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CD Equisearch Pvt Ltd June 23, 2016

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Lumax Industries Ltd.

No. of shares (m) 9.35

Mkt cap (Rs crs/$m) 658//97.4

Current price (Rs/$) 704/104.2

Price target (Rs/$) 884/13.1

52 W H/L (Rs.) 744/280

Book Value (Rs/$) 287.1/4.2

Beta 1.1

Daily volume (avg. monthly) 61460

P/BV (FY17e/18e) 2.1/1.9

EV/EBITDA (FY17e/18e) 7.6/6.9

P/E (FY17e/18e) 11.2/9.6

EPS growth (FY17e/18e) 12.9/17.2

OPM (FY16/17e/18e) 7.1/7.1/7.1

ROE (FY17e/18e) 20.3/20.7

ROCE (FY17e/18e) 13.7/14.2

D/E ratio (FY17e/18e) 0.3/0.3

BSE Code 517206

NSE Code LUMAXIND

Bloomberg LUMX IN

Reuters LUMA.BO

Shareholding pattern %

Promoters 73.6

MFs / Banks / FIs 0.1

FIIs 1.6

Govt. Holding 0.0

Public & Others 24.7

Total 100.0

As on March 31, 2016

Recommendation

BUY Phone: + 91 (33) 4488 0055

E- mail: [email protected]

Figures (Rs crs) FY16 FY17e FY18e

Income from Operations 1255.18 1380.69 1518.76

Other Income 3.88 3.77 3.90

EBITDA (other income included) 92.43 101.80 111.73

Net Profit after associate profit & EO 52.03 58.74 68.83

EPS (Rs) 55.66 62.84 73.63

EPS growth (%) - 12.9 17.2

Equity 9.35 9.35 9.35

Company Brief Lumax Industries Ltd is a leading provider of high quality automobile

lighting systems and solutions, which include stellar quality lamps and other

related products. It has a more than three decades old technical and financial

collaboration with Stanley of Japan (which holds 37.5% stake in the

company), a world leader in vehicle lighting and illumination products for

automobiles.

Quarterly Highlights

� Lumax registered a modest growth of 4.1% in Q4FY16 y-o-y in its

revenue at Rs 323.22 crores ($47.8 m) compared to Rs 310.40 crores ($45.9

m) in Q4FY15. Largely due to weak dispatches of India’s two & three

wheeler vehicles, it reported sub 10% growth in revenues to Rs 1255.18

crores ($185.8m) last fiscal compared to Rs 1142.56 crores ($169.1 m) in

the same period a year before. Yet early signs of cyclical turnaround in

passenger and commercial vehicle sales bode well for the company.

� Fall in the raw material costs as a % to sales (66.6% in Q4FY16 vs 71.1% in

Q4FY15) and increase in the productivity levels expanded the operating

margins by 276 bps to 6.7% (3.9% in Q4FY15). The EBITDA also saw a

remarkable growth of 72.7% (Rs 22.84 crs vs 13.23 crs) in the last quarter,

buttressed by cost reduction initiatives and technological upgradation.

More gains are expected as the upcoming design centre in Taiwan will

further optimize the cost of production.

� Profit after tax in Q4FY16 stood at Rs 10.34 crores ($1.5m) compared to

Rs 2.43 crores ($0.4m) in the same quarter of the previous year registering

a massive growth of 324.7% which was backed by higher margins and

reduction in interest costs. The net profit margin reported in the last

quarter jumped by 242 bps to 3.2% (0.8% in Q4FY15). PAT last fiscal

stood at Rs 37.37 crores ($5.5m) compared to Rs 16.54 crores ($2.5m) in

the year ago period.

� The stock currently trades at 11.2x FY17e EPS of Rs 62.84 and 9.6x FY18e

EPS of Rs 73.63. Galvanized by stable margins and technology

upgradation initiatives, earnings would advance by 15% on average over

the next two years. Low volume base of the Indian automobile sector

shifts odds in favour of value minded investors. Needless to mention

sourcing benefits arising out of the new design centre in Taiwan.

Weighing all odds, we retain our ‘buy’ rating on the stock with a revised

target of Rs 884 (previous target Rs 625) based on 12x FY18 earnings.

