Buy Lumax Industries, target Rs 2,560: Edelweiss Broking

Edelweiss Broking has a buy call on Lumax Industries with a target price of Rs 2,560.

The current market price of Lumax Industries is Rs 2,007.20.

Time period given by the brokerage is one year when Lumax Industries price can reach the defined target.


View of the brokerage on the company:
Lumax Industries Ltd (Lumax) reported revenue of Rs 496 cr in Q1FY19, registering a strong growth of 46 per cent y-o-y. The growth was driven by healthy industry tailwinds combined with rise in the proportion of LED business—that helped to scale up the realisation. The EBITDA came in at Rs 41 cr up by 65 per cent y-o-y and EBITDA margins improved 100 bps y-o-y to 8.2 per cent in during the same period. However lower profit from associated companies strained the growth level for PAT to some extent which increased by 32 per cent y-o-y to Rs 20 cr. The Management believes growth momentum to be sustaining driven by strong rise in realisation supported by healthy volume growth. Further change in mix towards LED would drive profitability growth. The share of LED business for Lumax has increased to 35 per cent in Q1FY19 from about 10 per cent last fiscal which instills confidence in company’s growth prospect. We maintain our ‘BUY’ rating on the stock with the target price of Rs 2560.

Strong growth in realisation because of rising share of LED driving performance: Lumax topline observed strong growth of around 45 per cent y-o-y. Around 35 per cent of this growth was conrtibuted by volume rise while 65 per cent driven by change in product mix towards LED lights. The LED business was less than 10 per cent of the revenue last fiscal, has increased to about 35 per cent in Q1FY19. The transition in two wheeler segment has been more rapid, where the share of LED for the company is about 50 per cent, while in the four wheeler business the share of LED is about 32 per cent. During last few months, the company has been able to increase its market share in automotive lighting space, by bagging new orders from HMSI, Maruti Suzuki, etc. Going forward, we expect new model launches in the four wheeler and two wheeler segments (which will be equipped with LEDs) to drive strong realisation growth for Lumax. Further, the Company is expected to increase its market share by bagging new orders from Ciaz and TVS; this instills significant confidence about its medium to long term growth prospects.

EBITDA margins grew as economies of scale arising out of a strong topline growth benefited: Strong growth in topline, percolated at EBITDA levels as EBITDA margins increased by 100 bps to 8.2 per cent in Q1FY19. Higher realisation driven by increase in the share of LED business also benefited by some extent. However, at PAT level margins dipped by 40 bps y-o-y to 4.0 per cent. Sharp drop in profit from associate companies which was Rs 7.1 cr in Q1FY18 dropped to Rs 3.2 cr in Q1FY19. Management clarifies that the drop in the profit of SL Lumax was owing to the downward price revision from Hyundai. However, the management has assured by the end of the fiscal, profits from SL Lumax will be similar to last year. Going forward, the increasing mix of LED and Lumax’s efforts to increase localisation will aid in margin improvements.

Strong topline growth and margin improvement would provide strength to valuations: Strong topline growth driven by a healthy industry scenario and popularity of new models where Lumax has presence. Coupled with increasing mix of LED business and company’s effort to scale up the profitability by increasing localisation levels - instills positivity regarding growth prospects for medium to long term (both in the top and bottom line). The Company intends to reach double digit EBITDA margins by FY20. One the back of healthy growth momentum we maintain BUY on the stock with a target price of Rs 2,560. The stock is currently trading at PE of 21.7x/15.3x FY19E/FY20E respectively.