Recommendation from Auto Ancillaries sector

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year.

LUMAX AUTO TECHNOLOGIES: BRIGHT PATH AHEAD

HERE IS WHY
✓Strong order book
✓Growth in automotive sector
✓Partnerships with leading companies

Rising middle-class income and a booming young population has resulted in a rise in demand for twowheelers and four-wheelers in India. In January 2023, the passenger vehicle sales in India increased by 17 per cent from a year ago, which was supported by strong customer demand and improved supplies from manufacturers. According to Society of Indian Automobile Manufacturers, about 298,093 units were sold in the Indian market in the month of January 2023 as compared to 254,287 units in January 2022. Given the strong demand in the domestic market, there is one company, namely, Lumax Auto Technologies (LAT), which can benefit from the growing automotive trend in the India market.

LAT, incorporated in 1981, is a part of the D K Jain Group of companies and is engaged in the business of manufacturing and supplying automotive lamps, plastic moulded parts, telematics products and services and frame chassis of two, three and four-wheelers. It has partnerships with seven global players, namely, Yokowo (Japan), JOPP (Germany), Mannoh (Japan), Alps Alpine (Japan) and a few others that give the company a competitive advantage.

The company has 17 manufacturing facilities in five different states with research and development centres in Manesar and Pune. The company’s key customers include Maruti Suzuki, Honda, Tata Motor, Skoda, Bajaj Auto and Mahindra and Mahindra. On February 18, 2023, the company informed the stock exchanges about signing an agreement to acquire majority stake in IAC International Automotive India (P) Limited from the International Automotive Components Group. 

IAC India is a well-established Tier 1 interior systems and components supplier to key automotive OEMs in India, including Mahindra and Mahindra, Maruti Suzuki, Volkswagen and Volvo Eicher Commercial Vehicles, among others. It also has a strong and well-established engineering centre providing advanced design and engineering services to customers in India and overseas. IAC India’s 9MFY23 revenue stood at ₹470 crore. Lumax Auto Technologies’ acquisition of IAC India is an EPS accretive.

The revenue of LAT has been growing at a five-year CAGR of 9 per cent, which is likely to improve going ahead as the automotive sector is coming out of its long sub-par growth status. The company delivered an operating profit margin of 10.6 per cent in Q3FY23 compared to 10 per cent in FY22 and on TTM basis the operating profit margin is about 10.7 per cent. 

LAT delivered flat results in Q3FY23 with an increase of 4 per cent in revenue on YoY basis which stood at ₹445 crore while on QoQ basis it decreased by 9 per cent. The operating profit of the company stood at ₹47 crore which increased 5 per cent on YoY basis and decreased 9 per cent on QoQ basis. The company had debt of ₹190 crore at the end of the first half of FY23. The stock of the company is currently trading at a PE of 17 times. The company’s ROE and ROCE were at 13 per cent and 18.4 per cent, respectively, at the end of FY22. We expect the company to deliver good results in Q4FY23. It has a robust demand for its products and therefore given the strong business outlook we recommend BUY.