Lumax Industries Limited (517206) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Lumax Industries Limited Q3 and 9M FY '20 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involves risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Deepak Jain, Chairman and Managing Director. Thank you. And over to you, Mr. Jain.

Good afternoon to all. A very warm welcome to the Q3 and 9 Months FY '20 Earnings Call of Lumax Industries Limited. Along with me on this call, I have Mr. Anmol Jain, Joint Managing Director; Mr. Vineet Sahni, CEO and Senior Executive Director; Mr. Khanna, Naval, Executive Director, Lumax Management Services; Mr. Sanjay Mehta, Group CFO; and Mr. Shruti Kant, CFO; and SGA, our Investor Relations advisers. The results and investor presentation are uploaded on the stock exchange and company website, I hope everybody has had a chance to look at it. Before we start with discussions on the financial performance of the company, I would like to share few highlights of the automobile industry. 2019 witnessed the slowest demand in the past 2 decades due to the weak economic environment, higher vehicle sales due to safety and emission regulations and stricter lending rules due to the NBFC credit squeeze. However, during the month of December, a reduction in the pace of decline in the demand was observed in the passenger vehicles, though on a low base, and an improvement in the rolling average in the last 3 months of the year, led the industry to imply that the worst may be over. As per SIAM, the automobile sales declined 13.8% in 2019, passenger vehicles and 2-wheelers posted a decline of 12.8% and 14.2%, respectively. Thus, it is clear that the calendar year 2019 did not end on a good note for the industry. It is expected that the Indian economy will revise in FY '21, which, along with the low base of last year and availability of newer models, should support growth in the auto sector. The revival is expected to start from the second quarter of current calendar year and will be visible from the next festive season. Transition to BS-VI will lead to clearance of BS-IV inventory and also result in an uptick in the production of BS-VI vehicles. However, BS-VI will lead to an increase in the cost of vehicles and to ensure that this additional cost do not have any impact on the demand. SIAM has approached the government to reduce GST rate from 28% to 18% on vehicles and to also introduce an incentive-based scrappage policy. These propositions, if accepted, can give a major boost and help revive the sector. Experts also believe that a low base, good monsoons and gradual macro revival should aid a cyclical recovery in auto volumes in FY '21. But impending challenges from new emission norms and continued capacity overhang, especially in the CVs still haunt the sector. In order to ensure there is no BS-IV stock left after March 31, 2020, automobile companies have already started aligning their productions accordingly. However, due to the recent Coronavirus epidemic and also going forward, certain volatility in the global environment, the demand needs can be muted as well as we are cautious on the forecast. Lumax being a market leader in lighting, the top 3 customers, Maruti Suzuki, Honda Motor Scooters and Hero MotoCorp has shown significant decline in their revenue, which has also adversely affected the revenue growth of the company. However, in Q3 FY '20, the following new models have been launched, which your company is supplying lighting systems, too. With Tata, we are happy to start supplies to the new model Altroz and for existing models, Tiago, Tigor and Nexon. With Mahindra, we had lighting systems for the Jawa 2-wheeler model. With Honda, Shine SP125, we're supplying their head lamps. As we have been mentioning during our previous calls, as the industry moves forward towards adoption of BS-VI norms, the demand for LED lighting will increase at a faster pace. For the 9 months FY '20, LED constitutes about 32% of our sales currently. We foresee LED contributing 50% of our total sales in the coming year. On the operational front, our focus has always remained to rationalizing our cost and improving margins through constant innovation and improvement. As a result of which, the company has been able to steer through most difficult times and emerge as an industry leader. The difficult times is reflected in our revenue performance. However, we firmly believe with continuous focused efforts on localization and cost improvement projects, we will be able to sustain and grow a profitable fee margins. Hence, we are confident to deliver better returns than the industry NPLs. The Dharuhera plant of the company has won the prestigious TPM award for excellence in Category A from the Japan Institute of Plant Maintenance. Now I would like to hand over the line to Mr. Sanjay Mehta, Group CFO, to update you on the financial performance of the company.

