Lumax Auto Technologies


(Ayush Mittal) #1

BSE:532796| NSE:LUMAXTECH

It is usually rare to find a good company in the auto-ancillarybusiness. The reason is that they are capital intensive and usually the margins are low and hence they provide low return on capital. However, there are always some companies which do much better than the industry. Lumax Auto Tech seems to be one such company. The company has had a an excellent growth in past along with good profitability and strong balance sheet.

Lumax Auto ratios

The company manufactures aautomotive parts like sheet metal parts, fabricated assemblies, tubular parts, for two wheeler and three wheeler industry.a Thatincludes partssuch as chassis, silencers, petrol tanks and handle bars for motorcycles and scooters. They also manufacture head and tail lamps.

VALUATIONS:

The company has a market cap of 200 Crores and is trading at a PE multiple of just 4.4 times. Company has a consistent dividend track record, and is providing a dividend yield of 4%. Price is almost equal to its book value.

However, what excites us even more is the companyas beautiful balance sheet. The company is debt free (and mostly financed form tradepayables);the inventory turnover ratio has doubled from 15 to 33 times in 5 years; while the outstanding debtors have been maintained at ~50 days. The growth and return ratios are also quite good.

Return Ratios

The company came up with an IPO in 2007 at Rs. 75/- per share. At that time, the company had 7 functional plants, sales of ~200 Crores and net profit of 6 Crores. Now the company has 12 plants (plus one in progress), sales of ~750 Crores and net profit of 45 Crores.

TRIGGERS:

As the auto sector is going through a major slowdown, not many people are expecting growth in the company. However, if one looks at the recentHonda announcement, there is a high chance that the company may deliver decent growth for next 2-3 years.

Lumax Honda Plant Announcement

Other Triggers:

  • There have been many insider trades recently and thepromotersare increasing their stake a checkrecentannouncements.
  • Revival of auto-sector.

RISKS:

  • The auto sector slow-down can continue for some time.
  • Imports from China.
  • Company currently enjoys the benefits of tax-free zone and thus the effective tax rate is 24%. However, going forward, the effective tax rates should come to 33% as the tax benefits expire with in an year or two. Thus the forward PE is at around 6 times.
  • Company made a preferential allotment of 20 lac shares in 2011 to acquire the shares of a group company, Lumax Industries, worth 20 crores. Such preferential allotments can take place in future too.

Overall, at current valuations, the stock appears cheap and the risk reward ratio looks favourable.

Views Invited

Regards,
Ayush


(divyansh ) #2

ayush

thanks for picking up a new story . lumax is good promising story with revenues seemingly assured for next few years . and the two wheeler market is a semi fmcg market in india . hence the business is more or less stable and sustainable .

however for gaining the max out of it we might need to hold it till the auto cycle reverses and the auto sector again becomes the blue eyes sector . also the sectors like ancillary space come to limelight when crazy money starts finding that they have been late for the auto sector ride :: what i mean is past shows such stocks move max in a secular bull run( low int rates and good auto sales ) which should be there in 2-3 years .

i ll look out more and will post on the thread.

regards

divyansh


(Akshay Jain) #3

Hi

A few more questions

1). How concentrated is its customer base. Any break-up?? I understand bajaj auto and maruti are the biggest customers but any idea on the percentages??? also the percentage division of two, three and four wheelers??

I guess two wheelers will provide it a steady flow of income while four wheelers will be completely cyclical

2). Can we expect a PE re-rating here, or only EPS (which is more than satisfactory on its own)? But what has been its PE at its peak

A stupid question but I checked the promoter sold a huge quantity (total about 11lac shares) of his own stock at ridiculously low PE in december 2009. Does this show that promoter do not believe it deserves more value, given the clean balance sheet

3). How much business in terms of percentage of revenue will HMSI provide?

Regards

Akshay


(Ayush Mittal) #4

Hi Akshay,

I don’t have the break-ups and other specific details as these are not their in their annual report etc.

Promoters haven’t sold any of their shares. They had placed some new shares of the co to FII’s in 2009 and hence the % stake of promoters had come down

Ayush


(saurabh arora) #5

Hello

What would be nearest competitors to this company in terms of products mix and revenue?

