Long Term Recommendation: Lumax Industries Ltd. Industries Ltd. ... Honda Cars, HMSI, Hero Moto Corp, Tata Motors, ... Taking into consideration even cautious approach in case few

1 GWM

Edelweiss Investment Research

Lumax Industries Ltd. (LIL) is a market leader in domestic automotive lighting industry, with market share close to around 30-35% on standalone

basis. However Lumax group (i.e. SL Lumax, lighting business of Lumax Auto Technologies Ltd and Lumax Industries Ltd) has ~50-55% combined

market share in domestic lighting business. Over the years LIL has presence across leading OEMs like Maruti Suzuki, Honda Cars, HMSI, Hero Moto

Corp, Tata Motors, M&M, Toyota, etc. on the back of its consistency in the product quality. During past 4-5 fiscals, company has focused on cost

reduction and process improvement that has helped it to improve profitability significantly.

Scaling up the value chain to LED – Step forward in right direction

Sighting structural demand shift in the industry, LIL has gradually started focusing on expanding its LED offerings over last one year. Usage of LED in

automotive lighting has been increasing significantly since last couple of years. Better visibility, superior design, combined with introduction of BS

VI norms by 2020 to induce higher usage of LEDs. As delta between price of LEDs and conventional is almost 4x, rising mix of LEDs in revenue to

benefit topline growth as well as profitability improvement. We estimate LED share in revenue to increase from 5% in FY17 to around 22% in FY18E

and ~40% in FY20E.

Continuing process improvement and cost reduction drive to add to the benefits from value addition

During last 4-5 years, LIL has significantly focused on cost reduction and process improvement initiatives. For example company has been able to

reduce the rejection rates from ~5-6% in FY14 to ~2% in FY17 and it further plans reduce to less than 1% in next couple of years. We estimate EBITDA

margins to improve by ~200 bps by FY20E, while financial leverage will additionally lead to increase of ~250 bps in PAT margins by FY20E. We

estimate that increase in LIL topline will be ~15-16% CAGR during FY17-FY20E period, however compounding in PAT will be 35% CAGR during same

period.

Outlook and valuations: Attractive prospects and limited downside; initiate with ‘BUY’

Key drivers envisaged to spur LIL are: 1) healthy automotive demand; 2) Increasing premiumization in passenger vehicle industry; 3) rising mix of

LED lights in revenues; 4) process improvement and cost efficiency measures; We initiate coverage on the stock with ‘BUY’ recommendation and

target price of INR 2560 based on 18x FY20E earnings. The stock is currently trading at 22x and 17.2x FY18E and FY19E earnings, respectively.

Year to March FY16 FY17 FY18E FY19E FY20E

Revenues (INR Cr) 1255 1300 1463 1724 2011

Rev growth (%) 9.9 3.6 12.6 17.8 16.6

EBITDA (INR Cr) 89 100 122 152 191

Net Profit (INR Cr) 52 55 77 100 133

P/E (x) 33.1 31.5 22.4 17.2 13.0

EV/EBITDA (x) 20.9 18.2 14.7 11.5 8.9

RoACE (%) 14.2 15.3 19.6 25.1 31.0

RoAE (%) 23.3 18.9 22.9 25.7 28.8

Long Term Recommendation: Lumax Industries Ltd.

LED business to brighten prospects…

CMP INR 1850 | Target INR 2560

Rating: BUY Upside: 38%

Date: 8th November 2017

Bloomberg: LUMX:IN

52-week range (INR): 1,888.80 / 689.10

Share in issue (cr): 1

M cap (INR cr): 1,730

Promoters (%) 73.53

Avg Daily Vol

BSE/NSE (000’) 15

Vishal Srivastav

Research Analyst

[email protected]

Lumax Industries Ltd.

2 GWM

Healthy demand scenario for all key user industries in near to medium term period, owing to economic buoyancy to drive growth for LIL. Also rising

share of high realisation LED lightings and continued focus on improving efficiency is expected to spur growth not only in topline but also

profitability. At an expensive valuation of 17x FY19E and 13x FY20E, increasing ROCE from 15% in FY17 to 31% in FY20E and declining debt equity

from 0.3x in FY17 to 0.02x in FY20E is comforting

Healthy demand scenario

in key user segment in near

to medium

Significant value addition

with rise in LED penetration

and process improvement

to drive profitability

Improving margins, ROCE

and declining debt equity

to aid better valuation

FY15 FY16 FY17 FY18E FY19E FY20E

Revenue 1143 1255 1300 1463 1724 2011

EBITDA 59 89 100 122 152 191

EBITDA margins 5.2% 7.1% 7.7% 8.3% 8.8% 9.5%

PAT margins 1.5% 4.2% 4.2% 5.3% 5.8% 6.6%

At CMP, FY20E P/E is

13.0x

At Target Price,

FY20E PE is 18x

Upside of

38%

FY19E-20E RoCE of

25%-31%

FY15 FY16 FY17 FY18E FY19E FY20E

RoCE 8.1% 14.2% 15.3% 19.6% 25.1% 31.0%

Debt Equity 0.9 0.5 0.3 0.2 0.1 0.0

FY20E EPS CMP / Target

13x (CMP) 142.2 1850

18x (CMP) 142.2 2560


3 GWM

Risk-reward extremely favourable

Price Target INR 2560

We value the stock at a 2 year forward PE multiple of 18x based on healthy RoCE of 28% and