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CD Equisearch Pvt Ltd


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Outlook & Recommendation

Industry Outlook The Indian automotive industry has come a long way transforming from a locally focused industry to emerging as one of the

fastest growing automotive markets in the world with a buzz to become the fourth largest automobile producer by 2020 after

China, US and Japan. The last fiscal saw a high growth of 11.5% in the commercial vehicle segment (-2.8% in FY15) and 7.2% in

the passenger vehicle segment (3.9% in FY15) with the overall domestic sales growth dropping to 3.8% owing to the poor growth

in the two and three wheeler segment. The passenger vehicles segment saw the highest growth in the last few years which has

come on the strength of new model launches, deep discounts and the base effect -FY13 (1.3%) and FY14 (-6.1%) and FY15 (3.9%)

(Source: SIAM).

Weak consumer spending -due to elevated inflation and interest rates- had an adverse impact on demand for these vehicles.

With economic recovery expected in financial year 2016-17, demand for automobiles across the various categories is likely to

receive required impetus. As sales growth in commercial vehicles and passenger vehicles has already entered the positive

trajectory, growth would also accelerate in the two-wheeler and three-wheeler segments, driven by expected moderation in

interest rates, fall in ownership cost due to lower crude oil prices and improvement in economic activity and consumer

sentiments.

The Indian auto component industry can be seen today as a significant player in the global automotive supply chain. The

industry has been observing robust growth, and its turnover is anticipated to reach US$ 115 billion by FY21 from US$ 38.5 billion

in FY15. The contribution to GDP is expected to rise to as much as 3.6% by 2020 from 2.1% in 2009. With fortunes of the Indian

auto components industry directly linked to those of the OEM industry, prospects of the industry for FY17 looks good, as

accelerated vehicle demand would translate into increased revenues for the components industry.

India's exports of auto components increased at a CAGR of 21.6% in the period FY10-15, reaching to $11.2 billion in FY15. Europe

accounts for the largest share of Indian auto components exports (36.4%) followed by North America (23.3%) and Asia (25.3%).

This has been driven by the growth of global OEM sourcing from India and increased indigenization of OEMs which is turning

the country into a preferred designing and manufacturing base. With India becoming a global hub for small engines, the exports

are expected to range between US$ 80-100 billion by 2026 (Source: IBEF).

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The global automotive lighting market is projected to grow at a CAGR of 7.2% from 2016 to 2021 reaching US$ 29.53 billion.

Increasing vehicle demand will primarily push the global automotive lighting market and Asia-Oceania region is estimated to

dominate the automotive lighting market in terms of value due to factors such as lenient labor laws, economical labor and raw

materials, strong state support that supports growth in vehicle production.

Strategic move in Taiwan

Keeping in view of its focus to leverage on evolving opportunities in design and technology, the company inaugurated its state-

of-the-art design centre in Taiwan to strengthen its in-house design capabilities. The opening of the design centre is seen as a

strategic step towards company's self-reliance initiatives and making designing cost competitive which will leapfrog its business

in Japan, South Korea and mainland China in future.

The design centre in Taiwan will fulfill ever evolving market needs for innovative lighting solutions and reduce the

development time for technologically advanced products. It will also be an interface with key markets of automotive lighting

tool makers. With an annual purchases of around NT$350 million from Taiwan’s tooling, machinery and equipment suppliers,

Lumax can benefit from its comprehensive supply chain, industry clusters, innovative R&D and management capabilities.

Financials and Valuations With almost 60% of the market share in the domestic automotive lighting industry, Lumax Industries managed to notch a

revenue growth of 9.9% in the last fiscal year-ending the two years of slow growth (4.3% in FY14 & 2.3% in FY15), on the back of

rising demand for passenger vehicles and commercial vehicles. The revenue reported was largely in line with our expectations -

Rs 1255.18 crores ($185.8m) vs FY16e of Rs 1256.82 crores ($186.04m).

In the light of moderation in the volumes and with the expectation that the two wheeler segment will see an accession in the next

two years, we project the revenues to grow at a CAGR of 10% over the next two years- Rs 1380.69 crores ($204.4 m) and Rs

1518.76 crores ($224.8m) in FY17 & FY18 respectively.

With prudent raw material sourcing and volume growth leading to benefits of operating leverage, the automobile lighting leader

showed a flabbergasting gains in operating margin to 7.1% (the highest reported in the last five years). Unveiling value added

products such as LED lighting should help Lumax to expand its margins further as LED lights are increasingly preferred by auto

manufacturers for exterior lighting as it consumes less power and has a longer life.

Meltdown in the commodity prices could further galvanize operating margins which is expected to hover around 7.1% over the

next two years. The Ebitda growth also zoomed to over 40% last fiscal year with robust performance in the second half of the

year. With SIAM lowering down the current year’s growth forecast of passenger vehicles to 6-7% from 12% and Lumax deriving

half its revenues from the passenger car segment, we expect the ebitda to grow at a sustainable rate of 9-10% over the next two

years.

