Lumax Industries - Brightening Prospects

Lumax Industries offers a wide array of complete Automobile Lighting Systems and Solutions, which includes; Head Lamps and Tail Lamps, Sundry and Auxiliary Lamps and other related products and accessories for Four Wheeler, Two Wheeler, Trucks, Buses, Earth-movers, Tractors and a variety of diverse applications.

Lumax signifies ‘LUMINOSITY MAXIMA’ for automobile users.

Lighting products have become an integral part of vehicle styling & design

Lighting products have become an integral part of vehicle styling & design of lamp is being upgraded continuously to enhance the appeal of the vehicle. Further, OEMs now demand lower wattage & higher luminosity lamps to save energy which has made these products more technologically advanced.

The role of lighting manufacturer has progressed from being merely a component supplier to collaborate with OEMs from the concept stage & work as a team.

The auto lighting products in India now seems to be heading towards integration of advanced features with improved design languages.

Collaboration with Stanley Electric has given it a strong technological footing, apart from enabling it to garner business from the Japanese OEMs

Lumax’s technical collaboration with global automotive lighting leader Stanley Electric (which holds 35.77% equity stake in the company), has given it a strong technological footing, apart from enabling it to garner business from the Japanese OEMs. The company has been a preferred supplier for several models of the OEMs.

Lumax, which has collaboration with global lighting major Stanley Electric, is likely to be a beneficiary of this as apart from having its own established design & development team, it can procure latest technology from Stanley Electric, which has cutting-edge technology for automotive lights. Further aggressive adoption of LED by OEMs offer an opportunity to auto lighting suppliers like Lumax to expand its customer base as LED requires completely new expertise in the optical design to maximize the benefit from LED.

Hogs a huge 60% market share

Lumax accounts for over 60% market share in the Indian Automobile Lighting Business, catalyzed by its over two decades strong technical and financial collaboration with Stanley Electric Company Ltd, Japan, a world leader in Vehicle Lighting and illumination products for Automobiles.

Enjoys patronage of all major automobile companies

Its top five clients i.e. Maruti, M&M, Honda Cars, HMSI & Tata Motors account for ~79% of revenues, with Maruti alone accounting for around 35% of revenues.

In the passenger vehicle industry, while it has been supplying for most of the models of Maruti, it also supplies for models like Honda City, Jazz, Amaze, Brio, Zest, Etios, Etios Liva, Scorpio, Bolero, Sumo Victa, Safari, Nano, etc. For CVs & 2- wheelers, Lumax supplies to Tata motors, HMSI, Hero Motocorp, Yamaha, etc. In the luxury car market Lumax has been supplying for some models of Bentley, Audi & JLR.

Going forward too, the company is in agreement to supply for most new model programmes of OEMs for both cars & 2 wheelers. Maruti has contracted Lumax to supply lamps for all the new models till FY17. The company will also be supplying to HMSI, Toyota & Yamaha for the upcoming models. In the next 4-5 years, its PV & 2-Wheeler clients are expected to roll out around 30 models & 12 models respectively.

Yamaha is setting up a facility near Chennai & Lumax will supply for all types of lamps for several models including the facelifted Ray Scooter that will begin production in early 2015. Nissan’s recently launched facelifted sedan, Sunny, also has Lumax’s headlamps. It is also supplying small lamps to Nissan’s Qashqai & Juke models in UK.

Plans Rs 300 crore Capex, to double turnover in 5 yrs

Lumax Industries plans to invest Rs 300 crore and double its turnover to Rs 2,500 crore in the next five years.
Over the time, the company has substantially increased its manufacturing capacity and R&D capabilities. Keeping in view the present order book the proposed investment would be around Rs 300 crore in green-field, brown-field and capacity expansion plans in next 5 years, to be funded through internal accruals.

During the past couple of years, the company has invested about Rs 160 crore in its Bawal and Bangalore facilities. Capacity utilisation stands at ~75% currently.

Debt reduction plan on track

Long term debt stands at ~INR 1000 mn and we expect Lumax to repay INR 300 mn debt each year over the next 2 years. Revision in payment terms with Maruti has resulted in higher working capital debt for Lumax Ind. Though interest cost is expected to rise as a result of this but reduction in discount expenses will be higher than the interest outgo, thereby benefiting Lumax on a net basis.