EBIDTA margins of 9.5% on FY20E basis. We recommend ‘BUY’ with a TP of INR 2600

Bull

22x 2020E EPS INR 3100

Taking a view on FY20 and FY21, when LIL LED lighting business have a potential to surpass the

conventional lighting share by FY20, which will provide significant growth to revenue as well as

profitability even at a greater extent than what we have forecasted. This can result in

significant value accretion and a bull case scenario, a multiple of 22x and price target of INR

3100, an upside of 70% from CMP

Base

18x 2020E EPS INR 2560

We value the stock at a 2 year forward PE multiple of 18x based on healthy RoCE of 28% and

EBIDTA margins of 9.5% on FY20E basis. We recommend ‘BUY’ with a TP of INR 2560

Bear

15x 2020E EPS INR 200 INR 2100

Taking into consideration even cautious approach in case few of the models to which

company is supplying disappoints in sales volumes. In such scenario keeping the financial

projections constant, we are reducing the valuation on a 2 year forward PE multiple to 15x,

which gives target price of INR 2100, that is 15% increase from CMP


4 GWM

Average Daily Turnover (INR cr) Stock Price (CAGR) (%) Sensex CAGR (%)

3 months 6 months 1 year 1 year 2 years 5 years 10 years 1 year 2 years 5 years 10 years

2.1 2.4 1.9 97.8% 61.6% NA NA 20.4% 9.19% NA NA

Bu

sin

ess

Va

lue

Driv

ers

Nature of Industry Automotive Lighting (both head and rear) for passenger vehicles, two wheelers and commercials. The product forms a part of electrical

segment in auto component industry that is used for enhancing visibility

Opportunity Size LIL manufacturers head and tail lamps for vehicles across categories like PV, CV and two wheelers. The current opportunity size of this

product line in domestic market is close to INR 4000 cr and LIL along with its group company such as SL Lumax and lighting division of

Lumax Auto Technologies has around 50-55% market share in this product line.

Capital Allocation LIL is funding the ongoing capex of INR 120cr for its new LED facility at Gujarat to supply to new Swift Dzire and upcoming Swift models of

MSIL. The company plans to scale up this capacity to reach peak rate in one year inorder to supply Tata Motors and HMSI.

Predictability PV forms around 2/3rd of the business, hence LIL growth is susceptible to growth in PV industry. Further company’s growth is also

vulnerable to the success of models to which it is supplying lighting components

Sustainability Pre-qualifications criteria are tough to achieve, hence repeat orders are high. Also, LIL is among very few manufacturers domestic

market in its current product line that has R&D capability and presence across different lighting systems

Disproportionate Future Healthy demand scenario for all key user industries in near to medium term period, owing to economic buoyancy to drive growth for LIL.

Also rising share of high realisation LED lightings, is expected to not only spur growth not only in topline but also profitability

Business Strategy &

Planned Initiatives LIL is currently focussing on scaling up its high realisation and high margins LED business significantly. The LED business which constituted

around 8% of company’s revenue mix has sharply increased to 25% in Q2FY18 and it expects to further increase to 40% by FY20E.

Near Term Visibility Healthy user industry tailwinds coupled with rising demand for LED to drive growth for LIL

Long Term Visibility Increase in the LED business share, along with process improvement and cost reduction drive to fuel growth in both topline and

profitability for the company going forward


5 GWM

Focus Charts – Story in a nutshell

Topline has grown at a modest pace… LED business witnessed sharp rise in last 2 fiscals

Process improvement measures has helped LIL to scale up margins at healthy

levels in the past

Estimated global automotive lighting market share: As share of LED lighting

increasing significantly

India to follow suit and LIL to be a key beneficiary of this structural change in

domestic automotive lighting business

Higher margins in LED and continuous cost reduction drive to lead significant

improvement in profitability

Source: Company, Edelweiss Investment Research

985 1070 1117 1143 1255 1300

FY12 FY13 FY14 FY15 FY16 FY17

INR

(in

cr)

CAGR FY12-FY17: 6%

100% 98% 92%

2% 8%

FY15 FY16 FY17

Conventional lights LED lights

4.6% 5.7% 4.6%5.2%

7.0%7.5%

1.3% 1.3%0.7%

1.5%

4.1% 4.1%

0%

2%

4%

6%

8%

0

20

40

60

80

100

120


INR

(in

cr)

EBITDA (LHS) PAT (LHS) EBITDA margins PAT margins

CAGR FY12-FY17EBITDA: 16%PAT: 33%

FY16 FY17 FY18E FY19E FY20E

INR

(in

cr)

Conventional LED

12551300 1463

1724

2011

22%

40%

5%14% 15%

20%25%

31%0.5

0.3

0.2

0.1

0.0

0.0

0.1

0.2

0.3

0.4

0.5

0%

10%

20%

30%

40%


tim

es

ROCE Debt equity

Halogen

56%

Xenon

16%

LED

25%

OLED

3.0%

Halogen

40%

Xenon

13%

LED

40%

OLED

7.0%

CAGR

Halogen: 2%

Xenon: 5%

LED: 20%

OLED: 29%


6 GWM

A snapshot on business model - Dominance in automotive lighting business with strong hold across all vehicle segments and OEMs Lumax Industries Ltd. (LIL) is a market leader in domestic automotive lighting industry, with market share close to around 30-35%. However consolidated Lumax

group which includes SL Lumax, lighting business of Lumax Auto Technologies Ltd and Lumax Industries Ltd, the combined market share is ~50-55% in domestic

lighting business.