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The company has no significant capex plans over the next two years and it intends to invest 40-50 crores each in FY17 and

FY18. This capex will mainly be a routine capex and will be utilized for upgradation of plants and improvement in technology.

Due to headwinds in the auto sector, we do not envisage a dramatic increase in its capacity utilization rate from its current 70-

80%.

SL Lumax Ltd, one of the associate companies of Lumax, is primarily engaged in the manufacturing of auto components like

lamps, chasis parts, mirrors and gear shifters mainly for Hyundai. It reported sales of Rs 921.5 crores ($136.4m) with a growth

of 30.9% (Rs 704.17 crores/$104.2 m in FY15) and registered a jaw dropping jump in the profits to Rs 71.18 crores ($10.5 m)

(growth of 664.8%). The company has a net worth of around Rs 350 crores ($51.8 m) and with increase in sales and cost control

measures the prospects looks encouraging.

On a standalone basis, the profit after tax ameliorated by 126.0% to Rs 37.37 crores ($5.5m) (Rs 16.54 crores ($2.4m) in FY15) on

the back of higher utilization across plants, reduction in debt levels leading to lower interest expenses and lower capex

requirement justified by the sturdy rise in margins by 155 bps (3% vs 1.45%). On the consolidated basis, Lumax reported the

profit after tax of Rs 52.03 crores ($7.7 m) of which Rs 15.15 crores ($2.2 m) is Lumax’s share of its associate profit. Going

forward, we expect the profits to grow at a CAGR of 15% over the next two years to Rs 58.74 crores ($8.7m) & Rs 68.83 crores

($10.2m) in FY17 and FY18 respectively. Technology initiative, robust growth plans in designing, and a loyal base of the clients

with introduction of new models will help Lumax in achieving the projected profits and sustaining margins.

The stock currently trades at 11.2x FY17e EPS of Rs 62.84 and 9.6x FY18e EPS of Rs 73.63. Galvanized by stable margins and

technology upgradation initiatives, earnings would advance by 15% on average over the next two years. Low volume base of

the Indian automobile sector shifts odds in favour of value minded investors. Needless to mention sourcing benefits arising

out of the new design centre in Taiwan. Weighing all odds, we retain our ‘buy’ rating on the stock with a revised target of Rs

884 (previous target Rs 625) based on 12x FY18 earnings. For more info, refer to our Dec report.

Note: All $ values expressed in the write up are translated at current exchange rate.

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Risks and Concerns

Automobile Industry

The automobile industry has been in despondency state in the past years with a little cyclical upturn to be expected in the

coming years. The fortunes of the company are directly dependent on the OEM market which now demands lower wattage

lamps to save energy. Moreover, delivery schedules and quality standards have to be strictly adhered to. With lighting

products becoming an integral component of the vehicles, the auto lighting market needs to continuously focus on the

technological advancement and stringent regulations. The macroeconomic factors also have a huge impact on the automobile

industry and its operations.

Raw material Risk

The company is exposed to fluctuation in commodity prices. Yet the company can lessen these risks by strengthening its R&D

capabilities and deepening their OEM engagement.

Cross Sectional Analysis

Company Equity* CMP Mcap* Sales* Profit* OPM(%) NPM(%) Int

cov. ROE(%) DER

Mcap/

sales P/BV P/E

Lumax Ind 9.3 704 658 1255 52 7.1 4.1 4.1 19.4 0.4 0.5 2.5 12.6

FIEM Ind 12.0 836 1000 988 57 12.9 5.8 6.0 22.9 0.4 1.0 3.7 17.4

*figures in crores, all figures on ttm basis Although the companies presented in the exhibit above belong to the auto ancillary industry space yet they are not fully comparable due to variation in products manufactured.

