Market volatility has seen the Lumax Industries stock drop by about 25 per cent since our ‘buy’ recommendation in mid-December 2014. But this fall presents a good entry point for long-term investors. After going through a rough patch in 2013-14, in line with the slowdown in auto sales, the company has pulled itself up in 2014-15. With auto sales on a cyclical upturn, Lumax’s market leadership position in automotive lighting and its diversified clientele should hold it in good stead for the next one-two years.

Valuations of many auto component players have zoomed in the last year, thanks to market preference for cyclical stocks. Stocks of bigger players such as Bosch and Wabco trade at over 50 times their trailing 12-month earnings. Even small-cap suppliers such as Jamna Auto and Setco Auto trade at over 20 times trailing earnings. In comparison, Lumax trades at a reasonable 17.7 times its trailing 12-month standalone earnings. Those buying the stock can look at limited exposure though, considering its small-cap nature.

Ride on revival Lumax supplies head lamps, tail lamps and auxiliary lamps to the auto industry and has about 55 per cent market share. While Maruti Suzuki, Honda (cars and two-wheelers), Mahindra and Mahindra (M&M) and Tata Motors are among its top clients, Lumax also supplies to many other manufacturers, including Toyota, Yamaha, Suzuki, Nissan, Ford, GM and Ashok Leyland.

Since Lumax caters mainly to the original equipment market (that is, new vehicles), the cyclical turnaround in auto sales bodes well for it. Cars and utility vehicles have seen 4-5 per cent growth in volumes in 2014-15 compared with the 4-5 per cent drop in volumes growth in the previous year.

Heavy commercial vehicles showed a 16 per cent growth, compared with a 25 per cent drop in volumes in 2013-14.

The good run has continued into the first quarter of this fiscal too. In the months to come, benign inflation and interest rate cuts should further improve the sale of cars. Also, reviving industrial growth should keep up demand for commercial vehicles.

Thanks to its technical collaboration with Stanley Electric Company of Japan, the company has a good rapport with Japanese automakers. While it currently caters to almost all existing models of Maruti Suzuki, Lumax has been roped in for its new model launches till FY 2017 as well. It will also be part of upcoming cars from Toyota and Honda (it now provides supplies for the Etios, Etios Liva, City, Jazz, Brio and Amaze). Besides, Lumax may begin supplies to M&M’s trucks as well. It currently caters only to M&M’s utility vehicles.

Numbers look up For the year ended March 2015, Lumax’s net sales grew 2 per cent over the previous year to ₹1,133 crore. Net profit doubled from ₹7.7 crore in 2013-14 to ₹16.57 crore in 2014-15. Benign raw material costs and lower interest costs on debt repayment helped ramp up profit. The operating margin came in at 5.1 per cent, against 4.5 per cent in 2013-14.

Higher utilisation as a result of increasing vehicle demand, greater export revenue from supplies to Bentley, Jaguar Land Rover, Audi, New Holland and John Deere, and value additions through products such as LED lighting should help Lumax’s margins expand further.

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