LIL is present across all key domestic OEMs such as Maruti Suzuki, Honda Cars, HMSI, Hero Moto Corp, Tata Motors, M&M, Toyota, etc.

Over the years the company has been able to enchance its presence in all the leading OEMs across vehicle segments, mainly on two counts: 1) consistency in

the product quality and 2) ability to scale up its product technology.

LIL was able sustain decent top line growth despite of rise in competition LIL Revenue Mix: Timely diversification helped to defy

the challenging scenario

Source: Company and Edel Invement Research

Source: Company and Edelweiss Investment Research

634 866 985 1070 1117 1143 1255 1300

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17

INR

IN

R c

r)

Drivers

Product

diversification

Market

diversificationClient diversification

• Rising proportion

of LED in head

lamp from 2% in

FY16 to 5% in FY17,

which is both top

line growth and

margin accretive

• Diversifying

aggressively in 2W

space which will

provide significant

upside in LED

space as currently

penetration is at

very nascent

stage

• Increasing

penetration in

new launches of

MSIL, M&M,

Honda and

Toyota

MSIL,

35%

M&M,

11%

Honda,

9%HMSI,

9%

HMCL,

9%

TAMO,

6% Others,

21%

FY17

Head

light, 68%

Rear

light,

22%

Others,

10%

FY17

Head

light,

60%Rear

light,

16%

Others,

24%

FY13

MSIL,

33%

M&M,

14%

Honda,

3%

HMSI,

7%

HMCL,

8%

TAMO,

9%

Others,

26%

FY13

PV

73%2W

21%

CV

6%

FY13

PV

65%

2W

30%

CV

5%

FY17Vehicle wise

OEM wise

Product wise


7 GWM

Scaling up the value chain to LED – Step forward in the right direction Usage of LED in automotive lighting has been increasing significantly since last couple of years. Better visibility, superior design and higher energy efficiency has

been a key growth driver. Sighting a structural demand shift in the industry, LIL has started focusing on expanding its LED offerings during last 1-2 years.

Further introduction of new emission norms i.e. Bharat Stage (BS) VI by 2020, that aims in substantially reducing emission from current levels, will lead OEMs to re-

architect almost all their current models in order to comply with new norms. This will thereby boost the usage of energy efficienct technologies across different

components and LED will likely be the one that will replace conventional halogen or xenon lightings systems.

Revenue mix of LIL: LED business witnessed sharp rise in last 2 fiscals


During last three fiscals, the share of LED business in overall revenue has increased to 8% in FY17 from almost nil in FY15. Although at a nascent stage LED business

is expected to quantum leap in next three years. This is evident from the fact that in Q2FY18, LED bus iness share shot up to ~25% of LIL’s topline. Increased usage

of LED in compact and midsize cars in the domestic market during last one year is leading to sharp spurt in the demand for LED lightings which previously were

used only in premium and luxury cars.

100% 98% 92%

2% 8%

FY15 FY16 FY17Conventional lights LED lights


8 GWM

I. Increasing usage in mass market cars to drive growth for LED lightings in domestic PV industry Worldover, automotive lightling technology has evolved significantly over the years. Initially, lighting has considered only as an element of safety because of

enhanced visibility, however gradual evolution in technology not only improved visibility factor but also helped to create a USP for a car on the basis of its integration

into the design of the car.

Automotive lighting has not only undergone technological changes, but also change in attributes

Source: Edelweiss Investment Research

Domestic market offlate has been quick to adopt any latest technological change from advance economies globally. This is evident from the swift adoption of

the last three technological changes i.e. advance front lighting systems, high intensity discharge (HID) xenon lamps and LED lamps.

Rising mix of LED to be margin accretive, as realisations of these lights are atleast 4x versus conventional lights

The rising proportion of LEDs in LIL’s revenue mix will not only benefit topline growth but also help to improve profitability. The price of LED is atleast 4x higher than

conventional lighting, hence even if rising demand provides economies of scale going forward, the price of a LED light will continue to remain significantly higher

than the conventional counterpart.

EarlierVisibility and safety were the

key attributes of lighting systems earlier.

CurrentAppearance and selling attributes of

a car along with enhanced lighting

83%

75%

69%

14% 12%

7%

1%

11%

22%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Global Ligh Vehicle Headlamp Type Penetration

HALOGEN XENON LED


9 GWM

Price difference between LED and conventional lighting for same models


India following a similar transition path towards LED as global market

Energy saving and low emission levels are driving LED’s popularity in automobile

lighting globally. This is evident from the increased usage of LED lighting in high

volume smaller cars which earlier was used only in luxury car models.

