Investors can bet on the Lumax Industries stock to ride on the improving demand for automobiles. After going through a rough patch in 2013-14, in line with the slowdown in auto sales, the company has pulled itself up in recent quarters. Lumax’s market leadership position in automotive lighting and its diversified clientele hold it in good stead for the next one-two years. Unlike many other mid- and small-cap stocks whose valuations have zoomed in the ongoing market rally, Lumax trades at a reasonable 23 times its trailing 12-month earnings. Those buying the stock can look at limited exposure, considering its small-cap nature (market capitalisation of ₹386 crore).

Riding the revival wave

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 , Hero Motocorp, Ford, GM and Ashok Leyland. Since the company caters mainly to the original equipment market (that is, new vehicles), the cyclical turnaround in automobile sales bodes well for it. From only about 3.5 per cent in the last fiscal year, overall sales volumes of cars, utility vehicles (UVs), commercial vehicles (CVs) and two-wheelers put together have grown by 10 per cent in the April-November period this year.

In the months to come, lower inflation and interest rate cuts are expected to further improve the sale of cars and bikes. A revival in industrial growth will also boost demand for goods carriage and, hence, CV sales.

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 launches of bikes/scooters from Yamaha and Honda and cars from Toyota and Honda (it now provides supplies for the Etios, Etios Liva, City, Jazz, Brio and Amaze). Besides, thanks to M&M’s recently announced strategy of integrated sourcing of components for all its product lines, Lumax expects to begin supplies to M&M’s CVs and two-wheelers. It currently caters only to UVs.

Gathering steam

In line with better sentiments, Lumax’s financials have been looking up in the last two-three quarters. Net sales have grown from flat and low single-digit growth in the March and June quarters, rising 10 per cent to ₹285 crore in the quarter ended September 2014 (over September 2013).

Net profit zoomed to ₹5.4 crore from a mere ₹39 lakh in September 2013. Improving sales, benign raw-material costs and lower interest costs on repayment of debt helped the company ramp up profit. The operating margin in the September 2014 quarter came in at 5.7 per cent, against 4.3 per cent in the year-ago period.

With much of its capacity expansion done, higher utilisation (now at 65 per cent) from increased 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, Lumax’s margins should expand further.

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