Thanks

Sorabh


(T Anil Kumar) #6

In my opinion headline numbers in case of Lumax Auto Technologies are totally misleading** and I do not see any competitive advantage which enables company to earn better profits than its group company Lumax Industries. **

**1) **A large part of EBITA [> 50%] is contributed by **trading activity and other miscellaneous income like labour charges [which was included in sales]. **

  1. Company has entered into** n**umerous related party transactions [sales > 20% to related parties] which raises question on the reliability of reported numbers.

  2. Remuneration to related parties has increased steeply during the last two years, it has increased from average of 2% of PBT during 2008-09 to around 6-9% during 2010-12.

  3. Lumax Industries [another group company and a listed entity] which is exactly in same business as Lumax Auto technologies had EBITA margin between 2-4% during last five years and simple average of last five years is 3% whereas Lumax Auto technologies EBITA margin for last two years is around 7.5%-8%.[[look at standalone number for Lumax Auto, subsidiary is engaged in providing brake and parking assembly]

  4. There are enough players in Lamp assembly to give tough competition to Lumax Technologies and I am not able to understand the competitive advantages which the company enjoys, which enable it to enjoy ROCE of more than 40% and then why Lumax Industries ROCE average for last two years is only 12%. [Standalone average number for last two years]

  5. Further [this point is not that serious but still raised many questions] while Lumax Auto technologies has classified part of sale to Lumax Industries under finished goods, Lumax Industries in its accounts do not show any purchase of finished goods. Under Lumax Industries accounts, entire thing is shown as purchase of raw materials. The deeper you analyse the numbers, the suspicion deepens. I have attached break up of trading goods, which just does not make sense. In some years, some items shows losses and in some years abnormal profits. Please download PDF from here [https://docs.google.com/file/d/0B8Mr8IuAEwz7eHdZdzRzWUxBRUU/edit?usp=sharing], to read the detailed analysis.

Disclaimer: On the face of it, numbers looks very attractive. I am a very sceptical person and do not trust reported numbers in general. Please do your own due diligence. Itâs quite possible that despite all concerns stock price many increase substantially from here. Its also possible that I misunderstood any key data, as I have not interacted with management at all.


(Vinod MS) #7

Hi Anil,

Great digging, very valid concerns.

Cheers

Vinod


(Ayush Mittal) #8

Hi Anil,

Thanks for pointing out your observations however it would be quite naive to say that the acs are manipulated. One key thing to note in the co is - that it is debt free, has very low working capital and fixed assets and pays out decent dividend and taxes. Plus with the stock not trading at fancy valuations and volumes, its hard to find any incentives for manipulation here.

During our research, we had noticed most of the points mentioned above. Infact, I would like to say that we were quite impressed with the disclosures of the co.

Few quick points:

1). The majority part of the trading income is from after sales market. And in my opinion if we can get more details/confirmation on this then this is a big positive as the after sales market is a very lucrative area. This area is more sustainable and has better margins.

2). Will do a re-check on tallying of the related party between the group cos. Last time we had a look, things tallied though classifications were different for the to cos. Also as these have been consistently there, I don’t see much issue and they may be genuine transactions too. However, yes its a concern as the mgmt can shift profitability from one co to other at their ease.

Somebody also informed that as Lumax Ind is party owned by foreign co and the indian promoters have lesser stake, hence there main concentration is on Lumax Auto Tech. Also they manufacture some products for Lumax Ind which are further processed by Lumax Ind and sold to OEMs.

3). Yes. remuneration is high at abt 4-5% but this is common for most of the Indian cos. We have to live with this thing. The people managing the day to day affairs and everything of the co are bound to take the permissible remuneration. The good part is that most of it is by way of commission and which is a fixed % of profit

Ayush

PS: Will look up more on the details mentioned by you. Thanks


(vikas kukreja) #9

Hi Anil,

The concerns highlighted are really great and adorable in my opinion. Currently reading financial statement analysis book and witnessing the midcap carnage for e.g.: Geodesic and Arshiya due to improper disclosures, I am learning the great importance to scrutinise the numbers and have a not to take reported numbers on face value. The way you have checked in details is appreciable.