Decreasing prices of LED, higher energy efficiency and high luminosity is driving

increased usage of LEDs in vehicles.

Estimated global automotive lighting market share: LED lights to be one of the

fastest growing in near to medium term period


The present market size of LED in domestic automotive lights is estimated

to be minuscule i.e. market share of around 10-12%.

Nevertheless, similar to global transition, rapid increase in models having

LED offerings, particularly in the mass market small and mid-size car

categories, demand for LED lights will likely increase manyfold in the near-

to-medium term.

Estimated composition in domestic automotive lighting market


Popularity of LED models increasing at a rapid pace…

One component that is expected to certainly undergo change in the

near future as the country prepares for transition into the next level of

emission norms, is autmotive lighting.

Empahsis on energy conservation will dirve replacement of the high

energy consuming halogen and xenon lamps with LEDs.

Further comparatively greater visibility and better design will lead to

demand for LED rising specifically in mass market compact cars, small

SUVs and mid-size cars.

Normal Dzire lamps LED Dzire lamps

INR 3500-4000 INR 16000-18000

Normal Honda City lamps LED Honda City lamps

INR 7000-8000INR 20000-22000

Halogen

56%

Xenon

16%

LED

25%

OLED

3.0%

Halogen

40%

Xenon

13%

LED

40%

OLED

7.0%

3-5% 10-12%

FY16 FY17

LED Conventional

CAGR

Halogen: 2%

Xenon: 5%

LED: 20%

OLED: 29%


10 GWM

Car models with LED variants have increased significantly in last 5 years


… however, LED penetration still nascent in two-wheeler industry

Two wheeler industry signficantly lags PV in the usage of LED. This is evident from the fact that two wheeler models with LED variants constitutes merely 6-7% in the

overall industry offerings. Hence we believe, the penetration of LED in two wheelers will increase at a rapid pace in the near term.

Car models with LED variants have increased significantly in last 5 years


5%

20%28%

FY13 FY17 Apr-Jun FY18

% Car models with LED variants % Car models without LED variants

3% 5% 7%

FY13 FY16 FY17

% 2W models with LED % 2W models without LED


11 GWM

II. Surpassing industry growth on most ocassions – A comforting scenario Being a market leader in the automotive lighting industry, LIL’s overall growth rates mirrors the key user industry’s (two-wheeler, CV and PV) growth trajectory.

However, effective diversification has ensured that LIL’s revenue growth has surpassed industry growth on most occasions since FY10.

LIL revenue growth vs key user industry growth trajectory


PVs constituted close to 2/3rd of LIL’s business in FY17, however focus on two wheeler has increased significantly in last 4-5 years

Traditionaly, PVs have been the mainstay of LIL’s business but over the last 4-5 years LIL has been able to increase its two-wheeler business at a considerable pace

i.e. from ~21% in FY13 to ~30% in FY17. Incremental new orders from players like HMCL, Yamaha, and Suzuki have helped the company negate the slowdown in

growth from PV business.

Vehicle segment wise revenue share

CAGR FY13-FY17

PV: 2%

Two wheeler: 15%

CV: 0%


0%

5%

10%

15%

20%

25%

30%

35%

40%

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17

Key user industry growth Sales revenues growth

CAGR FY10-FY17

Revenue growth: 11%

Key user industry: 9%

PV

65%

2W

30%

CV

5%

FY17

PV

68%

2W

28%

CV

4%

H1FY18

PV

73%2W

21%

CV

6%

FY13


12 GWM

Sluggish performance of new launches from Tata Motors, M&M, coupled with non-existence in MSIL’s popular newer models strained growth in PV business during

last 3-4 years…

Non-existence in the popular newer models of MSIL such as Baleno, Vitara Brezza and Ciaz has impacted LIL’s PV business growth significantly in last 3-4 years.

Although company was able to bag the newer models from Tata Motors (i.e. Tiago and Zest) and M&M (new Scorpio, XUV500 and TUV300), sales of these models

have not scaled up as per the expection.

LIL’s business amongst most of its clients have grown at healthy pace … … at higher than the overall production growth of these OEMs indicating

market share gains

Source: Company and Edelweiss Investment

0

50

100

150

200

250

300

350

400

450

500

MSIL M&M Honda HMSI HMCL TAMO Others

INR

(i

n c

r)

FY13 FY17

7%

-1%

38% 12% 8%-6%

0%CAGR (FY13-FY17)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

MSIL M&M Honda HMSI HMCL TAMO

Un

its

(in

mn

)

FY13 FY17

7%

-7%21%

16%

2%

-9%

CAGR (FY13-FY17)

LIL business: OEM wise growth OEM wise production growth


13 GWM

…however with lot of upcoming models up the sleeves, LIL expected to scale up its market share at a faster pace than earlier

Going forward LIL has been able to make in roads into the newer offerings of MSIL, bagging the orders from newly launched Swift Dzire, SCross coupled with

upcoming new Ciaz and new Swift that are expected to be launched within few months.

