Lumax Industries’ headlamps have always been ahead of the curve

Commanding over 50% of the auto-lighting business, Lumax Industries truly ‘owns’ the road. It works with leading two-wheeler and four-wheeler manufacturers in India, with Maruti accounting for 36% of its business, and Honda Motorcycle and Scooter India for 16%. Between FY16-20, its revenue increased from Rs.12.55 billion to Rs.16.02 billion, at a CAGR of 6.29%. Over the same period, its net profit has gone up from Rs.368.8 million to Rs.598.1 million at CAGR of 12.85%.

This growth is largely on the back of its LED business. In a halogen-light-partial India, the company seized the LED market opportunity at the right moment, and the vertical has seen its revenue share take off from only 2-3% in 2015 to an impressive 35% today. For its peers, the same vertical currently accounts for 22-23% of their revenue.

One of the reasons Lumax got it right in LED is taking the lead early. According to Pankaj Bobade, head of fundamental research at Axis Securities, a big plus was the presence of Japan’s Stanley Electric as a strategic investor (they hold 37.5% stake, while DK Jain Group holds an equal proportion). “They managed to capitalize on the technological knowhow of their partner and that helped in getting aggressive,” says Bobade.

Their big bet on LED hinges on Indian customers’ love for bling. The lights are costlier than the halogen ones, but Vineet Sahni, CEO of Lumax Industries, says that people don’t mind shelling out extra if that is going to make them look good. Of course, the long term plan is to make LED cheaper but that involves reducing the dependence on imports for its inputs.

It has not been easy for the automobile industry with COVID-19, though Axis Securities’ Bobade is optimistic. The company makes 65% of its revenue from passenger cars, 30% from two-wheelers and the rest from commercial vehicles. “The month-on-month sales numbers have been rising across the board with two-wheelers leading followed by passenger vehicles, as the need for personal mobility over public transport is felt. Going forward, demand is expected to recover especially from rural India on the back of a good rabi harvest and a ‘normal’ monsoon,” he explains. OEMs have already increased their production in the expectation of the momentum lasting through the festive season. 

CEO Sahni says the way forward is to grow with each of the existing clients, even while looking at exports and trying to gain a foothold in the tractors business.

How has COVID-19 changed your cost structure? At what sales value do you start making an operating profit?

At a turnover of Rs.11 billion-12 billion, operating profit starts to kick in. We have a long-term approach towards costs. So, we have brought down our raw material cost from 70-72% of total cost five years ago to 61%. But we have increased our manpower cost, by investing in R&D, as a strategy. The percentage invested in R&D has gone up from 1-1.5% to 3.5-4%. Overall, during this period, our profit has doubled. 

Post COVID-19, our expense structure has definitely changed. For example, this September, when we are operating at close to last year’s level, our variable costs have gone up. Money has to be spent on sanitisers and masks and supporting social distancing. Fortunately, fixed costs are under control from the salary cuts done until September. We have also stopped spending on travel and events and continue to keep a close watch on fixed costs. In fact, we are tracking profitability on daily basis. Some of the fixed costs such as travel will be partially reinstated. Overheads, annual maintenance contracts will also be reinstated, but will be better negotiated. We are looking at this as an opportunity to redo our cost structure. 

We are also renegotiating rents and annual maintenance contracts, planning better space utilization, seriously considering outsourcing certain functions, and working on consolidation of suppliers for a few areas. We were always focused on cost control but now the effort is more pronounced. 

What capacity utilization are you operating at currently? How does it compare to earlier quarters?

We are approximately at 85% capacity utilization. In the best quarter over the past three years, it was at 90% and, in the same quarter last year, it was 75%. 

Has cost of credit gone up for you, over the past one year?

Our cost of credit saw no deviation since we already had good rates well before COVID-19. During the lockdown, our customers were supportive too, extending discounting and prepaying dues. Discounting implies giving earlier payments before the payment terms at competitive finance cost. Most of the OEMs are offering this option.

Indian customers are notoriously price sensitive and now they are likely to be more so. Will you therefore continue to focus as much on selling costlier LED lights? 

The LED lamps are 4-5x more expensive than halogen lamps, though the former affords the same profitability as the latter, or may be a little more. The reason is that a significant portion of the inputs for LED are imported. Domestic inputs and imported inputs are almost of the same proportion in LED lights while, in the halogen variety, 85-90% of the inputs are domestic.  The way forward will be to localize the input content for LED. 

The pricing may not affect the Indian consumers as much because they have interesting priorities. They may cut back on the overall cost of the vehicle but not on something that will add to the esteem value. Fortunately, lighting plays a significant part here since it adds to the good looks of the vehicle and it is visible to others. The choice of moving to LED is made on account of grabbing eyeballs, and of course to navigate our poorly lit roads. Indians also like to drive with the high beam and refuse to dim their light. Therefore, LED lights, which form 30-35% of our portfolio today, will become 50% in the next three to four years.

How do you see the demand for passenger vehicles and two-wheelers panning out for the rest of the year? What about the next fiscal?

The festive season should be good. In fact, I expect December quarter demand to be even better than last year. We believe there is pent-up demand and people will be waiting to spend. For the next fiscal, the industry will need something coming from the government by way of incentives to sustain demand. Demand can grow 8-10% more in FY22, assuming COVID-19 is completely out of the way. 

In two wheelers, demand has returned to last year’s level supported by rural markets and exports. The top two players are doing fine and we expect the smaller ones to pick up during Diwali. Price will matter, and models at the lower end of less than Rs.75,000 will see more traction. 

What is the rationale behind your foray into tractor lighting?

We spotted this opportunity five years ago. Our logic was, if technology was changing in two- and four- wheelers, why won’t it happen in agriculture? We had no presence in that sector. So, we set up a team and our research showed that pride is a factor there. We exploited that, first with LED in tractors. It took time to convince customers, but they are willing to pay if there is visible value. It may not be sold in huge volume, but it opens a new line of business.

Are there any pockets of opportunity that can shore up revenue or profit? 

The opportunities always exist, and we see it in both domestic and overseas markets. We work with all the large brands in India and the approach is to go deeper with product offerings by investing in technology. On the shopfloor, our effort is to use the same facilities to make small changes in existing products. We make marginal investments and do not allow redundant assembly lines. We sweat our assets as much as possible. 

How much scope do you see for garnering better value share from clients? 

Customers like Maruti are extremely organized and have a pre-decided number of suppliers. That does not change dramatically. To that extent, a change in value share may not happen with our matured clients. There is an opportunity though with our new clients — today, it could be just one model, but we should be there when they move to the second and third models.  

Any innovation you have done to cut cost or to make business more efficient during the current times? 

We have de-risked quite significantly. Take the NCR region for example, where we have three plants. Plant A produced a certain product, which Plant B could not. Post-COVID, I can produce it from Plant B or Plant C.  We allowed for a bit of duplication on the assembly lines, trained the manpower during this phase and worked on skilling the staff. There was capex involved but very marginal, and the long-term advantage is that the high-volume, critical products can be handled from anywhere.