In our bl.portfolio edition dated March 19, 2023, we had given a buy call on the stock of Lumax Industries when the stock was trading at about ₹1,700 a share. The call was given on the back of an expectation that the company would be a beneficiary of a good auto sector upcycle. Revenue/ EBITDA/ net profit for FY24 grew at 13.7 per cent/ 18.4 per cent/ 7.7 per cent, over a high base set in FY23. The above metrics have grown at quite healthy CAGRs of 23 per cent, 52 per cent and 65 per cent respectively between FY22 and FY24.
This was well reflected in the stock reaching an all-time high of ₹3,045 on July 8, 2024. However, the cyclical nature of the automotive sector came to the fore during the first half of FY25, with sales growth of OEMs (original equipment manufacturers) sputtering and inventory with dealers rising. Coupled with a correction in the small-cap space, Lumax’s shares have dropped 24.6 per cent from the all-time high. This makes it a good time to reassess the prospects for this company. Given the flurry of new launches from its client OEMs, and for other factors detailed below, there is visibility for good growth in earnings. At current valuation, the risk-reward is favourable and investors can accumulate the stock.
Growth visibility
Demand was back on the fast lane in Q3 FY25 and most OEMs posted double-digit growth (year on year) in the number of vehicles sold. The festive season sales and year-end discounts helped clear dealer inventory. While demand for two-wheelers (2Ws) continued with recovery in the rural economy, personal income-tax relief in the Budget and rate cuts can spur demand for passenger vehicles (PVs – cars basically).
Lumax Industries makes lighting products (head lamps, tail lamps) for vehicles. About two-thirds of its revenue comes from sale of lights meant for PVs. 2Ws contribute 28 per cent and commercial vehicles (CVs) contribute 6 per cent. Five OEM clients account for 74 per cent of 9M FY25 revenue (see infographic). All five have new product launches lined up. Lumax is set to supply lights for Mahindra’s BE6 and XEV 9e, Maruti’s new Dzire and most other upcoming models, Tata Motors’ Tiago and Tigor refreshes among others. The company already supplies to other hit models such as Punch, Thar ROXX and XUV700.
Lighting assemblies are powertrain-agnostic. Hence the company is immunised against the shift towards electric vehicles (EVs). The shift towards EV might even be good for the company, in the sense that, EVs more often tend to have features such as ambient lighting, a product that the company offers too. The order book stands at roughly ₹2,600 crore (₹1,150 crore as of our last call) with EVs accounting for 33 per cent. These orders are expected to be executed over the next couple of years.
Margin trouble
In 9M FY25, revenue growth has been 31 per cent over the same period last year and growth in EBITDA and net profit has been 28 per cent each. The company has been witnessing margin erosion recently — one due to the cost of imported PCBs (printed circuit boards) going up, thanks to a levy of anti-dumping duty. Two, imports have become costly due to the weakening rupee. To counter this, the company is in the process of localising the PCB supplies. Further, compensation from the OEMs (not all OEMs compensate though) with respect to the cost escalation due to the anti-dumping duty is expected to flow in the next couple of quarters.
More importantly, the higher share of LED lights in the order book at 86 per cent is set to support the margin. As per the management, LED lights have, on an average, 2.5x higher realisation compared to conventional halogen units. Though material cost of LED lights is also higher, the overheads are lower, making LED lights bring higher margin at EBITDA level vis-à-vis conventional lights. Further, the premiumisation trend is still alive and that will mean higher LED lights in the mix. The higher margin is not going to be immediate though. For FY26, the share of LED lights in the revenue is expected to be at only 65 per cent, bumping up EBITDA margin by 100-150 basis points.
Key monitorable
The company has been adding capacity recently, fuelled by debt. The debt-to-equity ratio has gone up from 0.65x as of FY23 to 1.14x as of Q2 FY25. The management said that majority of the capex is complete and from FY26, it will be lower. There are also no plans for incremental debt too and debt is set to reduce gradually as per the repayment schedule.
The management has guided for a revenue growth of an overall 30 per cent for FY25 and 15-20 per cent for FY26. Recent price hikes by OEMs and a possible slowdown in automobile credit could act as dampeners. Only 1.1 per cent of revenue (FY24) came from outside India. Hence, the company will be unaffected by Trump’s tariffs.
The call
Lumax Industries is one of the few auto parts companies that delivered more than 20 per cent growth in Q3 FY25. The stock has historically traded at a 10-year average price-to-earnings (PE) multiple of about 28.7x as against the current 16.3x (trailing 12-month earnings). The PE has undergone a derating possibly thanks to the higher debt. Considering the above factors, the risk-reward situation is skewed in favour of rewards and hence, investors can accumulate the stock, in small quantities though, as it is a small-cap.