Apart from MSIL, LIL has been able to bag orders of other popular models like Honda WRV, Tata Tigor, Hexa, HMSI’s new Activa, etc. These new orders will help LIL

to scale up its market share in near term. Further as these orders are for LED lightings, it will benefit LIL’s topline growth as well as profitability.

New orders in MSIL will provide significant growth to business as these are LED models


Model under coverage FY13-FY17 FY18

Omni

Alto

Eeco

Wagon R

Ertiga

CELERIO

Vitara Brezza × ×

Swift

Baleno × ×

Dzire (LED)

S Cross (LED)

Ciaz (LED) ×

Ignis × ×

New Swift (LED)


14 GWM

III. Introduction of BS VI would provide significant push in the usage of LED lamps in automotive industry Introduction of BS VI would require rearchitecting almost all the vehicle module as new norms significantly cuts down the emission level from the current one. This

would consequently lead to rediesigning and refurbishing of majority of existing components with lighter and energy efficient components to make the vehicle

lighter and fuel efficient.

Drop in prices of LED driven by economies of scale and stringent emission norms to fuel growth for LED lights

As benefits of economies of scale starts seeping in with the rise in the usage, the price of LED automotive lighting is becoming affordable even to install in small

and midsize cars, which 3-4 years back were installed only in premium and luxury cars.

We believe the LED automotive lighting market is in a high growth phase. Moreover, as the awareness to make vehicles more energy efficient is increasing, demand

for LED is expected to rise considerably from this levels in the domestic market.

Product Life Cycle Analysis of Automotive Lighting Industry


GR

OW

TH

Laser

OLED

LED

HalogenXenon

EMERGING GROWTH MATURITY DECLINETIME

Product Life Cycle Analysis of Automotive Lighting Industry


15 GWM

Healthy macro-economic scenario to fuel rise in domestic automobile demand – A comforting factor

The ongoing healthy economic activity supported by lower inflation is likely to drive PV and two wheeler demand in both the urban and rural economies, whilst

improvement in industrial and trade movement is likely to fuel growth in CV demand in the near–to-medium term.

Lower inflation growth to infuse consumer confidence…

…further rise in economic activities to spur income growth and thereby fuel

automobile demand

Automobile production to grow at healthy pace in near to medium term

Source: SIAM and Edelweiss Investment Research

Source: Edelweiss Invement Research

5.7

5.2

3.83.6

2.2

3.0

3.8

4.2

4.5

Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18

CPI

gro

wth

7.9

7.5

7.0

6.1

5.7

7.0

7.3

7.7

8.0 7.9

8.2 8.1

Ju

n-1

6

Se

p-1

6

De

c-1

6

Ma

r-1

7

Ju

n-1

7

Se

p-1

7

De

c-1

7

Ma

r-1

8

Ju

n-1

8

Se

p-1

8

De

c-1

8

Ma

r-1

9

GD

P g

row

th 3.1 3.2 3.1 3.2 3.4 3.8 4.0 4.4 4.9

15.5 15.716.9

18.5 18.819.9

21.8

23.5

25.3

0.9 0.8 0.7 0.7 0.8 0.8 0.8 0.9 1.1

FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E

Un

its

PV production estimates 2Ws production estimates CV production estimates

CAGR FY12-FY17

2W: 4%

PV: 5%

CV: 0%

CAGR FY17-FY20E

2W: 9-10%

PV: 10-11%

CV: 12-13%


16 GWM

Premiumisation in PV industry – A key positive

Penetration of LED in automotive lighting in India is presently at a nascent stage. As future BSVI focuses on significantly reducing emission levels and enhancing fuel

economy, it will induce OEMs to replace conventional lights with LED. Further rising premiuimization in PV industry would add to the growth for LED lights in the

automotive lighting industry.

Premiumisation: Demand for premium cars witnessing healthy rise in last 4-5 years

Source: SIAM and Edelweiss Investment Research

36%

45%48%

50%

FY12 FY14 FY17 FY18E

% Increase in the share of premium cars


17 GWM

IV. Process improvement drive have led to improvement in profitability during last 4-5 years… During the last 4-5 years, LIL has significantly focussed on cost reduction and process improvement initiatives. For example, the company has been able to reduce

the rejection rates from ~5-6% in FY14 to ~2% in FY17. The company plans to reduce this rate further to below 1% in the next couple of years.

Benefits of cost reduction helped LIL to improve profit at much faster pace than topline growth. For instance even though company’s topline grew only by a

modest 6%, PAT grew by ~34% CAGR during FY12-FY17 period.

Topline has grown at a modest pace… …whist profitability has grown at a far more rapid pace

Source: Company and Edelweiss Invement Research Source: Company and Edelweiss Investment Research

… which also led to substantial improvement in the financial strength of LIL

Improvement in margins in the last two years, have also added significant financial strength to the company’s balance sheet. Despite having incurred decent

capex during last five years (i.e. FY12-FY17) company has been able to reduce its debt as well as improve ROCE significantly.