Good afternoon, everyone. Let me update on Q3 and 9-month consolidated performance. The Q3 total revenue stood at INR 383 crores against INR 432 crores Q3 last year, a down by 11% on year-on-year basis. This is mainly due to low production of almost all the OEMs catered by the company. The revenue for 9 month was INR 1,214 crores against INR 1,419 crores last year 9 month, showing a degrowth of 14% on year-on-year basis. Manufacturing revenue for Q3 stands at INR 360 crores as against INR 417 crores during the same period last year, down by 14%. Similarly, it is INR 1,137 crores during the 9 month this year as against INR 1,384 crores 9 month last year, a down by 18%. Revenue from sale of molds during Q3 stands at INR 23 crores against INR 15 crores last year. And similarly, it was INR 77 crores during this year as against INR 34 crores during the 9 month last year. The company reported a consolidated EBITDA of INR 44 crores in Q3 against INR 43 crores in Q3 last year, a growth of 3%. The EBITDA for 9 month stood at INR 127 crores, whereas it was INR 125 crores 9 month last year, showing a growth of 2%. EBITDA margins stands at 11.5% for Q3 as against 9.9% for Q3 last year. Margins during 9 month are 10.5% as against 8.8% in 9 month last year. The margins have improved by 170 bps on 9-month basis in spite of lower uptake from OEMs, which is due to various cost control initiatives and in-sourcing of electronics business with effect from April '19. Profit after tax and share of associate for Q3 stood at INR 19 crores as against INR 20 crores in Q3 last year, degrown by 4%. And for 9 month, it is INR 56 crores as compared to INR 61 crores in 9 month FY '19, showing a decline of 8%. The PAT margin is at 4.9% as against 4.6% in Q3 last year. For 9 month, PAT margin stood at 4.6% as against 4.3% in 9 month FY '19. The CapEx incurred during the 9 month is INR 67 crores, excluding INR 22 crores on account of right to use asset as per Indian Accounting Standard 116. The estimated CapEx for FY '20 is at INR 135 crores, including INR 75 crores on new electronics facility. Now we open the call for questions.

[Operator Instructions] The first question is from the line of Vimal Gohil from Union Mutual Fund.

Congratulations on a very strong gross margin performance this quarter. Sir, I just -- so my question was actually on gross margins. If you could just give me what has led to such a strong improvement there? And what would be the sustainable level of gross margins? Because -- and more so, I would want to understand the reason behind Q-on-Q improvement in gross margins for this particular quarter?

The gross margin for this quarter is 34.5%, against 38.7%, up by 4.2% on 9-month basis. This is mainly due to in-sourcing of PCB, almost around 2% contributes from PCB in-sourcing, and the balance due to reduction in raw material prices throughout the year, which has been partly passed on to the customers and for remaining negotiation are in process with the customers. So basic in-sourcing of PCB and favorable raw material prices.

Okay. So raw -- so you haven't passed on the entire benefits to the customers there yet, is it?

It is under discussion, negotiations. Partly, we have passed and partly, it is under discussion.

Right. And while calculating the gross margins, you are including other income as well in your numbers, right?

Other operating income.

Other operating income we are including.

So the...

And also the cost measures we have taken also give us the improvement in the productivity.

Right. Okay, okay, okay. And sir, would you want to really talk about your account as far as Honda is concerned? When can we see some improvement over there? Because there -- if I'm not wrong -- I mean, if you could just make me understand how have we done vis-à-vis their own production this quarter? And my second question was, in this particular quarter, how -- what -- out of the whatever decline that we've seen what -- is there a price increase and volume increase? If you could just break that up for me, please.

I got volume.

So I'll take few questions of yours. There are I think multiple questions. So first and foremost, let's talk about you -- when you said Honda, I'm assuming you're talking about the Honda 2-wheelers?

That's right, sir.

Right. So HMSI's sales during the, basically, period, if you see 9 months vis-à-vis the customer revenue going down was 16% as far as going down, Lumax sales were impacted about 20% or so. If you see quarter 3, it's more sharply declined, where customer is about 9% down, but Lumax Industries is about 16% down. One of the major reasons is that we are probably 100% on their 1F plant, which also had seen certain IR disturbances. So because of that and lesser production by HMSI, there -- we actually had a deeper decline on the Q3 revenue. The SOB in reduction in BS-IV models of Activa will basically be taken care from January 20, because they will start producing BS-VI vehicles, which is the Activa 6G now, and hence, we will actually recover these revenues. So this is on the HMSI, kind of thing. I couldn't get -- so I think I've been -- what -- any other question you had regarding...

