Investors can make use of the run-up in the Lumax Industries stock to book profits. Since our December 2010 ‘buy’ recommendation at Rs 266, the stock has moved up about 45 per cent. At the current market price of Rs 386, the stock trades at a rich price-to-earnings ratio of about 37 times its trailing 12-month earnings.

Lumax manufactures head-, tail-, and auxiliary-lamps for the auto industry. The company is a tier-I supplier to automakers such as Maruti Suzuki, Hero MotoCorp, Honda, Tata Motors, Toyota, and Mahindra and Mahindra.

Replacement demand not strong

After growing at 26 per cent (year-on-year) in both 2009-10 and 2010-11, auto industry volume growth took a beating last year. High inflation, interest rates and a slowing economy pulled growth down to 12 per cent. This jaded performance has continued this year as well.

Among all the segments, passenger cars were the most affected in this period, with volume growth in low single digits. Lumax, which earns at least half its revenues from the passenger cars segment, has borne the brunt of this slowdown. In addition, intermittent shutdowns at one of its major clients — Maruti Suzuki — following workers’ strikes in the last year, have been a double whammy for the company. After the recent violence, the Manesar plant still operates at less than half its capacity. Besides, although lamps do tend to be replaced off and on due to breakage, the lighting segment does not have sizeable replacement market sales. In comparison, other components, such as tyres, batteries or clutches get a helping hand from replacement market demand at times when direct sales to auto manufacturers take a beating.

Challenging times

Weak demand, high input costs and a jump in interest costs due to capacity expansion pulled down profit growth in the year ended March 2012 and the first quarter of this year as well. In the quarter ended June 2012, net sales grew by 16 per cent to Rs 270 crore, while net profits slipped by 68 per cent to Rs 1.5 crore. Operating margins fell to 4.5 per cent from 5.8 per cent a year ago. The months ahead will continue to be challenging. For one, economic growth seems to be in no hurry to pick-up. Second, two-wheelers and light commercial vehicle sales, which showed some resilience last year, have now begun slowing down. Three, the hike in diesel prices announced last week may dampen demand a bit further for passenger cars. Considering the price differential between petrol and diesel, the majority of cars that sold so far were diesel models.

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