985 1070 1117 1143 1255 1300


(IN

R c

r)

4.6%5.7%

4.6%5.2%

7.1%7.7%

1.3%1.3%

0.7%

1.5%

4.2% 4.2%

0%

1%

2%

3%

4%

5%

6%

7%

8%

0

20

40

60

80

100

120


(IN

R c

r)


CAGR FY12-FY17EBITDA: 16%PAT: 34%


18 GWM

Capex has been at a decent level… …however both ROCE and debt-equity has improved


Decent results in the last 2 quarters of FY18 has been comforting

Despite the slowdown concerns due to BS IV and GST implementation, the user industry growth has risen at a healthy pace, amid buoyancy in sentiments and

modest growth in economic activities. LIL’s revenue has considerably surpassed its key user industry growth trend, indicating market share gain combined w ith

increasing realisations.

Further, LIL recently received new orders from HMSI and M&M also induces positivity about the company’s growth prospects in near term.

160

102

46

78

64 61


(IN

R c

r)

8%

9%

6%

8%

14%15%

1.1

1.0

0.9 0.9

0.5

0.3

0.0

0.2

0.4

0.6

0.8

1.0

1.2

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%


tim

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ROCE (RHS) Debt-equity


19 GWM

Quarterly financials

(INR cr) Q2FY17 Q2FY18 Y-o-Y growth H1FY17 H1FY18 Y-o-Y growth

Net Sales 304.2 379.6 25% 607.0 720.1 19%

Other Operating Income 0.0 0.0 0.0

Total Income 304.2 379.6 25% 607.0 720.1 19%

Raw material 188.8 245.8 30% 381.7 469.0 23%

Employee Expenses 40.2 45.2 12% 78.3 88.6 13%

Other Expenses 49.7 58.4 18% 98.2 107.7 10%

TOTAL EXPENDITURE 278.6 349.4 25% 558.1 665.2 19%

EBITDA 25.6 30.2 18% 48.9 54.9 12%

Other Income 1.1 0.8 -31% 6.1 2.5 -58%

EBITDA incl OI 26.7 31.0 16% 55.0 57.4 4%

Depreciation 10.4 11.6 12% 20.6 22.8 11%

PBIT 16.3 19.4 19% 34.4 34.6 1%

Interest 2.9 1.2 -60% 5.9 2.4 -59%

PBT 13.4 18.2 36% 28.5 32.2 13%

Profit from associates 6.4 6.7 4% 6.4 13.8 114%

PBT 19.9 24.9 26% 34.9 46.0 32%

Tax 2.9 4.2 46% 5.1 10.0 98%

PAT 17.0 20.8 22% 29.8 35.9 20%

GRM 37.9% 35.3% 37.1% 34.9%

EBITDA margins 8.4% 8.0% 8.1% 7.6%

PAT margins 5.6% 5.5% 4.9% 5.0%

Key user industry production growth (units)

PV 1013424 1034024 2% 1863993 1961175 5%

CV 188937 210971 12% 394549 373048 -5%

Two wheeler 5567085 6267056 13% 10740654 11904287 11%

Total 6769446 7512051 11% 12999196 14238510 10%



20 GWM

Change in revenue mix towards LED along with process improvement to drive topline growth and profitability improvement in next 2-3 years

LED constituted around 5% of the company’s overall business in FY17. However this share has shot up significantly to 25% in Q2FY18 on the back of bagging orders

of new popular models in LED space. We expect going forward LED’share in company’s revenue mix will be in excess of 40% by FY20E. The growth in LED business

is expected to be ~110-130% on CAGR basis, which fuel ~15-16% CAGR rise in company’s topline during FY17-20E period.

LIL to garner the benefits arising out of structural change in domestic automotive lighting business


Going ahead, continued process improvement to reduce wastage significantly, cost reduction along with product mix changes — all of these are expected to

benefit LIL’s margins considerably in the near term.

We believe these initiatives could add ~200-300 bps to EBITDA margin by FY20E. On the other hand, financial leverage on the back of reduction in debt will add

benefits at the PAT margin level in FY20E.

Further new orders for LED of popular brands from market leaders in PV and two wheeler space, will benefit with some sort of market share gain in near term, which

infuses positive sentiments towards achieving this growth target.


(IN

R c

r)

Conventional LED

CAGR FY17-FY20E

LED: 110-130%

Conventional : 0-2%

1255 1300

1463

1724

2011

22%

40%

5%


21 GWM

Favourable product mix and cost reduction to lead improvement in margins in near to medium term


Illustration of comparative profitability analysis between current and FY20 scenarios depending on change in business mix and improvement in margin profile

FY17 scenario

UOM Conventional LED

Sales INR cr 95 5

EBIT % 5% 6%

Net FATO times 2.5 3.5

Net FA INR cr 38 1

NWC days -37 -37

WC INR cr -9.6 -0.5

Cap Emp INR cr 28.4 0.9

EBIT INR cr 4.6 0.3

ROCE % 16% 31%

Overall blended ROCE 17%

FY20E scenario

UOM Conventional LED

Sales INR cr 60 40

EBIT % 8% 9%

Net FATO times 2.5 3.5

Net FA INR cr 34 4

NWC days -18 -18

WC INR cr -3.0 -2.0

Cap Emp INR cr 21.0 9.5

EBIT INR cr 5 3.6

ROCE % 23% 38%

Overall blended ROCE 29%


7.0%7.5%

8.3%8.7%

9.4%

4.1% 4.1%

5.3% 5.4%

6.5%

0%

2%

4%

6%

8%

10%

12%

0

50

100

150

200

250


(IN

R c

r)


CAGR FY17-FY20E

EBITDA: 25%

PAT: 35%


22 GWM

Despite decent capex, the improving margin profile should benefit ROCE signficantly in next 3 years

LIL is expected to incur ~INR120-150 cr in next two years, mainly invested towards scaling up the capacity in Gujarat plant, along with process improvement and

enhacing product development at its R&D facility in Taiwan. However signficant improvement in margins, will help to fuel growth in ROCE despite decent capex.

