 2021-22.
• Conventional lighting contributed 67% to the revenues in FY22 while LED lighting contributed the balance. Management targets to further improve the LED lighting contribution to 45-50% over the long term.
• PV contribution to revenue increased by 300 bps YoY to 65% while the 2W sector contribution declined to 28% (from 32% in FY21) and the rest came from the CV segment in FY22. The breakup of revenue between Front Light: Rear Light: Others stood 64:25:11 vs 66:25:9 in FY21.
• Management expects 25-30% growth in total revenue for FY23.
• Company has an order book of Rs 800 Cr as on Mar-2022. It would be executable over the next 24-30 months.
• For FY22, Mould sales increased 80% YoY at Rs 92 Cr. Mould sales are expected at Rs 130-150cr in FY23.
• Operating margin is expected at around 10% for FY23. Management guides for 12-13% EBITDA margin in the medium term.
• Company incurred a capex of Rs 130cr in FY22 while the capex for FY23 is expected to be lower. New electronic facility at Bawal has commenced commercial production in Jan-2022 which will enable the company to enhance its localisation strategy in electronics. This facility will help in margin improvement in the medium term.

   

CAPACITY EXPANSION

The Company is constantly expanding the boundaries of its existing facilities and during the year under review, the Company has invested towards capacity expansion of its manufacturing facilities as follow:

- Capex for new Projects at plants 4,178.69 Lakhs

- Capex for new Projects at Bawal and Sanand 3,576.56 Lakhs and 6,908.78 Lakhs respectively

Further, an expenditure on Research and Development facilities of Chakan and Gurugram was done to the tune of 211.02 Lakhs.

TECHNOLOGY, INNOVATION & QUALITY

• Based on challenges ahead, the car industry changes to EVs and software-defined cars; the tier-1 lighting business is in a huge structural change; enabled by technologies Sensor based, Charging indicator Lamps, new lighting elements, micro optics, and much more. It looks a lot like disruption.  On the safety side of business, Company has to look much more at the whole system, not only the usual view of a subsystem like the headlamps. Accordingly the Company needs to develop more adaptive systems— adaptive to the complete environment. Small projectors for dynamic ground illumination are starting to enter the car. Lit logos are trending, but legislation is still difficult. All Lighting Functions are dynamic in future. One of the Company’s future tasks will be providing the best light for the respective situation taking care of Styling, Quality & Cost. 
• To achieve Technology Roadmap the Company has expanded its Engineering Strength in Europe & India with the experts in Optics, Electronics & Core Engineering. This will expedite the pace to catch up with Lighting Technology in the west and have it available for OEMs in India at affordable cost. The Company already has a tie-up with Stanley Japan which continues to be a Pillar of strength.

OBSERVATION

In March 2022, the company stated that it had relocated the Manesar facility's activities to its electronics plant in Bawal, Haryana, for operational efficiency. Although the semiconductor shortage is a worry for the whole vehicle sector and may have an impact on output in H1FY23, the underlying demand environment remains healthy. We remain bullish on the company because of its market leadership in the lighting industry, long-term OEM agreements, growing share of the high-margin LED segment, localization strategy, and product innovation.Company is expanding its product line to include Heating, Ventilation and Air Conditioning (HVAC) panels in collaboration with SECL, which would aid in diversification of product portfolio over the medium term.