As The legend said: Return of capital is more important than return on capital.

Regards,

Vikas Kukreja


(Donald Francis) #10

Hi Anil,

Many thanks for playing the 'Devil’s Advocate" role to near perfection. We desperately need many more folks like you.

On the other hand - what Ayush mentions is noteworthy - Zero debt, very low working capital some 5-7% of Sales, pays dividends, pays taxes. though both dividend payouts and tax rates have been dipping.

I will be starting to look into LUmax Auto Tech seriously over next couple of days, and your pointers will seriously help in the digging - what are the tough questions to ask management - the numbers sometimes look too good to be true:). Ayush has already done lot of work on the company. I will be looking to add to his efforts.

The related party transactions/conflict of interest with Lumax industries requires serious examination from a first-look.Please keep pointing/guiding at whatever looks incrongruent in the whole story - what are the most important aspects to focus on?

And the bulls in Lumax - please point to where are the growth triggers? the factory for HMSI beginning production in Q1FY14? Is that through?

-Donald


(T Anil Kumar) #11

Thanks Vinod, Vikas and Donald…


(Donald Francis) #12

I had an initial good look at Lumax Industries the past 2-3 days. I am actually very favourably impressed - provided certain inferences/assumptions hold.

Some Observations:

1). The first thing that catches attention is how dramatically LATL has improved on the Operational front in last 5 years - just to sample - Fixed Asset Turns has almost doubled - 4.34x (2008) to 8.37x (2012). Inventory Turns have more than doubled - 7x (2008) to 18x (2012)

2). It can be argued, as Anil Kumar has clearly pointed out, that “Trading” Sales is primarily responsible for the growth of LATL’s profitability - given the big difference in Trading & Manufacturing margins.

3). However if we look closely, its not as if trading as a percentage of Sales has kept on increasing and thus the improvements; infact we will see that Trading Sales/Overall Sales has actually been decreasing over the last 5 years - from 35% (2008) to 27% of Sales (2012).

4). So while I was initially inclined to credit all the good things in LATL to its “surprising” Trading margins, now I know better - that perhaps the bigger credit should go to the 2x operating efficiency improvement - and only a portion of it can be credited to Trading sales - less than 1/3rd

Some Inferences ( to be quizzed during management Q&A):

1). Lumax Industries does not have an all-india distribution network. All its sales are to OEMs. LATL thus caters to after-market sales of LIL as well alongwith its own products for Bajaj Auto.

2). Lumax Industries provides LATL with Spares at favourable terms, being a related company. This is the main reason for high margins in trading activity.

3). There is an agreement (explicit or implicit) between LIL & LATL that LATL will not sell Head lamps & Tail Lamps to LIL customers. and that LATL will take care of after-market sales for the full customer base.

4). In which case this is a happy arrangement (if sustainable), LATL will continue to reap the benefits of a growing after-sales market at very favourable terms (high margins). As for manufacturing growth, Sales to Bajaj Auto (49% of Sales) will keep growing with Bajaj. It has successfully demonstrated ability to grow business in unrelated ancilliaries - Gear Shifters to Maruti Suzuki (6% of Sales). The plastic moulded assembly for Honda Motors (around the lamps, but not the lamps - is that LIL?:))), is capable of quickly scaling up as it seems to be a sole supplier.

To concretise future growth visibility, I would the key lies in dissecting each of the major segments thoroughly

a) Bajaj Auto Sales 2) After-Market Sales 3) Maruti Suzuki Sales 4) HMSI Sales 5) Lumax DK Sales 6) Air-Intake systems sales

If we understand these segments threadbare, the sources of growth and sources of profitability will be pretty clear I think. That will enable us to take a good call.

-Donald


(Ayush Mittal) #13

Hi Donald,

Good to see your inputs.

As per break-up at my end, Bajaj Auto contributes close to 50% of turnover and 20% of the turnover comes from after market. As per my understanding, majority of the trading sales is after market sales.