ROCE to improve more than two folds in next 3 years, supported by improving margin profile


Key highlights on expected capex

Company has invested around INR 100 cr so far, for setting up manufacturing facility at Gujarat and earmarked ~INR 120 cr in expansion of this capacity. At peak

rate this facility will have capacity of producing 0.3 mn lamps.

The facility will supply around 0.22 mn lamps to MSIL for its New Swift Dzire and upcoming new Swift models. The company also plans to supply Tata Motors and

HMSI from this facility.

Company plans to improve its R&D capability, independently devloping new technology LED PCB lamps in Taiwan designing centre.

14% 15%

20%

25%

31%0.5

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0.2

0.1

0.0

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tim

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ROCE Debt equity


23 GWM

V. Impressive earning growth in next 3 years provides signifcant upside to valuation from these levels as well Strong growth in earnings in next 2-3 years driven by signficant improvement in both topline and margins is expected to drive upside in valuation from these current

levels as well in near to medium term period. We estimate EPS to grow almost 2.5x, which is ~34% increase on CAGR basis during FY17-FY20E period.

Even though stock price has rallied significantly in last 2 months, currently 1-year and 2-year average PE is below the 8-year average, Indicating significant

upside is still intact


26

13

27 26

46

23

8

13

1719

0

5

10

15

20

25

30

35

40

45

50

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E

tim

es

PE 1 yr Forward (LHS) Average

13

7

2326

52

19

78 9

14

0

10

20

30

40

50

60

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E

tim

es

PE 2 yr Forward (LHS) Average


24 GWM

Companies focussed on continuous process improvement and consistent improvement in profitability enjoy valuation premium

Although at current levels, LIL is trading at 17.5x for FY19E and 13.5x for FY20E EPS estimates, which by no means is low valuation. However analysing few auto

component players which have gone through similar sort of process improvement drive that has led to improvement in profitability trade on higher valuation than

industry.

Key indicators FY15 FY16 FY17 FY18E FY19E

Sales growth

Bharat Forge 13% -11% -6% 18% 18%

Sundram Fasteners 15% 3% 1% 9% 12%

Fiem Inds 15% 20% 3% 23% 15%

MSSL 14% 8% 14% 35% 16%

Lumax Inds 2% 10% 4% 14% 15%

EBITDA margins

Bharat Forge 19% 21% 20% 23% 24%


Fiem Inds 13% 13% 12% 12% 12%

MSSL 7% 10% 10% 10% 10%

Lumax Inds 5% 7% 8% 8% 9%

PAT margins

Bharat Forge 10% 10% 9% 12% 13%


Fiem Inds 5% 6% 3% 5% 5%

MSSL 3% 3% 4% 4% 4%

Lumax Inds 1% 4% 4% 5% 5%

Debt Equity

Bharat Forge 0.7 1.0 0.8 0.4 0.1

Sundram Fasteners 1.4 0.5 0.4 0.3 0.2

Fiem Inds 0.4 0.4 0.4 0.3 0.2

MSSL 1.5 1.4 1.3 0.8 0.5

Lumax Inds 0.9 0.5 0.3 0.2 0.1

ROCE

Bharat Forge 19% 15% 11% 17% 23%


Fiem Inds 19% 21% 11% 13% 15%

MSSL 18% 23% 19% 20% 24%

Lumax Inds 7% 13% 13% 18% 22%

PE

Bharat Forge 40.3 46.2 50.4 35.1 27.2

Sundram Fasteners 82.0 82.0 30.8 25.2 21.2

Fiem Inds 18.0 19.0 38.0 20.0 17.0

MSSL 37.3 37.9 32.7 31.5 26.3

Lumax Inds 104.3 33.8 32.7 22.6 17.5

Source: Company reports and Edelweiss Investment Research


25 GWM

Financials

Income statement (INR cr)