Financial : On equity of Rs 9.35 crore and face value of Rs 10 per share

Disclosure - Invested

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http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/58D3F983_792D_461F_AC9D_694C2372A2E6_171743.pdf
Lumax results have been announced

Aashish Tater’s view on Lumax Industries

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Is anyone looking into this… BIG opportunity with Lighting shifting to LEDs.

Lights (head and tail) in car getting replaced with LED
Ligts HEad lights in two wheeler - getting replaced with LEDs. Govt of India madated AHO for all 2 wheelers (https://auto.ndtv.com/news/government-to-mandate-automatic-headlamp-on-aho-for-two-wheelers-from-2017-1284054)

Replacedment of conventional with LEDs will result in 3-10x revenue opportunity as per Lumax mgmgt
Convesntional are arounf ~6% margin, LED’s are much higher margin products.

Currently Lumax has 92%/8% Conventional/LED mix and expects 60/40 mix by 2020.

So size of Revenue will increase due to LEDs being 3x-10x expensive compared to conventional [the efficiency/energy saving etc will be 80% as per Luma mgmt. so if running cost is 100 for coventional it will be 20 for LEDs]

Blended margin will increase by 2.5-3.5pp due to increasing proportion of high margin LED, as per Lumax mgmt

first mover technology advantage due to strategic tie up with Stanley (http://stanley-ledlighting.com/)

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notes from q1’18 concall:

[‘Automatic Headlamp On’ means headlight will remain on all the time, even during daytime to increase safety – easier to spot. LEDs are most energy efficient making this possible.]

  • To increase and meet international safety standards, the government has mandated that all two-wheelers being sold with automatic headlamp On (AHO) feature. This is similar to the daytime running lamps on cars. Manufacturers have already started rolling out vehicles with this feature. We expect this measure to put two-wheeler manufacturers to focus on LED headlamps with less energy consumption and styling appearance. The overall expectation of style from customers or end users are opting for more LED. Most companies were destocking inventory in the Q1 of the current fiscal ahead of implementation and then planning to restock, once the GST impact is fully understood.
  • Ashutosh Tiwari: I am asking that the shift to LED based lights in the automotive cars and all so how the content per car lights will change after we shift to this LED lights? Deepak Jain: I think I will just give you a range that currently if you see the four-wheeler the content per vehicle externally is about Rs.3000 per vehicle and with this LED shift coming in it should probably be some 10000-20000 depending on the technology what is being used by passenger cars. In the two-wheeler also, the content would be about Rs.350 for two-wheeler, which can actually change from about Rs.1500 to Rs.2500 again based on the technology.
  • Deepak Jain: Headlamp. So, I mean average the shift from conventional LED can see anywhere price up from 3x to 10x based on the technology.
  • Ashutosh Tiwari: And are we seeing willingness among the OEMs shift to this because this is a big cost increase for them? Deepak Jain: Yes it is. Actually, there is a willingness to shift. I think the last time also I have said that, , our conventional to LED ratio was about 95 to 5. if you see today in 2017-2018 we are projecting a conventional to LED is about 75 to 25 and probably by 2020 we are probably thinking about doing almost about 60:40 or 50:50 range.
  • Deepak Jain: Absolutely. See as I said if you look at my 2016-2017 numbers it is just from the conventional lighting and LED lighting it was about a split of about 92% was conventional and 8% was LED. In 2018, I mean it has growing at faster 75-25 is what this the trend which is coming in which I explained.
  • Deepak Jain: So, this is a trend. First of all thank you for your compliment, this is a trend which is the industry wide trend. The adoption of LEDs in two-wheelers is now coming as at a faster pace than what it is coming in four-wheelers. …if you see our revenue breakup or the passenger vehicle to the two-wheeler segment in 2016-2017, we were at 70% in passenger vehicle and 24% in two-wheeler. However in Q1, passenger vehicle is at 64% and two-wheeler is at 31% others an agro is 5%, which is consistent. So, this is the trend, which I am talking about and there is as a ramp up of two-wheelers is lot faster the volumes are bigger as soon as they start adopting the LEDs and forward lighting you see a bigger impact
  • I think the market itself will expand and if you actually even maintain the same kind of thing market share here there is an opportunity to gain market share and the reason is because in the country there are almost close to 14 lighting manufactures which play in different segments. Lumax is the only company, which actually competes in all segments and has probably market leadership in all segments as well. Hence, I think there is an opportunity when the technology shift from because of Stanley advantage because of a high dominance of Japanese makers on the Indian market, we probably get a natural first mover advantage and probably also can gain market share the market expands to the new technology.