Yes. Sir for -- just to finish on Honda, Honda 2-wheelers. Honda 6G, we have 100% share in the BS-VI version?

No. We are 50-50 share in the corporate.

Okay, okay, okay. Fair enough. And Honda 6G is a 100% LED model, sir? Is it?

No. It is not. It is a combination of [ bulb-type and HID ].

Right, sir. And -- yes, so my second question was around volume and pricing growth. If you could just break that us -- break that up for us, please. For the quarter and for the 9 months, how much would that be?

If you see, as our share of conventional to LED has been consistent in the last 12 months, which is ranging from 32% to 34%, so whatever the reduction in the sales value has happened, it is mainly -- it is all because of volume only.

Right. Okay. Okay. And sir, what would be the absolute gross debt in our -- gross and net debt in our balance sheet right now?

Our debt, no? Debt? Our debt is -- long-term is around INR 61 crores and the short-term debt as on 31st of December is INR 243 crores. The short term, I'm talking about largely working capital limit, which includes the vendor financing and the customer financing as well city limits.

Okay. That is INR 240 crores?

INR 243 crores, precisely.

And the long-term debt is around INR 61 crores?

INR 61 crores, though it comes in accounting terms as a long-term because it is more than 1 year, but precisely it is -- we have taken for 1.5 years only.

Okay, okay, okay. And sir, next year, this should come down, given -- because most of our CapEx will be done. So are we looking to pay off the debt using our internal accruals?

Yes. Definitely.

Next question is from the line of Varun Baxi from Equirus.

Sir, my question is regarding our mold sale. So like in 9 month our mold sale has been about INR 79 crores, INR 80 crores. So are we looking at something like INR 100 crores, INR 110 crores of mold sales for this year?

Yes. That's correct.

INR 110 crores is a good number. Okay. Sir, also, my question is regarding now Hero. Like, we have seen a sharp decline in Hero Motors' revenue contribution also, almost 34% decline Y-o-Y. So is it largely attributed to the change in mix? Or have you lost any business over there?

See, we have not lost any share of business. There are certain model mix that has changed, which has contributed to this decline. However, we will see the recovery starting of BS-VI models, starting this month.

[Operator Instructions] Next question is from the line of Abhishek Jain from Dolat Capital.

Sir, my question is related with the gross margin. As you have not passed on the benefit of the RM cost to client during this quarter, the negative impact of this will be reflected in the third quarter, this will be a bit of pressure on the margin front?

So it is, in fact, a continuous exercise. There may or may not be, but largely, we will try to not get impact to this coming quarter.

So I think a better way to respond is -- it's Deepak Jain, I'll respond to that. I think we have been talking about actually expansion of our margins and sustaining it at a double-digit level. If you see Q3, against the performance has been better off in terms of sustaining and also improving our margins. There are 3 reasons specifically for that. Number one, I think, obviously, we can say that there is localization effort on our electronic components, especially PCB in-sourcing, which has come out. Second, it is also to do with better negotiations, which we keep on having with our customers. Because of this downturn, we have also had great aggressive negotiations with our customers. Giving price increases, taking price decreases, these are the norms of the industry. But due to the economic downturn, we have probably been little bit more aggressive this time with our customers. Third, also from our supplier partners. We have supported them by basically giving them bill discounting limits. However, we have also taken certain, basically, price advantages, given the fact that there has been certain reduction in the commodity prices as well for us. So these are the 3 broad-based reasons why we believe. Also, beyond this, there are multiple cost-saving projects, which are ongoing in the company, but this is not necessarily on raw material. But these are on all types of operational efficiency improvements. We believe that almost close to -- on EBITDA, almost close to about 0.7% or 70 bps is basically because of that itself. So we hope that we are able to continue our efficient performance and sustain these margins going forward.

So your FY '18 and '19, EBITDA, which is used to be around 8.2%, 8.3%, so what sort of the margin outlook are going ahead? Is it 200 bps margin expense and so we can see around 10% sort of the EBITDA margin for FY '21, '22?