So in a way its a good thing that the co is getting a major portion of profitability from theaftermarketwhich is much more stable and should be growing in coming years. While the co continues to grow in the OEM space by bagging relationship with HMSI.

However, like Anil pointed, we need more understanding and comfort as the co has lot of related party transactions (about 20%) and hence the corporate governance risk and complexities.

Ayush


(Donald Francis) #14

Unfortunately, the only way way we can get comfort on this aspect, is what we get to hear from the Management, eventually.

We need to understand theworking relationship between LATL & LIL completely. It might be that the areas are cleanly segregated by Customer (this is as mentioned in the Draft IPO prospectus), and by OEM vs After-Market Sales (as is being guessed by us), so Conflict of Interest would be negligible.

If say that is the case, should one be worried just because Related Party Transactions is a hefty 20% of Sales??

-Donald


(jigar savla) #15

Yeah, there is an observed intent of mgt wanting to divert the profits from lumax inds to lumax auto tech. The numbers though show up great at 40% ROCE - the business doesnt provide any evidence of greatness to support it.

1).

2).


(Nikhil Gore) #16

A 2011 article explaining relationship between the two entities.

http://www.dsij.in/article-details/articleid/2993.aspx

Combined revenue contribution from Bajaj and Lumax Industries has come down from 90% at the time of IPO to about 65-70% now. Once the HMSI site goes online, this should further go below


(Ayush Mittal) #17

Hi Donald,

Over the longer term the earnings should matter and current low valuations should take care of some of the concerns.

Ayush

PS: Related party transactions at about 20% of total turnover is surely on the higher side. It gives the mgmt the power to shift the earnings in favour of other group co if they wrongly intent to. Hence it is seen as a long term risk. But if we can raise this query to mgmt and get proper response, it will be great.

** theworking completely. **


(Donald Francis) #18

Hi Ayush,

I am a “probabilities” guy. Given the shareholding patterns of LIL & LATL, one can argue that this intent reversing is a very remote possibility.

I will even hazard to say that the odds are 95:5 that the situation will not reverse. Why should I see this as a RISK:)

But yes, It will be good to see how the management handles these queries. How transparently, confidently, directly!

-Donald


(Donald Francis) #19

Ayush,

All the best for the upcoming Management Q&A.
Sorry I will not be able to accompanybecauseof the Kaveri groundwork in Nagpur belt. Am leaving tomorrow.
Below is my set of top of the mind questions. If we systematically query along these lines, and the Management answers transparently, we might be able to have a good comfort feel. As you mentioned before, the only way to get comfort feel (beyond what we have put forward) will be by talking to Management to know more.
You and Anil Kumar have done lot more work on the company, so kindly add to these base questions. Let;'s get the maximum out of the interaction.
Others - Please go through. Sometimes the questioning itself gives a good feel about the company (as it did for me over the last 2-3 days). You may feel compelled top contribute more and add/refine.
-Donald

Question for Lumax Auto Technologies Management

  1. 1. GROWTH

Lumax Auto Technologies has grown rapidly in the last 5 years and more. Sales have grown by over 26% CAGR while Net Profits have grown by over 40% CAGR. Kindly take us through this journey and the key success factors.

  1. 2. QUALITY OF GROWTH

What is even more remarkable is the quality of this growth. You have continuously reduced debt to almost zero debt. Inventory turns have have gone up more than 2x in 5 years (7x to 18x). Fixed Asset Turns have also almost doubled (4.3x to 8.3x)

This kind of numbers is perhaps uncommon in Auto Ancilliary industry. Kindly educate us on what makes this possible?

Is this sustainable, especially as you gain more business from other segments like Gear- shifters (MSIL), and Plastic Moulds (HMSI) which may be more capital intensive than Lamps?

  1. 3. PRODUCT SEGMENTS.

Lighting (55%), Sheet Metal (11%), Gear-Shifters & Parking Brakes (15%), Rest from Light Adjuster mechanisms,, Mouldings.

Kindly educate us on the major product segments.