Technology evolution in automotive lighting
Head Lamps:

Tail Lamps

Best,
Ayush (https://twitter.com/Ayush_Agg)

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Noted Investor Mr. Ashis Kacholia has also taken exposure in the stock in 10th October 2017. Any one can see in the BSE Site (Bulk Deal section). So far not taken any exposure, but story is very interesting.Keeping watch closely to enter.

Thanks for sharing this info. I could see this in BSE Bulk Deal section.

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Promoter is continuously buying from the open market. Recently 114.33 lac shares have been bought from market.

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Fantastic numbers by Lumax Industries. The theory of bulb lamps to LED lamps in cars is playing out very well. It will continue to play for next 2-3 years at this pace (from 25% of the new cars to 50% in 2 years and then gradually to 100%).
Sources - Conference Calls and industry research

@Yogesh_s Lumax Industries seems to be well positioned to take advantage of shift in the automobile indutry to LED lighting and BS IV Norms by 2020 helps it further. They have already started to expand LED offering with great product quality combined with superior design. They are the suppliers for major OEM’s like Maruti, Hinda, Hyundai, Toyota, Tata, Hero etc. Profit margin seems to be on the lower side but increasing YoY. LED’s could help for significant improvement on the profit margin. Most of the metrics looks fine. Can you provide your opinion on on Lumax Industries?

Dear Ayush, Please share your views on current qtr results and the management indicated the foray of electronic business after evaluating the feasibility study where Stanley present.
Does it offers value at current levels?

@santhozp
Don’t have much idea about Lumax Industries. A quick look at the numbers show that margins have expanded from 1% to 4% mainly due to increase in gross margins. Company has reduced debt and working capital management is good.
I am generally not a fan of low margin businesses especially if there is a sharp increase in margins. It is possible that this increase in margins is temporary and margins can revert to earlier levels. On the other hand, margins are a function of scale and now that company has scaled up, margins can sustain.Overall fundamentals look OK but valuations are high.

This is based on my initial analysis. Need to take a deeper look to see if this is a good value at current price.

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Lumax industries is JV between DK Jain group and Stanley Electric, Japan. Its top clients are Maruti Suzuki, HMSI, Hero MotoCorp, M&M. Its EBITDA Margins are approx 8.50%.
Its main raw material is Polycarbonate(40% content imported) which is used in the manufacturing of Head Lamps.

Lumax Q2FY19 performance. Revenue has gone up by 36% and EBIDTA has gone up by 51%.

Was studying this company over the past week. Adding whatever I felt useful.
Views are invited.

Management’s views on current auto slowdown:

In Q4FY19 conference call (May19), management said that it expects growth to pick up in H2. It will be lead by pre-buying in H2FY20 on account of BSVI implementation for FY21.
In Q4FY19 due to the slowdown in their customers, Lumax reduced its prices for one-time request with an OEM with whom they share a strong relationship (my guess is Maruti Suzuki?) and contributed one-time credit note on certain committed business that the company would be getting in future.

LED Business:

The LED business is growing rapid fast with 8% contribution to sales in FY17, 25% contribution in FY18 and 33% contribution in FY19. This is expected to stand at 33% in FY20 due to the slowdown however the speed is expected to pick up once the industry turns around. Industry penetration is still very low in terms of volumes. Around 10% in PVs and 15% in 2Ws and CVs still have to adopt.

Realization of pure LED vs. pure conventional lighting is around 3x to 10x. Lots of companies are launching lights with partial LED and hence actual realization is sometimes only 2x. However, overall, this is a positive development for the company. With most of OEMs, the company has a fixed contract where the price decreases are planned in the purchase order itself by negotiating the contract. The price decrease is of 1.5% to 2% YoY. The rationale for price decrease is maturing market. By FY21 or so, basically when the whole market may have adopted to LED then we probably would see certain margin pressures.

Company initially promised the LEDs would improve the margins a lot, however, the amount of improvement didn’t reach to the amount what management was initially projecting. Few reasons they cited was import of electronics needed for manufacturing LED lighting. They are currently working on localizing this electronic content (Thanks to Stanley partnership and Taiwan R&D center) to improve margins.