Income from operations 1,255 1,300 1,463 1,724 2,011

Direct costs 884 889 1,002 1,181 1,367

Employee costs 141 158 171 201 241

Other expenses 283 311 339 391 452

Total operating expenses 1,167 1,200 1,341 1,572 1,820

EBITDA 89 100 122 152 191

Depreciation and amortisation 38 40 42 44 46

EBIT 51 59 80 108 145

Interest expenses 13 11 8 6 3

Other income 4 6 8 12 16

Profit before tax 41 54 80 114 158

Provision for tax 4 9 18 29 39

Core profit 37 45 63 86 118

Extraordinary items -0 -0 -0 -0 -0

Profit after tax 37 44 62 85 118

Minority Interest 16 11 15 15 15

Share from associates 0 0 0 0 0

Adjusted net profit 52 55 77 100 133

Equity shares outstanding (mn) 1 1 1 1 1

EPS (INR) basic 55.9 58.8 82.7 107.5 142.2

Diluted shares (Cr) 0.9 0.9 0.9 0.9 0.9

EPS (INR) fully diluted 55.9 58.8 82.7 107.5 142.2

Div idend per share 12.8 15.5 33.2 43.1 57.0

Div idend payout (%) 22.9 26.3 40.0 40.0 40.0

Common size metrics- as % of net revenues (INR cr)


Operating expenses 92.9 92.3 91.7 91.2 90.5

Depreciation 3.0 3.1 2.9 2.6 2.3

Interest expenditure 1.1 0.9 0.6 0.3 0.1

EBITDA margins 7.1 7.7 8.3 8.8 9.5

Net profit margins 4.2 4.2 5.3 5.8 6.6

Growth metrics (%)


Revenues 9.9 3.6 12.6 17.8 16.6

EBITDA 49.3 12.7 21.9 24.9 25.7

PBT 187.6 30.7 49.5 42.5 37.9

Net profit 215.8 5.2 40.7 29.9 32.4

EPS 215.0 5.2 40.7 29.9 32.4

Balance sheet (INR cr)

As on 31st March FY16 FY17 FY18E FY19E FY20E

Equity share capital 9.35 9 9 9 9

Reserves & surplus 259 307 353 413 493

Shareholders funds 268 316 362 422 502

Borrowings 127 92 72 42 12

Minority interest 0 0 0 0 0

Sources of funds 396 408 435 465 514

Gross block 760 768 828 868 898

Depreciation 352 381 422 467 513

Net block 408 387 406 401 385

Capital work in progress 17 52 30 20 20

Total fixed assets 425 440 436 421 405

Investments 69 79 94 134 139

Inventories 105 116 140 165 209

Sundry debtors 181 191 220 269 358

Cash and equivalents 3 1 11 20 34

Loans and advances 43 39 44 51 60

Total current assets 332 347 415 506 661

Sundry creditors and others 406 439 481 567 661

Provisions 6 7 7 7 7

Total CL & provisions 412 446 488 574 668

Net current assets -80 -99 -73 -68 -7

Net Deferred tax -19 -28 -28 -28 -28

Misc expenditure 1 16 -6 -6 -6

Uses of funds 396 408 423 453 503

Book value per share (INR) 287 338 387 452 537

-32 -111 -160

Cash flow statement


Net profit 37 45 63 86 118

Add: Depreciation 38 40 42 44 46

Add: Misc expenses written off -11 -15 22 0 0

Add: Deferred tax 4 9 0 0 0

Add: Others 16 11 15 15 15

Gross cash flow 84 89 142 145 180

Less: Changes in W. C. -2 -17 17 -4 47

Operating cash flow 86 106 125 150 133

Less: Capex 41 55 38 30 30

Free cash flow 45 51 87 120 103

Ratios


ROAE (%) 23.3 18.9 22.9 25.7 28.8

ROACE (%) 14.2 15.3 19.6 25.1 31.0

Debtors (days) 53 54 55 57 65

Current ratio 0.8 0.8 0.9 0.9 1.0

Debt/Equity 0.5 0.3 0.2 0.1 0.0

Inventory (days) 30 33 35 35 38

Payable (days) 118 123 120 120 120

Cash conversion cycle (days) -35 -37 -30 -28 -17

Debt/EBITDA 1.4 0.9 0.6 0.3 0.1

Adjusted debt/Equity 0.5 0.3 0.2 0.1 (0.0)

Valuation parameters


Diluted EPS (INR) 55.9 58.8 82.7 107.5 142.2

Y-o-Y growth (%) 215.0 5.2 40.7 29.9 32.4

CEPS (INR) 96.5 102.3 127.6 155.2 191.9

Diluted P/E (x) 33.1 31.5 22.4 17.2 13.0

Price/BV(x) 6.4 5.5 4.8 4.1 3.4

EV/Sales (x) 1.5 1.4 1.2 1.0 0.8

EV/EBITDA (x) 20.9 18.2 14.7 11.5 8.9

Diluted shares O/S 0.9 0.9 0.9 0.9 0.9

Basic EPS 55.9 58.8 82.7 107.5 142.2

Basic PE (x) 33.1 31.5 22.4 17.2 13.0

Div idend yield (%) 0.7 0.8 1.8 2.3 3.1


26 GWM

Edelweiss Broking Limited, 1st Floor, Tower 3, Wing B, Kohinoor City Mall, Kohinoor City, Kirol Road, Kurla(W)

Board: (91-22) 4272 2200

Vinay Khattar

Head Research

[email protected]

Rating Expected to

Buy appreciate more than 15% over a 12-month period

Hold appreciate between 5-15% over a 12-month period

Reduce Return below 5% over a 12-month period

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Lumax Sensex

Disclaimer

27 GWM

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28 GWM

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