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Soumik Kar
My Best Pick
Daljeet Singh Kohli
Head of research, IndiaNivesh
COMMENTS PRINT
Special Issue: My Best Pick My Best Pick

Lumax Auto Technologies

Ancillary major to gain from higher capacity utilisation as a broad recovery sweeps through the auto sector

  • CY14 return 170%
  • Stock price Rs 284
  • P/E (FY14) 8
  • Market cap Rs 388 cr
  • Net sales Rs 763 cr
  • Net profit Rs 30 cr
  • ROE 14%
  • RoCE 18%

Note: Market data as on Dec 19, 2014; Financials for FY14; PE trailing 12-month

Source: Ace Equity

***

Several months ago when I was at a showroom of a well-known luxury car maker, a seemingly innocuous query from a salesperson made me mull over the potential of automatic transmission gear cars in India. The salesperson’s question was whether I will be driving the car or a chauffer. I counter-questioned her by asking how it mattered? Her response was interesting. She said that if the chauffeur was going to drive the car, then I should go for a manual transmission. If not, then I should opt for an automatic version. My corollary question was why so? She replied that the automatic variant would result in higher initial payments by about 5-10% and also the fuel efficiency would be lower by 10%-15%. This discussion led to the conclusion that buyers of automatic vehicles faced a double-whammy: 1) they pay a higher price and 2) they get lesser mileage even though it is more convenient to drive an automatic vehicle.

That conversation set me thinking that in a city like Mumbai a break-through in automatic technology would be a welcome change as people spent a large part of their daily lives driving cars. That’s what Maruti did by rolling out the automatic Celerio at an attractive price point with improved fuel efficiency. A deeper study on which were the vendors for this breakthrough product led me to Lumax Auto Technology which is into automatic transmission gears besides manufacturing two- and four-wheelers parts.

Discussions with the company’s management further strengthened my view that now the Indian companies have developed technology which has reduced upfront costs significantly and improved fuel efficiency so much that the gap between automatic and manual versions has shrunk dramatically. Effectively, this means it is only a matter of time when the appeal of automated geared vehicles catches the fancy of the masses.

Given that both drawbacks of automatic transmission are taken away, the demand for automatic gear based vehicles is likely to increase at rapid pace. An example is the phenomenal success of Celerio. Maruti has two models having auto gear shift variants and has also launched Alto K10, the country’s cheapest small car with automated gear shift technology. Tata Motors might soon come out with automatic variants of its upcoming hatchback Bolt and compact sedan Zest. All that means Lumax Auto Technologies (LATL) stands to be a big beneficiary.

A New Route

LATL has come a long way from being a manufacturer of automotive lighting systems, which now accounts for only 30% of standalone revenue and 19% of consolidated revenue, to a provider of critical high-value added products. The new products include parking brakes and shift gears. LATL’s product portfolio now comprises head lamps, tail lamps, frame chassis, adjustor motor, handle bar, mufflers, gear shift lever, parking brakes and other small parts. The company caters to auto majors such as Bajaj Auto, Piaggio, Honda Motorcycles and Scooters, Maruti Suzuki, Toyota and Tata Motors.

 
 
At present, automatic gears account for just 5% of LATL’s total turnover
 
 
At present, automatic gears account for just 5% of total turnover for Lumax, but the likely shift could be a major growth driver for the company. To fully exploit the opportunity from this business, LATL has signed a joint venture agreement with Japan’s Mannoh Industrial to design and manufacture complete gear shift lever systems for manual, automatic, automated manual transmission (AMT) and continuously variable transmissions (CVT) in India. Mannoh, a technology leader in automatic, AMT, CVT and MT type gear shift lever assemblies, will provide complete local designing and testing capability in India through its R&D centre in Gurgaon.

Let There Be Light

In order to upgrade and enhance the appeal of vehicles, innovation and designing have become key differentiators in the lighting business. Further, OEMs now demand lower wattage and higher luminosity lamps to save energy, which has made these products more technologically advanced. LATL has been beefing up its in-house product development capability to make itself self reliant and at par with evolving global lighting technologies. LATL has also been strengthening its design and development team to handle the increasing demand of OEMs for new products in the shortest lead time.

Indian auto ancillary players have huge potential for exports as international automotive players with operations in India are increasingly sourcing components from local players. The demonstrated ability of Indian component makers to manage supplies to global automotive manufacturers in the country opens up the possibility of the component makers supplying the same OEMs in other countries as well. Indian component manufacturers continue to enjoy competitive advantages primarily on account of low labor costs, less stringent environmental regulations and possession of established technology. Currently, export contribution is very small (2-3%) of overall revenue but Lumax has developed nine new products to get better presence in export markets.

 
 
Lumax has the potential to increase its revenue by 68% between FY14 and FY17
 
 
The company has a diversified product portfolio which caters to both two- and four-wheelers. This diversification helps the company to overcome downturn/cyclicity in any segment of the automobile industry. For two-wheelers, the company makes plastic moulded parts, seat frames and for four-wheelers it produces air intake system. The company’s manufacturing facility at Narsapur, Hubli, Karnataka has commenced supplying plastic moulded parts to Honda Motorcycle & Scooters last year. With Honda growing rapidly and capturing significant market share the growth of LATL is likely to remain intact in the coming years. In order to strengthen its foothold in the seat frame business, the company has entered into a 50:50 joint venture agreement with Gill-Austem of the US. According to our estimates, over the next three years, moulding parts, seat frames and sheet metals will be fast growing sub-segments for the company. Owing to a small base, shift gears and air intake systems will show abnormally high growth. The company has signed another joint venture in equal proportion with Pune-based Cornagila, christened Lumax Cornaglia Auto Tech, for supplying air intake system to leading automobile manufactures such as Tata, Fiat, Volkswagen, Skoda and General Motors.

Changing Gears

The past couple of years have delivered muted growth for LATL, in line with overall slowdown in the auto sector. On the back of lower capacity utilisation and higher fixed costs, margins took a beating and net profit declined in FY14. However, going forward, we expect a strong revival in the automotive industry on the back of 1) overall macroeconomic recovery, 2) cut in fuel prices and 3) peaking out of interest rates. The company has the potential to increase its revenue by 68% between FY14 and FY17, while profits can grow by whopping 172% over the same period from Rs 30 crore in FY14 to Rs 82 crore. The stock is trading at low single digit multiple of based on FY16 and FY17 estimated earnings. With a comfortable debt-to-equity ratio of just 0.2x and robust ROE of around 20%, we believe the company has the potential to yield a very high return over the next couple of years. The company has a consistent dividend track record with a dividend payout of above 25%.


The author of this report does not hold this stock in his personal capacity. However, he has recommended this stock to the clients of IndiaNivesh Securities for whom he works as head of research. It is safe to assume that IndiaNivesh’s clients, directors, affiliates and associates may have holding in this stock. The author has not been compensated in any manner by the LATL nor he is/has been associated in any way with LATL.

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