Even as prospects still seem iffy for many segments of the economy, the auto sector has seen good growth in new vehicle sales in the last one year. With several macro-economic factors also favouring the industry right now, this cyclical upturn in auto sales looks to be firmly in place, at least for the next two years.
Investors can ride on the revival by investing in the stock of Lumax Industries, a supplier of lamps for cars, commercial vehicles and two-wheelers.
The stock trades at a reasonable 17 times its trailing 12-month standalone earnings. This valuation is lower than that of peers, such as Fiem Industries (20 times) and other similar sized auto ancillary players, such as Gabriel India, Jamna Auto Industries and Setco Auto.
Those buying the stock can take limited exposure though, considering its small-cap nature.
Lumax supplies head lamps, tail lamps and auxiliary lamps to the auto industry and has about 55 per cent market share. Maruti Suzuki, Honda (cars and two-wheelers), Mahindra and Mahindra, Hero MotoCorp and Tata Motors are among its top clients.
The cyclical turnaround in auto sales bodes well for the company. Building on the nascent growth of 5 per cent seen in 2014-15, new car sales have accelerated this fiscal, with volumes growing 11 per cent in the first nine months of 2015-16, over the same period last year.
Heavy commercial vehicle sales have also done well to record a 30 per cent growth in April-December 2015. Lumax derives half its revenues from supplies to the passenger car segment.
On a strong footing
In the months to come, factors such as benign interest rates and Seventh Pay Commission dole outs 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. Maruti Suzuki is the company’s single largest client, accounting for about 35 per cent of Lumax’s revenues.
While it currently caters to almost all existing models of Maruti Suzuki, Lumax has been roped in for new model launches till FY 2017. Given this strong relationship with Maruti, Lumax will also be a beneficiary of Suzuki’s upcoming plant at Gujarat.
Lumax will be part of upcoming cars from Toyota and Honda as well.
For the half-year ended September 2015, Lumax’s net sales grew 11 per cent over the previous year to ₹618 crore. Net profit jumped 81 per cent to about Rs.19 crore. Benign raw material costs helped operating margins, which increased to 7.5 per cent, compared with 5.8 per cent in the same period in 2014. Value additions through products, such as LED lighting should help Lumax’s margins expand further.
LED lights are increasingly preferred by auto manufacturers for exterior lighting as it consumes less power and has a longer life.
While the collaboration with Stanley Electric will help on this front, the company is also upping its own R&D efforts. It developed in-house LED head lamps and stop lamps for overseas clients, such as Land Rover and Audi as early as 2011-12.