CMP Rs157, Target Rs184, Upside 16.9%
Domestic OEM market: multiple factors to drive growth
Multiple tailwinds for the domestic automobile industry such as strong rural demand, rising exports, entry of new players (VW, Nissan, others) will lead to sustained momentum in volume growth for passenger car manufacturers. This would translate into major business opportunity for auto component manufacturers such as Lumax Auto Technologies Ltd (LATL) which generates ~80% of its sales from the OEM market. ~35% of the sales for LATL are accounted by Bajaj Auto, which is expected to deliver better than industry (motorcycles) volume growth.
New product lines to propel revenue growth
LATL has widened its product portfolio by venturing into new product lines. The company, which is primarily into the business of head/tail lamp assembly, has set-up a new plant for providing other related applications coupled with a new trading plant for adjustor motors. Further, to break-away from the vagaries of cyclicality of the auto industry, LATL is diversifying into non-automotive segments (infrastructural lighting). Above mentioned factors will corroborate revenue growth.
Benefits of operating leverage will lead to margin expansion
EBIDTA for its subsidiary, Lumax DK Auto has improved from 12.3% in FY07 to 14.3% in FY10. Given its lower utilization levels (currently below 50%) for two of its major segment and continued momentum in sales going ahead, there is a strong case of margin expansion as benefits of operating leverage kicks in.
Healthy balance sheet coupled with cheap valuations
LATL has maintained healthy 20%+ return ratios over the past three years (average ROE at 25% and ROCE at 28%). Further, the company has near zero net debt/equity. During Q1 FY11, LATL reported a consolidated revenue growth of 66% and a PAT growth of 83%. For FY11, we expect the company to register a 36.5% growth in revenues and 40% growth in PAT. The stock is trading cheap at 5.5x FY11E EPS. Assigning P/Ex of 6.5 for FY11E EPS, we arrive at a target price of Rs184.
Valuation summary (Consolidated)
Y/e 31 Mar (Rs m)
|
FY07
|
FY08
|
FY09
|
FY10
|
Revenues
|
2,543
|
2,911
|
3,004
|
4,169
|
yoy growth (%)
|
116.9
|
14.5
|
3.2
|
38.8
|
Operating profit
|
130
|
237
|
233
|
367
|
OPM (%)
|
5.1
|
8.1
|
7.8
|
8.8
|
Reported PAT
|
63
|
119
|
114
|
229
|
yoy growth (%)
|
62.8
|
90.3
|
0.3
|
97.4
|
|
|
|
|
|
EPS (Rs)
|
5.4
|
10.2
|
10.3
|
20.3
|
P/E (x)
|
29.0
|
15.3
|
15.2
|
7.7
|
Price/Book (x)
|
4.0
|
3.3
|
2.8
|
2.2
|
EV/EBITDA (x)
|
15.1
|
8.5
|
8.6
|
4.9
|
Debt/Equity (x)
|
0.5
|
0.5
|
0.4
|
0.1
|
RoE (%)
|
21.1
|
23.8
|
20.1
|
32.4
|
RoCE (%)
|
22.0
|
26.5
|
22.1
|
33.7
|
Source: Company, India Infoline Research