Management believes that lighting business is going to more electronic in the future and hence is investing in building electronic skills within the company. The same reason for establishing R&D center in Taiwan. Management gave guidance of double digit EBITDA margins in FY20 due to electronic localization and also announced 75 crores capex for the electronics parts (not the regular lighting business). The company is in discussion with Stanley to run business on not just automotive lighting but also extend it to electronic parts for related components.

At the same time, management says they can’t do 100% localization as tech would keep upgrading and they want to be caught up with that.

Customers:

% numbers below are rough. Please look up yourselves on conf calls for more accurate numbers. I’m happy with rough numbers. So didn’t give too much emphasis here.

Maruti Suzuki - 35% of revenues - 40% share of business
HMSI - 12% of revenues - 60% share of business
Hero MotoCorp - 11% of revenues - 50% share of business
M&M - 9% of revenues - 60% share of business
Honda Cars - 7%
Tata Motors - 6%

Lumax is not in CV space. 40% of the volume there is still being used by the glass lens and the sheet metal reflector tech which the company has exited out. However expect to capture a lot of market share when CVs start moving to LED.

SL Lumax:

This is an associate company in which we hold around 21-22% and it caters only to Hyundai India. The bargaining power lies with Hyundai and management suggests to not ask too much about the company, especially on quarterly basis. They ask analysts to look at the associate company on yearly basis. However, I find yearly profits also fluctuating reasonably. EBITDA margins of SL Lumax are higher compared to Lumax Industries as that is only Plant P&L and not a complete P&L. Their R&D expenses, management expenses are handled in Korea.

New models they have entered over the years:

Q4FY19 - Hero MotoCorp Maestro Refresh and Xpulse.
Q3FY19 - Maruti Suzuki Ertiga, Wagon-R; M&M Jawa, Marazzo
Q2FY19 - Force Motors Gurkha; Hero MotoCorp Destini 125 Scooter; Piaggio Ape
Q1FY19 - Toyota Yaris; HMSI Aviator
Q4FY18 - HMSI Activa 5G & X-Blade; Isuzu motors D-Max; Tafe Magna
Q3FY18 - Hero MotoCorp Passion Pro, XPro, Super Splendor; MG Hector
Q2FY18 - M&M KUV; HMSI Grazia
Q4FY17 - Tata Motors Tiago, Tigor Sedan, Hexa; Honda City (new model), WR-V; Toyota Innova Crysta, Fortuner; Maruti Suzuki Alto 900, Ignis; Audi Q2; Hero Achiever, Glamour Refresh; HMSI Shine, Activa 125; M&M K102; Piaggio Motard; Yamaha B81 New Ray.

Other Notes:

Usually customers have for a model single source policy. If we are a headlamp supplier or tail lamp supplier usually the customers would have a single source on a headlamp or a tail lamp.

For the company, the first quarters go a little slow and then the sales pickup during Diwali time and last quarters are better. That’s the quarterly trend.

The company has a strong negative working capital cycle. However, their suppliers have improved terms with them and are getting payments earlier than usual from Q4FY19. The cycle is still pretty strong post that.

4W business has higher margins compared to 2W.

Risks:

Forex - 60% of LED raw material is imported. Bright side is company has deals to pass on raw material / forex movements to customers with a six month lag.
Reputation - Most business seems relationship based. Any mess up will be costly as other players will be ready to jump on as this business is not a branded one.
Slowdown - Already going through that for now. Need to check how Q1FY20 will pare out.
Poor Execution of Localization - If the company messes up big time, customers might move to other companies or ask Lumax to stop localizing electronics (as it is not really their competent area)

Views / Disclosures:

Bearish for FY20 however will keep it on my watchlist for the long-term.
No holdings. Not a buy / sell recommendation. Please do your own due diligence before buying / selling Lumax Industries.

This company has a plant at around 50 km from Bangalore. If anyone is interested, we can visit the plant together when the times start turning around for the auto sector.

Thanks,
Rahul

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Hi, did anyone understand the Lumax Inds. 170 crores of capex in FY20? They had guided for 100 crores capex only at the start of FY20.

On the con-call, bifurcation given is 25 for SMT M&A, 25 for electronics, 25 for right to use asset (which is a BS entry, not cash flow. So why?) and 90 crores for expansion across their 9 plants.

How the valuation looks today after stock has touched 900 levels?

Good management? - Saurabh Mukherjea little champs but exited due to competition…

Growth? - LED lightening growing.

Stock is near median PE.

Auto sector under pressure due many reasons over the 2-3 years

And India has low PV penetration.

Disclaimer: Invested