We are already at operating about 10.7%. And also just to -- and so as you gave that figure of '17/'18, '18/'19, if you see, our revenue has actually declined 9 months, almost close to about 14%. This is probably in line with '17/'18 figures. If you were to see '19 -- 9-month figures of '17/'18, and even maybe what we will close, we will probably close this year, maybe about 10% to 12% on a revenue decline from the previous year, which probably would be similar or stable of '17/'18. But if you look at now the EBITDA, at '17/'18, we had done a revenue of about INR 1,650 crores or so stand-alone, and we had done about a 8.5% to 8.7% EBITDA. So from that perspective, on the same revenue, we've actually expanded 200 basis points. And going forward, also, we hope that we're able to sustain these margins.

So my next question is related with the realization front. So what is the current differences in realization of conventional versus LED lighting? As we are also witnessing some gap is -- on pricing is also narrowing down. So what is your outlook for the LED prices for the medium term?

Well, LED prices will continue to improve dramatically, and they will probably then be stable. Our whole essence is to basically offset this and to retain our earnings and also realization based on the localization efforts, what we are doing. So we see that going forward on a mid-term basis, we -- I don't think we should be able to sustain if you see what the improvements have happened in our margin, as I mentioned, also partially or maybe almost 50% of these improvements have been done because of these LED transitions and we've been able to localize this PCB sourcing. So when, basically, going forward, if the LED prices come down, we expect that the company would be able to do more localization efforts and basically maintain the margins.

Sir, my next question is related with the EBITDA margin at different segment. So what is your EBITDA margin in passenger vehicle versus others, like in 2-wheeler and CVs?

We don't report segment-wise, basically for competitive reasons.

So which is the high margin? Is it passenger vehicle or 2-wheeler or CVs?

It, again, depends on customer specific. I think we basically monitor customer point of view. But as an industry, if I were to say, pass cars you have a higher revenue share. As such, we have a higher and better visibility as well on that. So that's what I would just comment on it.

Sir, my last question is related with your revenue contribution from Mahindra & Mahindra, that has gone up. So is it because of the new business you got for the Jawa? Or you won some new models?

See, the sale of Bolero model has gone up, for which we are the main supplier. And also, Jawa, we are the single supplier, and that also quantity have gone up. So that is the reason for this change.

Next question is from the line of [ H. R. Gala from Finvest Advisors ].

You -- in the beginning, you said that next year how much LED contribution do you expect in our revenue from 32% now?

So I think it is going to be stable given the economic downturn. I think we should have a stable kind of an LED mix vis-à-vis the basic, the conventional. What I've said in my opening comments was that we still do maintain that in the future, LEDs should become 50% of our revenue.

5-0?

Yes. 50% over a span of about 3 to 5 years.

Okay. 3 to 5 years. Okay. That was first question. Second question was, how did this budget spell out for auto industry in general and for our company?

Well, number one, I think, from a budget perspective, there were certain demands which the automotive industry, both SIAM as well as the component manufacturer, ACMA, had actually made to basically the Ministry. However, we do not see any kind of a specific request to be catered out. What are the, let's say, advantages, which has come in specifically for the component industry is the INR 1,000 crores fund, which they are trying to put it in a scheme and probably go to an MSME. And because of technology absorption, this may not add -- this may not -- this will not impact, let's say, the bigger players, let's say, when I say bigger players anything over INR 1,000 crores-plus because we already do have our own technology advantages and technology funds accessible with this vehicle supply chain. The concern was for the industry, and I would say a very simple negative because of this whole [ BS-VI ] transition, the high import content is there of -- in general, in the industry, and they have actually put in certain additional duties on...

Yes, exactly. That was going to be my next question, sir. Yes.

So however, from Lumax point of view, I think we were fortunate. We were always talking about localizing it, all our PCBs and -- are already localized. Hence, we will not have any severe adverse impact because of this. My concern is not just on the budget, my concern going forward is probably on the supply chain impacting globally as well as in India, basis on China's Coronavirus. We have stocks, and I think the industry is pretty much stocked in till as of probably first week of February, till what they were talking as of vacation, if they extend it further, they may have started seeing certain global supply chain failures. And that probably can be an ongoing risk.

