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Like many other small-cap stocks that have had a dream run in the booming market conditions of the last two to three years, Lumax Industries too has had its time under the sun. From our ‘buy’ recommendation at ₹452 in January 2016, the stock has zoomed five-fold to touch ₹2,240 at close last Friday. While the prospects appear bright for this player in the automotive lighting space, the stock has become pricey. It currently trades at about 38 times its trailing 12-month earnings. This valuation multiple is much higher than peers such as Fiem Industries (31 times) and other similar sized auto component players such as Gabriel India (23 times) and Jamna Auto Industries (27 times).
Besides, after the strong rally in 2017, the market has begun this year on a volatile note. If it continues to remain choppy or retreats downwards, overvalued small-cap stocks such as Lumax Industries could loose sheen. Hence, it will be prudent for investors to take some profits off the table in the stock at this juncture.
Promising outlook
After initial hiccups due to the changeover to BS IV norms and the move to GST, the auto industry has been clocking robust numbers this fiscal. Overall sales volumes of new vehicles have grown (year-on-year) by about 12 per cent so far in 2017-18, in comparison with the 6-7 per cent increase in 2016-17. Almost all segments, including cars, utility vehicles, motor cycles, scooters and trucks have seen good growth this year. After the lull due to demonetisation and the GST shift, urban consumption has improved in the last few months. Rural consumers too are likely to have more disposable income in their hands from the higher allocations in the budget. Also, reviving industrial growth should keep up demand for commercial vehicles. Hence, new vehicle sales is expected to remain strong in the months to come. Lumax Industries will be a beneficiary of this trend.
The company is a market leader in automotive lighting systems and has 60 per cent market share. It supplies lighting solutions such as head lamps, fog lamps, tail lamps, auxillary lamps and indicators to the automotive industry. It caters mainly to cars and utility vehicles, which bring in about 70 per cent of the revenue. Two-wheeler and commercial vehicle segments chip in with the rest. Thanks to its technical collaboration with Stanley Electric Company of Japan, the company has a good rapport with Japanese automakers.
Its biggest client is Maruti Suzuki, which contributes one-third to the topline. Other clients include Mahindra and Mahindra, Honda cars and motorcycles, Hyundai, Tata Motors, Toyota, Hero MotoCorp and Ashok Leyland. The company started production at the new Sanand facility, Gujarat, from this January. This plant has begun supply of headlamps and rear lamps for the new generation Swift from Maruti Suzuki, that was brought out last month.
The company will also benefit from the preference for LED lamps among automakers. Lower power consumption, better life expectancy and improved aesthetics is driving the demand for LEDs from vehicle manufacturers. Also, the 2020 deadline for BS VI emission norms is encouraging faster adoption of LEDs across vehicle segments, due to their energy efficiency. From under 10 per cent in 2016-17, Lumax now derives 25 per cent of its revenues from LED lamps. The company expects this number to double in 2018-19.
Given the sanguine outlook, investors can re-enter the stock at lower levels at a later date.
Financials
For the nine months ended December 2017, net sales for the company grew by 22 per cent to ₹1,091 crore over the same period in 2016. Net profits grew by 27.5 per cent to ₹45 crore. Operating margin came in at 8.1 per cent, slightly below 8.3 per cent recorded in the nine months ended December 2016, impacted by higher raw material costs.
Considering that LED lamps have higher import content than conventional ones, margin pressures could continue in the next few quarters. However, the company plans to improve localisation levels in LEDs over the near to medium term.
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