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