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Financials

Quarterly Results- Standalone Figures in Rs crores

Q4FY16 Q4FY15 % chg FY16 FY15 % chg

Revenue From Operations 323.21 310.40 4.1 1255.18 1142.56 9.9

Other Income 1.35 1.15 17.3 4.38 5.56 -21.2

Total Income 324.56 311.55 4.2 1259.55 1148.12 9.7

Total Expenditure 301.73 298.32 1.1 1166.62 1083.25 7.7

EBITDA (other income incl.) 22.83 13.23 72.6 92.93 64.87 43.3

Interest 3.67 4.09 -10.3 13.44 14.43 -6.9

Depreciation 9.66 7.50 28.9 37.90 36.16 4.8

PBT 9.50 1.64 480.9 41.59 14.28 191.3

Tax -0.84 -0.80 5.2 4.22 -2.30 -283.4

PAT 10.34 2.43 324.7 37.37 16.58 125.5

Extraordinary Item - - - - 0.04 -

Adjusted Net Profit 10.34 2.43 324.7 37.37 16.54 126.0

EPS 11.06 2.60 324.7 39.98 17.69 126.0

Consolidated Income Statement Figures in Rs crores

FY16 FY17e FY18e

Revenue From Operations 1255.18 1380.69 1518.76

Other Income 3.88 3.77 3.90

Total Income 1259.06 1384.46 1522.66

Total Expenditure 1166.62 1282.66 1410.93

EBITDA (other income included) 92.43 101.80 111.73

Interest 13.44 11.24 10.20

Depreciation 37.90 40.18 42.73

PBT 41.10 50.38 58.80

Tax 4.22 5.19 6.06

PAT 36.88 45.19 52.74

Profit from Associate 15.15 13.54 16.09

Adjusted Net Profit 52.03 58.74 68.83

EPS (Rs) 55.66 62.84 73.63

Equity Capital 9.35 9.35 9.35

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Consolidated Balance Sheet Figures in Rs crores

FY16 FY17e FY18e

Sources of Funds

Share Capital 9.35 9.35 9.35

Reserves & Surplus 259.02 300.38 346.21

Total Shareholders’ Funds 268.37 309.73 355.56

Long Term Debt 10.57 5.30 2.92

Total Liabilities 278.94 315.03 358.48

Application of Funds

Gross Block 762.79 812.79 862.79

Less: Accumulated Depreciation 354.76 394.94 437.67

Net Block 408.03 417.85 425.12

Capital Work in Progress 17.00 15.00 20.00

Investments 68.79 81.84 97.43

Current Assets, Loans & Advances

Inventory 104.55 115.01 126.51

Trade Receivables 181.19 201.12 223.24

Cash and Bank 3.46 5.08 5.40

Other Assets 43.72 51.68 57.23

Total CA & LA 332.92 372.89 412.39

Current Liabilities 520.44 536.64 560.10

Provisions-Short term 5.59 19.08 23.82

Total Current Liabilities 526.04 555.72 583.92

Net Current Assets -193.12 -182.83 -171.54

Net Deferred Tax -19.44 -24.63 -30.69

Net long term assets -2.32 7.80 18.16

Total Assets 278.94 315.03 358.48

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Key Financial Ratios

FY17e FY18e

Growth Ratios (%)

Revenue 10.0 10.0

EBITDA 10.1 9.8

Net Profit 12.9 17.2

EPS 12.9 17.2

Margins (%)

Operating Profit Margin 7.1 7.1

Gross profit Margin 6.6 6.7

Net Profit Margin 4.3 4.5

Return (%)

ROCE 13.7 14.2

ROE 20.3 20.7

Valuations

Market Cap/ Sales 0.5 0.4

EV/EBITDA 7.6 6.9

P/E 11.2 9.6

P/BV 2.1 1.9

Other Ratios

Interest Coverage 5.5 6.8

Debt Equity 0.3 0.3

Current Ratio 0.7 0.7

Turnover Ratios

Fixed Asset Turnover 3.3 3.6

Total Asset Turnover 4.6 4.5

Debtors Turnover 7.2 7.2

Inventory Turnover 11.7 11.7

Creditor Turnover 4.1 4.2

WC Ratios

Debtor Days 50.5 51.0

Inventory Days 31.2 31.2

Creditor Days 90.0 86.3

Cash Conversion Cycle -8.3 -4.1

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Financial Summary – US dollar denominated

million $ FY16 FY17e FY18e

Equity capital 1.4 1.4 1.4

Shareholders funds 40.5 45.8 52.6

Total debt 18.2 15.7 14.4

Net fixed assets (including CWIP) 64.1 64.1 65.9

Investments 10.4 12.1 14.4

Net current assets -29.1 -27.1 -25.4

Total assets 42.1 46.6 53.1

Revenues 191.7 204.4 224.8

EBITDA 14.1 15.1 16.5

EBDT 12.1 13.4 15.0

PBT 6.3 7.5 8.7

PAT 7.9 8.7 10.2

EPS($) 0.85 0.93 1.09

Book value ($) 4.3 4.9 5.6

Income statement figures translated at average rates; balance sheet at year end rates; projections at current rates All dollar denominated figures are adjusted for extraordinary items.

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