Lumax Auto Technologies Product Mix

Lighting

Gear-Shifters & Parking Brakes

Sheet Metal

Level Adjuster Motors

Others

Total (Cr)

756.26

100.00%


Do you see this product-mix changing significantly over the next few years, as you scale up other relationships (non BAL)?

  1. 4. CUSTOMER SEGMENTS

BAL (49%); MSIL (6%); LIL (12%) , After-Market (21%)

Kindly take us through the major segments, with some colour on the relationship, growth & profitability picture,etc.

BAL: (Head Lamps, Tail Lamps, Sheet Metal, Chassis)

What is the scope of supply to BAL? All above and more?

Is it right to say Lumax Auto-Tech was started at the behest of Rahul Bajaj? Kindly tell us more on the long-term nature of this relationship.

Does LATL cater to all the major platforms? Boxer, Pulsar, Discover? How are the plans drawn up for these platforms. How early is LATL taken into confidence?

What percentage of BAL's requirements is catered to by LATL? Platformwise?

How do you see this relationship scaling up in the next 3-5 years? Can moulded products (around Lamp assembly) be supplied to BAL also, post HMSI success?

Who are the other prominent competitive suppliers to BAL in these categories/platforms?


--

LIL: (Head Lamps/Tail Lamps, anything else?)

The next biggest customer is Lumax Industries. What does LATL manufacture for Lumax Industries, and why?

Given that it is a related company in the same line of business as your biggest product segment, how do you ensure there is no conflict of interest?

Could you throw some light on following Related Party Transactions.

Sale of Raw Material & Components : 108.96 Cr (104.23)

Sale of Finished Goods : 31.92 Cr (22.14 )

Purchase of Raw Material & Components : 19.70 Cr (8.48)

Purchase of Finished Goods : 45.93 Cr (43.87)


-----

MSIL: Maruti Suzuki India Ltd. (Gear-Shifters/Parking Brakes)

MSIL is the biggest customer for Gear-Shifters and Parking Brakes. Is it correct that LATL supplies around 70% of total Maruti's requirement for these 2 products?

Which platforms does this relationship cover?

How do you penetrate deeper into the relationship? How do you see this relationship growing over the next 3-5 years?

Is it correct that you have Toyota, Daimler, Fiat and Tata Motors as new customers in Gear- Shifters and Parking Brakes segment? How much does MSIL contribute today and how much do the rest?

What are the plans for penetrating deeper into these new accounts, and addressing new customers?

Who are the competitive suppliers in this segment?


---

After-Market: (Tail Lamps/Head Lamps, others?)

Is it correct After-Market Sales now comprise a healthy 20% of Sales today? How has the after-market sales grown over the years? What are the key success factors?

How strong is LATL's pan-India distribution network today? What was the strength and level of business 5 years back?

Trading Sales today ~212 Cr (212 Cr) or 27% of Sales. Is it right to say most of Trading Sales address after-market sales?

Is it right to say most of trading sales comprise Lumax Industries products after-market sales?

What percentage of after-market Sales is from LATL's products? How much from LIL products? And Others?

  1. 5. Honda Motorcycles & Scooters India (HMSI)

Kindly tell us more about this new relationship? Is the new plant on schedule? When will commercial supplies start? Is this a sole supplier relationship?

This seems to a big investment (80 Cr)in the midst of the general auto slow-down? How much has already been spent (FY13) and how much will be spent in FY14? Kindly comment.

What is the potential sales from this factory in FY14? What are the plans? Where do you see Sales in 3-5 years from this segment?

This is for plastic moulded parts? Is it correct to say that the plastic moulded parts are for around the Lamp assemblies?

Who is supplying the Head & Tail lamps? Is it Lumax Industries?

Is there any restriction on LATL for approaching new customers for Head & Tail Lamps? Any restrictions for approaching Japanese customers like Maruti, Suzuki, Toyota's?

  1. 6. Lumax DK Auto Technologies

Can you tell us more about this 100% subsidiary? The IPO prospectus mentioned setting up Automotive lighting unit at Pantnagar, and Leveling Motor unit at Manesar. Subsequently Gear-shifters & Parking brakes have been also introduced?

