Lumax Auto Technology – Illuminating Its Way Ahead

In a volatile market it makes sense to play it safe and grab fundamentally strong businesses at low valuations. Considering this, we zeroed in on Lumax Auto Technologies (LATL), a fairly low-profile auto ancillary company for analysis and recommendation. A cursory glance at this company’s website www.lumaxautotech.com indicated that it is more of a manufacturer of automotive parts like sheet metal, fabricated assemblies, etc. But that isn’t really the whole story and there is certainly more to this company than meets the eye. The company derives 55 per cent of its total revenues from the lighting business (i.e. manufacturing of lamp and lamp assemblies).

Now this was quite surprising for us considering the fact that another group company called Lumax Industries too is in the lighting business. Doesn’t it create a clash of interests with group companies in a similar line of business? To get more clarity on this and to understand the business model of Lumax Auto Technologies (LATL) along with the growth prospects of this company, we spoke to Naval Khanna, Group Finance Head, who not only gave us an insight on the LATL business model but also the initiatives that the management is taking to drive its growth in the coming years.

Before we start understanding the business, here is an important fact revealed by Khanna which is that, LATL was actually started in the year 1979 at the insistence of Bajaj Auto’s (BAL) Rahul Bajaj who wanted LATL to manufacturer sheet metal components for them. Since then Bajaj Auto always has been a major client for the company and that hasn’t changed till date. As for the business, LATL is an auto ancillary player based out of Pune and manufactures products such as head and tail lamp assemblies, frame and chassis, silencer assemblies and gear shifts for two-wheelers, parking brakes, and mouldings for four-wheelers.

The company also has a 100 per cent subsidiary called Lumax DK Auto Industries, which is a manufacturer of similar products and accounts for almost 46 per cent of its total consolidated revenues. For FY11, on a consolidated basis, LATL’s revenues stood at Rs 622 crore, while its after-tax profit stood at Rs 45.40 crore. Through these products the company caters mainly to the two-wheeler segment, though some of its products are meant for passenger cars and commercial vehicles too. Up to 55 per cent of the company’s revenues are derived from lighting products, 11 per cent comes from sheet metals, while the balance comes from products such as lighting adjustor mechanism, gear shifters and parking brake systems, mouldings, etc

As for its clients, Bajaj Auto is the single-largest client of LATL and contributes to around 46 per cent of its consolidated revenues, with the balance coming from the replacement market, sales to Lumax Industries, Maruti Suzuki, and others. Now this is the major differentiator between LATL and Lumax Industries, wherein LATL caters mainly to Bajaj Auto’s requirements while Lumax Industries caters to a wide range or multiple number of clients that includes manufacturers of two-wheelers, passenger cars, commercial vehicles, etc. In fact, considering the business synergies there could be a possibility that LATL and Lumax Industries could merge going forward. However, the management was quick to rule out any such possibility.

In fact LATL is also catering to clients beyond two-wheelers with products such as gear shifts, parking brakes, etc which are meant for passenger cars and commercial vehicles. Currently, Maruti Suzuki is a major client for LATL. LTAL supllies 70 per cent of the gearshift and parking brakes required by Maruti. However, the company has added new clients such as Toyota, Daimler, Fiat and Tata Motors in this segment, which will bring in two-fold benefits – one, it will help increase the revenue contribution of this segment to the management’s estimate of 15 per cent (8 per cent) in FY12 and two, it would de-risk the business further.

With so many opportunities for LATL to grow, the company has wisely taken a decision to set up a new plant in the western region of India in FY12-13. This is another reason why the stock of this company looks attractive. The total cost of the project is about Rs 50-75 crore and is expected to be funded through internal accruals. The management, however, did not comment on the products these new capacities would manufacture. Hence it is difficult to work out the benefits it will bring to the company. The only concern for LATL is the current scenario of the auto industry which is expected to slow down in the wake of rising costs and interest rates. Considering that this impact is across the board, not only LATL but its clients will feel the pinch too. According to Khanna, “Cost pressures are bound to be there and it will be a major factor. Last year BAL asked for a 2 per cent price cut and a similar demand has been made this year too.” This may impact the company’s mar-gins and in turn its profitability.

As for LATL’s financial performance, the company has posted a consolidated revenue and profit of Rs 622 crore and Rs 45.40 crore for FY11 respectively. These numbers suggest that LATL has grown at a very brisk pace by almost 50 per cent in topline and 98 per cent on the bottomline front.

Looking at the products and the consistent performance, a company such as LATL should command a PE of at least 7-8x, but at its FY11 consolidated numbers, LATL’s valuations are quite low at a PE of 4.6x an EV/EBDITA of 3x respectively. Thus there is a clear valuation gap, giving an upside possibility of almost 50 per cent to the stock. However, even if we take a conservative call, a 25 per cent upside or target price of Rs 194 cannot be ruled out for this scrip and hence it makes sense to grab it at its CMP of Rs 155.