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Soumik Kar

My Best Pick 2015

Daljeet Singh Kohli
IndiaNivesh's head of research feels Lumax Auto will ride the recovery in the auto business

Several months ago when I was at the showroom of a well-known luxury car-maker, a seemingly innocuous query from a salesperson made me mull over the potential of automatic transmission gear cars in India. The salesperson’s question was whether I — or a chauffeur — would be driving the car. Curious, I asked her how it would matter.

Her response was interesting. She said that if a chauffeur was going to drive the car, then I should go for a manual transmission; if not, then I should opt for the automatic version. My next question, quite naturally, was why? She replied that the automatic variant would result in higher initial payments by about 5-10% and also the fuel efficiency would be lower by 10%-15%. This discussion led me to the conclusion that buyers of automatic vehicles face a double whammy: 1) they pay a higher price for the product and 2) they get much lesser mileage even though it is far more convenient to drive an automatic vehicle.

That conversation set me thinking that in a city like Mumbai, a breakthrough in automatic technology would be a welcome change, as people spend a large part of their lives driving. That’s what Maruti did by rolling out the automatic Celerio with improved fuel efficiency at an attractive price point. A deeper search for the vendors behind this breakthrough product led me to Lumax Auto Technology, which is into automatic transmission gears  and manufactures two- and four-wheelers parts. 

Discussions with the company’s management further strengthened my view that Indian companies have now developed technology that can reduce upfront costs significantly and improve fuel efficiency so much that the gap between automatic and manual versions has shrunk dramatically. Effectively, this means that it is only a matter of time before the appeal of automated geared vehicles catches the fancy of the rest of the country.

Bright spot

The car lighting segment is the biggest contributor to LATL's overall revenue

If you take away the two drawbacks of automatic transmission, the demand for automatic gear-based vehicles is likely to increase at rapid pace: an example is the phenomenal success of Celerio. Maruti has two models featuring auto gear shift variants and has also launched Alto K10, the country’s cheapest small car with automated gear shift technology. Tata Motors might soon come out with automatic variants of its upcoming hatchback Bolt and compact sedan Zest. All that means Lumax Auto Technologies (LATL) stands to be a big beneficiary.

A new route

LATL has come a long way from being a manufacturer of automotive lighting systems, which now accounts for only 30% of standalone revenue and 19% of consolidated revenue, to a provider of critical, high-value-added products such as parking brakes and shift gears. LATL’s product portfolio now comprises head lamps, tail lamps, frame chassis, adjustor motors, handle bars, mufflers, gear shift levers, parking brakes and other small parts. The company currently caters to auto majors such as Bajaj Auto, Piaggio, Honda Motorcycles and Scooter, Maruti Suzuki, Toyota and Tata Motors. 

Bouncing back

After a dismal FY14, revenue growth is set to revive

At present, automatic gears account for just 5% of total turnover for Lumax but the likely shift could be a major growth driver for the company. To fully exploit the opportunity from this business, LATL has signed a joint venture agreement with Japan’s Mannoh Industrial to design and manufacture complete gear shift lever systems for manual, automatic, automated manual transmission (AMT) and continuously variable transmissions (CVT) in India. Mannoh, a technology leader in automatic, AMT, CVT and MT type gear shift lever assemblies, will provide complete local designing and testing capability in India through its R&D centre in Gurgaon.

Let there be light

In order to upgrade and enhance the appeal of vehicles, innovation and design have become key differentiators in the lighting business. Further, OEMs now demand low-wattage and high-luminosity lamps to save energy, which has made these products more technologically advanced. LATL has been beefing up its in-house product development capability to make itself self-reliant and at par with evolving global lighting technologies. LATL has also been strengthening its design and development team to handle the increasing demand of OEMs for new products in the shortest lead time.

Profitable growth

High operating leverage to improve margins in future

Indian auto ancillary players have a huge potential for exports as international automotive players with operations in India are increasingly sourcing components from local players. The demonstrated ability of Indian component-makers to manage supplies to global automotive manufacturers in the country opens up the possibility of the component makers supplying the same OEMs in other countries as well.

Indian component manufacturers continue to enjoy competitive advantages primarily on account of low labour costs, less stringent environmental regulations and possession of established technology. Currently, export contributes very little (2-3%) to overall revenue but Lumax has developed nine new products to establish a better presence in export markets.

The company has a diversified product portfolio that caters to both two- and four-wheelers. This diversification helps the company overcome downturn or cyclicity in any segment of the automobile industry. For two-wheelers, the company makes plastic moulded parts and seat frames and for four-wheelers, it produces air intake systems. The company’s manufacturing facility at Narsapur, Hubli, Karnataka has commenced supplying plastic moulded parts to Honda Motorcycle & Scooter last year.

With Honda growing rapidly and capturing significant market share, LATL growth is likely to remain intact in the coming years. In order to strengthen its foothold in the seat frame business, the company has entered into a 50:50 joint venture agreement with Gill-Austem of the US. According to our estimates, over the next three years, moulding parts, seat frames and sheet metals will be the fastest growing sub-segments for the company.

Owing to a small base, shift gears and air intake systems will show abnormally high growth. The company has signed another joint venture in equal proportion with Pune-based Cornagila — christened Lumax Cornaglia Auto Tech — for supplying air intake system to  leading automobile manufactures such as Tata, Fiat, Volkswagen, Skoda and General Motors.

Changing gears

The past couple of years have delivered muted growth for LATL, in line with the overall slowdown in the auto sector. On the back of lower capacity utilisation and higher fixed costs, margins took a beating and net profit declined in FY14. However, going forward, we expect a strong revival in the automotive industry on the back of 1) overall macro-economic recovery, 2) cut in fuel prices and 3) peaking of interest rates.

The company has the potential to increase its revenue by 68% between FY14 and FY17, while profits should grow by a whopping 172% over the same period, from ₹30 crore in FY14 to ₹82 crore. The stock is trading at low single-digit multiples of based on FY16 and FY17 estimated earnings. With a comfortable debt-to-equity ratio of just 0.2X and robust RoE of around 20%, we believe the company has the potential to yield a very high return over the next couple of years. The company has a consistent dividend track record with a dividend payout of above 25%. 

Disclaimer: The author of this report does not hold this stock in his personal capacity. However, he has recommended this stock to the clients of IndiaNivesh Securities, for whom he works as head of research. It is safe to assume that IndiaNivesh’s clients, directors, affiliates and associates may have a holding in this stock. The author has not been compensated in any manner by the Lumax Auto nor is/has he been associated in any way with Lumax Auto.

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