Okay. Okay. My specific question was that there was 1 -- 2 items, which I could see from the list, one is lamps and light fittings where custom duty has been increased from 10% to 20% and printed circuit board assembly, where similarly, 10% to 20%.

Correct.

So do we import any in these 2 categories?

So first and foremost, on the lamps and lighting fixtures, basically, including searchlights, spotlights and parts thereof, these are mainly on the illuminated signage as well as, probably, there is also to do with mainly on the nonautomotive framework. So I don't see an impact on that. And I told you about the PCB, I don't think -- at least Lumax Industries does not have any impact because of this specific thing.

Next question is from the line of Sabyasachi Mukerji from Centrum Portfolio Management Service.

My first question is on the -- on your Maruti sales. So if I look at the Q3 numbers, almost -- Y-o-Y, almost 10% down from INR 151 crores to INR 135 crores. This was despite a production increase we saw in Maruti Suzuki for consecutive 2 months in November and December. Anything, any color on that? The models we cater to, is there any change in models that we cater...

No. We actually maintain our market share with Suzuki. If you see the 9 months, basically, the Maruti has degrown 16%. We have actually grown 10 -- degrown 10%. If you are basically only looking at Q3 quarter-on-quarter, we have degrown about 10%, and customer degrowth has been 4%. However, if you see, there were more reduction in the volumes on the Swift and Dzire model as compared to the Baleno and the Brezza model and Swift and Dzire, we're 100% on it. And hence -- so it's probably because of the model mix, not necessarily because of any shift of specific strategies, which means any loss of share of business or any growth of share of business on this.

So Swift and Dzire, Lumax is 100%?

Yes, we are.

Okay. Okay. And going forward, how do you see -- do you kind of look forward to recover this lost model production that they are trying to -- going to increase the Swift and Dzire production in the BS-VI?

I think it's very clear that we -- if you're talking specifically of Maruti Suzuki, I think Maruti Suzuki, we are the preferred lighting suppliers. As they have 4 lighting major suppliers, and we are their preferred lighting suppliers with more than about almost 50% share of business in forward lighting, almost about 30% in rear lighting. So going forward, we expect to maintain our share of business. Also, Maruti, we are extremely bullish upon because from -- they've already transcended from all BS-VI vehicles, so any uptick coming in, it should directly support out. And being one of the largest customers to Lumax, we see that we are having a strong potential for a uptick if Maruti recovers.

Right. And on the new models, like they have launched S-Presso, XL6, new models are yet to come up, some other models, what is our market share there?

So S-Presso, good you asked, is 100% forward lighting with Lumax. And also, we have a strong order book with Maruti Suzuki going forward as well, especially on platforms, which will be produced in their Manesar plants as well as in their Gujarat plants, both sites.

Okay. Okay. And on XL6?

On XL6 also we are best.

Okay. Okay. Lastly, on SL Lumax, I believe this is -- Hyundai is your major customer here on the...

Yes. That's the only customer as of now.

Okay. Okay. Can you share the 9-month revenue number on SL Lumax?

9-month revenue was INR 1,074 crores, 1-0-7-4 crores is the 9-month revenue of SL Lumax.

Okay. And a similar number for 9 month FY...

INR 944 crores -- 9-4-5, in the last 9 months, '18/'19, FY '19.

Okay. Okay. Any outlook on that? I mean, the FY '19 revenue was INR 1,255 crores. On FY '20, where do you expect to end? Any guidelines?

I think around 9% to 10% growth they have just told us, which is also seen in 9 month vision.

Next question is from the line of Kashyap Jhaveri from Emkay Global Financial Services.

Yes. Congratulations on great numbers. All my questions have been answered. Just if you could repeat SL Lumax M9 revenues, I missed out that number. INR 1,070 crores, right?

Yes. INR 1,074 crores, precisely.

And versus INR 945 crores Y-on-Y?

Yes.

Now here, largely, it will be value-led growth, right? Because if you look at Hyundai production numbers in the compact car, there was a sharp decline of 30%, but let's say, Kia and Creta would have done very well?