Kindly give us a break-up of product segment contributions from Lumax DK Auto?

Lumax DK Product Mix

Lighting

Gear-shifters & parking Brakes

Level-adjuster Motors

Moulded Parts

Others

Total (Cr)

310.66

100.00%

Kindly tell us a little more on level Adjuster Motors? Is it true that you are the only local manufacturers of this product currently in India? Is it true that this is mandatory for use with Headlights today?

Who are your customers currently? Where do you see this segment in 2-3 years?

Looks like this is not a Capital-Intensive business â initial investment of ~4 Cr only? Are there any other barriers to entry? Is it likley that OEMS will buy Level Adjuster Motors assembly along with the headlights manufacturer only, not stand-alone?


----

Kindly tell us more on the Moulded Parts business? Is this catering to Head/Tail light assemblies?


----

Is it correct to say Gear-shifter & Parking brakes business is only carried out from Lumax DK Auto?


----

So there seems to be overlap between Lighting business and Moulded Parts business between this wholly-owned subsidiary and parent company? How do you prevent overlaps in jurisdiction between marketing/after-sales, and customers, etc.

  1. 7. Lumax Industries Ltd

Lumax Industries is a leading player in this market. Is it correct that it holds over 60% market share in Inidan market? Do you enjoy exclusive/majority supplier relationship with some customers?

Kindly comment on other leading players like Varroc, Minda Industries & Rinder? What kind of market shares do they enjoy in Automotive Lamps? Do they have exclusive relationships/majority supplier relationships with some customers?

What are the plans for this company along with the JV partner Stanley?

Given the dominant industry position, it looks likely that either Lumax Industries or Stanley should look to buy out the entire stake? Kindly comment.

Is there any possibility of merging Lumax Industries with LATL being considered?


(T Anil Kumar) #20

Hi Donald excellent set of questions

Questions from my side would be

__

  1. Trading margin had jumped from average of 8.5% during 2007-09 to around 15% during FY11-12. Whatâs the reason for this steep jump?

  2. Trading had enjoyed gross margin [Sales âcost of goods traded, taken from notes to account] of about 28crs in FY11 and 35crs in FY12. Assuming a SG&A expenses of around 4% [as per company level on consolidated basis], trading EBITA for FY11 comes to around 19crs for FY11 and 26crs for FY12. This accounts for around 35% for FY11 EBITA and 45% for FY12 EBITA. What enables us to enjoy such a high margin on trading sales and is it sustainable?

  3. In FY12 around 8.5 crs were recorded as labour charges. Can you explain more about this [Note Labour charges contribute about 12% to FY12 EBITA]

  4. Lumax Industries [another group company and a listed entity] which is exactly in same business as Lumax Auto technologies had EBITA margin between 2-4% during last five years and simple average of last five years is 3% whereas Lumax Auto technologies EBITA margin for last two years is around 7.5%-8%.[[look at standalone number for Lumax Auto, subsidiary is engaged in providing brake and parking assembly]. Lumax Industries enjoys almost 60% market share, whereas Lumax Auto technologies serve mostly Bajaj Auto [on standalone level]. Whatâs the reason that Lumax Auto margin are much higher than Lumax Industries.

  5. Under related party transaction part of transactions with Lumax Industries are classified under Raw materials and part under finished goods. A) Can you please explain what is the value added done on the finished goods. B) Also Why Lumax Industries is procuring raw material through Lumax Auto, and what sorts of margins Lumax Auto technologies enjoys on sale of raw materials to Lumax Industries.

PS: Its note the volume of related party transactions which worries me. But from analysis of numbers I SUSPECT it is being used to MANIPUATE reported profits in year of slowdown. Even if we assume half of trading sales are from after market, why Lumax industries is supplying at a price which leaves so high margin for Lumax Auto. All in all continue to remain HIGHLY sceptical of REPORTED NUMBERS. Not able to understand what enables company to report such an excellent numbers. If we exclude trading margin and labour charges, core EBITA from manufacturing operations had remained in the range of 10-20 crs for the last five years [see the google doc link in earlier post]