Lumax Industries : An EV disruption Proof Story

Market Cap-1,240 cr

CMP- 1325

Industry- Auto Components

Business Overview

Lumax Industries is renowned company under the DK Jain group. It started as a trading company in 1945 and today it is a full-fledged provider of premium quality automotive lighting solutions for two-wheeler, four-wheeler, trucks, busses, tractors, farm-equipment’s and other various applications. It has a market share of almost 55%-60%. The company entered into a technical collaboration with Stanley Electric Co. Ltd., Japan (SECL) since 1984, which currently holds around 37.5% equity stake in the company. Stanley is a world leader in Vehicle Lighting & Illumination products for Automobiles.

Indian auto Industry

India is the world’s 4th largest automobile industry. The Indian automobile industry contributes to almost 7% of India’s GDP. Overall domestic automobiles sales increased at 6.71 per cent CAGR between FY13-19 with 26.27 million vehicles getting sold in FY19. Domestic automobile production increased at 6.96 per cent CAGR between FY13-19 with 30.92 million vehicles manufactured in the country in FY19. Indian automotive industry (including component manufacturing) is expected to reach Rs 16.16-18.18 trillion (US$ 251.4-282.8 billion) by 2026.

Transitions to BS VI will lead to clearance of BS IV inventory and also result in an uptick in the production of BS VI vehicles. However, BS VI will lead to an increase in the cost of vehicles and to ensure that this additional cost does not have any impact on the demand, SIAM has approached to government to reduce GST rate from 28% to 18% on vehicles and to also introduce an incentive based scrappage policy.  2 wheelers form the majority of the production ie 80%.

Growth of EV’s

The Indian Government has said that it aims to make 30% of the Indian Vehicles electric by 2030. According to media reports the EV penetration is only 1% till now There were many special policy measures to ensure this:

  • Cutting of GST rates to 5% from 28% on EV
  • 1.5 lakh tax exemption on loans to buy electric vehicles

On average, electric vehicles are 75-80% cheaper from fuel and maintenance perspective. EVs have 75-80% fewer moving components and this ultimately translates to a much lower maintenance bill. A lighting system player in the auto sector would be least impacted by the growth of EV.

(https://www.ibef.org/industry/india-automobiles.aspx)

(http://www.siam.in/statistics.aspx?mpgid=8&pgidtrail=13)

(https://inc42.com/features/what-is-the-future-of-electric-cars-in-india/)

Indian Automotive lighting

Key growth drivers

  • Emphasis towards road safety- Rising number of accidents due to lower visibility is a major cause of concern among vehicle drivers today. This has paved the way for a rise in demand of brighter automotive lighting.
  • New government regulations- Lighting makes a part of the safety critical components that are covered under AIS-037. Due to this there will be more adoption of LED lamps thus leading to growth in demand for the LED lamps.

Key customers

Percentage wise revenue contribution

CompanyMaruti SuzukiHonda MotorsHero MotocorpM&MTataHonda CarsOthers
202038%15%10%9%5%4%19%
201936%14%11%9%7%5%18%
201832%12%11%10%7%9%19%
201736%9%9%12%6%7%21%

The company’s other key clients are Nissan, MG, Fiat, Toyota in 4 wheelers. Yamaha, Piaggo, TVS in 2 wheelers. Ashok Leyland, Force Motors and Diamler in commercial vehicles. The company also exports to Audi, Jhon Deere, Case New Holland and Truck Lite thus giving it a very good customer base

Manufacturing facilities and backward integration

The company has 11 manufacturing plants in key auto belts of India. The company has 2 in house R&D centres in Gurugram and Pune and the company also has a design centre in Taiwan. The company works with over 4893 total employees.

Margins Accretive Backward Integration- The company has been constantly trying to localize their raw materials by acquiring the PCB business from Lumax Auto in April 2019. This will help the company bring down the cost of production and increase their margins.

In the 1st quarter of FY20 the company got benefits of 50bps on EBITDA margins due to the in sourcing of the PCB facility. This was previously imported by the company and is still imported for certain models but is localized for many models. The same benefit was 70bps during Q2 FY20. This was in conditions of degrowth and once volumes pick up there will be a higher contribution to the margins. (As per management guidance in Concalls).

Exponential Potential- Shift from conventional to LED lamps

The ratio of conventional lamps to LED lamps was of 92%:8% in 2016-2017. This ratio stands at 66%:34% in FY20. There has been a massive shifts to LED lamps in recent years and according to the management this ratio will be around 50%:50% in the coming years as the industry moves towards BS-VI, LED lighting will increase.

The LED prices currently are 3.5x of that of the conventional lighting. The management expects the prices to mature and come to around 2x to 2.5x of conventional lighting due to localization. The LED business comes from replacement demand as well as introduction of complete or partial LED’s in new models.

By April 2020, the Indian Government will introduce BS – VI norms that will regulate emission, energy-efficiency and even safety factors in vehicles. Under the regulation, both two wheelers and four-wheelers will have to use oxygen sensors to reduce energy consumption. This regulation, in turn, will trigger the shift from conventional incandescent halogen lamps to modern LED lighting solutions. LEDs are energy efficient, thus reducing the load on engines.

The company can pass the hike in raw material/forex movements to the customers with a 6-month lag.

Lumax Product and segment Mix

Particulars201820192020
Front Lighting66%69%66%
Rear Lighting23%24%25%
Others11%7%9%
Particulars201820192020
PV68%67%66%
CV6%6%5%
2-wheelers26%27%29%

Passenger vehicles have a slightly higher margin than commercial vehicles and 2 wheelers according to the management.

Financials

Particulars2017201820192020
Sales1271164918511602
YOY change 30%12%-13%
Expenses1170151516981444
EBITDA101135154158
EBITDA margins8%8%8%10%
ROCE20%20%26%26.21%
ROE18.8%21.3%18.6%24.0%
EV/EBITDA1315.411.18
PE23.828.722.414.01
EPS49.3367.65114.8977.35
Debt/Equity0.30.30.40.8
CFO100140104

The company has been steadily expanding margins due to its insourcing capabilities. Their material costs as a percentage of their expenses are coming down as they are trying to localize their raw materials. Their 3-decade long partnership with Stanley gives them ready access to newer technology hence they are staying at the forefront when it comes to technology.

Capex Cycle

It has done a capex of about 354 crores in the past 5 years and has been continuing to enhance its capabilities and make efficient production processes even in a downcycle. Once the cycle turns the operating leverage will kick in and the margins will shoot up.

About Foreign Partner

Collaboration with global leader like Stanley Electric Co provides huge advantage in company’s R&D efforts. Lumax Ind’s partnership with Japense lighting soultions provider dates back to 1984, Lumax Industries holds 37.5% stake while Stanley with another 37.5%.

Strong partnership not only gives Luamax Ind superior technological access but also reputed & loyal customer base.

Apart from Stanley, Lumax Ind has formed technological collaborations with various global giants through its subsidiary SL Lumax, Lumax Ind holds 21.28% stake in the subsidiary.

The JV includes– Mannoh- Japan., Austem & SL- S. Korea, Cornaglia & Sipal- Italy & Gill Group- USA

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