Lumax Industries Limited (517206) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Lumax Industries Limited Q1 FY '21 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 involve 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. Thank you, and over to you, sir.

Good afternoon, ladies and gentlemen. A very warm welcome to the Q1 FY '21 earnings call of Lumax Industries Limited. I wish everyone is healthy and keeping themselves safe from the pandemic. Along with me on this call, I have Mr. Anmol Jain, Joint Managing Director; Mr. Vineet Sahni, CEO and Senior Executive Director; Mr. Sanjay Mehta, Group CFO, along with his finance team, Shruti Kant and Mr. Ankit Thakral; and also Mrs. Priyanka Sharma, Head, Corporate Communication; along with SGA, our Investor Relations adviser. The results and investor presentation are uploaded on the stock exchange and company website. I hope everyone has had a chance to look at it. Before we start with discussion on the financial performance of the company, I would like to share the few highlights of the automobile industry. With each passing month, the auto sector revival signals are getting stronger. With strict lockdown to ease in lockdown, companies have reported 0 revenue in the month of April to considerable growth in month-over-month number. Supply constraints and strict social distancing norms led to lower capacity utilization, which is now showing signs of improvement. The road to normalcy is going to be a challenging one. With easing lockdown restrictions and improvement in demand, OEMs across the industry have reported substantial pickup in sales in July 2020. Majority of the demand is coming from 2-wheeler and private car segments. People, who used to travel by public transport, prefer traveling in their own isolated space now as a matter of hygiene and safety. However, auto sector recovery is yet to experience full normalcy. Economic activity will remain below the pre-pandemic level in the near term. As I'd mentioned in the previous calls, various auto industry associations have requested government for stimulus and demand-boosting policies like the scrappage policy. The recent vocal for local campaign will lead to increased outsourcing by OEMs, leading to higher utilization for Indian auto component manufacturers. If this call was to happen in pre-COVID time, this call might have had more discussions on transition from BS-IV to BS-VI. Also, as you know that the BS-VI norms were implemented amongst the recent lockdown. Despite COVID, we hold a view of generating about 50% of our revenue from LEDs over the next 3 to 5 years. New product launches during this quarter we had were the following: In the 2-wheeler segment, the BS-VI models of Piaggio Vespa VXL and XXL model and also the HMSI Grazia model all had LED headlamps supplied by Lumax. In the commercial vehicle segment, Lumax LED lighting is a part of Tata Winger headlamp and taillamp. It can be clearly seen that the new product launches is following a trend of LED lights over conventional lighting, and we're confident of increasing our market share from LED segment at a faster rate, with wide range of LED lights through our know-how, R&D team and strong partnership with Stanley Electric, Japan. During the lockdown period, the company was recognized in the following category: The Dharuhera Plant received the JIPM TPM award for excellence in Category A for the year 2019. The Chinchwad Plant was awarded the first place out of 51 teams participating in the top 3 categories at the ACMA QCC Virtual Competition held in August 2020. I would like to place on record a deep gratitude to our team, customers, supply chain partners and all our associates, who have risen to the challenge of COVID-19 during the quarter to quickly stabilize the company operations. Now I would like to hand over the line to Mr. Sanjay Mehta, Group CFO, to update on the financial performance of the company.

Good afternoon, everyone. I will just update on the operational performance for Q1. The sale of LED lighting stands at 30% of our total revenue and that of conventional lighting stands at 70% during Q1 FY '21. The product mix for Q1 as a percentage of total revenue is 68% of front lighting, 22% of rear lighting and 10%, others. The segment mix for Q1 as a percentage of total revenue is 67%, passenger vehicles; 25%, 2-wheelers; and 8% commercial vehicles. Now I will just update on the consolidated performance. Due to the outbreak of the COVID-19 pandemic and the consequent lockdown announced by the government of India, due to which the operations were suspended for part of the quarter and gradually resumed with requisite precautions. Thus, the results for the quarter are not comparable with those for the previous quarters. The revenue stood at INR 78 crores for Q1 FY '21, April was completely locked out; 15% of the Q1 revenue was achieved in May 2020; while the balance, 85%, was achieved in the month of June. We have witnessed substantial recovery in June and the momentum continues in July 2020 as well. Manufacturing revenues for Q1 stood at INR 74 crore while the balance was mould sales. The consolidated EBITDA loss is INR 32 crores for Q1 vis-à-vis a gain of INR 39 crores in Q1 FY '20. The consolidated PAT after share of associates stood at INR 32 crores in Q1 FY '21. That is all from my side. We will now open the call for the questions.

[Operator Instructions] The first question is from the line of Varun Baxi from Equirus.

Sir, my first question is regarding our customer revenue split in 1Q. So for 1Q, the revenue from HMSI has come down significantly. Is it largely because of higher inventory that was there in the end of March? Or what led to such a steep decline?

So this is Anmol Jain here. So largely because HMSI did not start the production in Q1 substantially. If you look at April, May and June, the numbers are absolutely miniscule, and they were obviously doing their inventory correction as well. So that's primarily the reason why our revenues for HMSI in Q1 is -- were also negligible or close to nothing.

This is Deepak here. I just want to add a little bit of structure. If you see, Q1 has been an exceptional and an abnormal, I would say, quarter. And I don't think it's kind of comparable even to Q4. However, I mean, say, just to give a -- compared to -- of the 90-odd days of basically Q1, we actually were shut down almost on an average of about 43 days. You'll definitely see a better tick from Maruti Suzuki and Hero, and that is primarily because both being leaders in the rural segment, having an outreach, and also on the entry segments vehicles, their recovery in the month of June has been much better. Also, for the company, the revenue which they did in the month of June almost consists of 82% for what we are reporting for the quarter. And hence, you can see that there would be probably some anomalies in the current customer share segment because some customers had delayed their production startup. However, in the long-term or even in the midterm, we see that once the operations of all the customers are normalized, more or less, we will remain stable on the customer lampings, which were probably for the same as what it was in the year of '19-'20. So our top 3 customers will still remain as Maruti Suzuki, HMSI and Hero, and also along with Mahindra and Tata Motors. So we don't see a very significant shift on the ranking, but these 5 will remain our top 5 partners.

Sure, sir. Sir, also, if you could provide more color on how the demand is shaping up in, say, July and August? And what kind of utilization have we reached in these currently in the month of August?

So I think we have seen a better-than-expected recovery in the month of July as well as in the month of August. We are seeing an improvement, although we still have not gone in terms of the complete utilization because you have to see as a total, we were 20% down from last year. And then we will probably -- overall, for the year, we will contract. However, if I compare it with basically the manufacturing revenue, for the month of July vis-à-vis what it was for '19-'20, we are down 20%; August, probably about 4%; and September, we expect to have a positive as compared to last year's September. So we definitely see a better-than-expected recovery.

Okay. Sir, also, if you can provide any update regarding the new products like HVAC panels from Stanley that we were looking at, if there is any kind of a development over there.

Well, I mean, say, the HVAC panel remains as a product which we will be having launched with our partner. Currently, we are discussing with our customers, and our plans remain basically the same. There are no changes because of the COVID, so basically launch, it's going forward.

Okay. So do we have any confirmed orders for the HVAC panels from our customers?

We are currently under discussion. Then once we have the thing, we will be able to let you know.

The next question is from the line of Kishan Gupta from CD Equisearch.

I'm Dhagash Shah Desai. Sir, what sort of integration do you have between business -- different business units that is 2-wheelers, 4-wheelers, commercials?

Can you please elaborate what you mean by integration?

Integration as in what sort of integration between production, administration and those sort of things?

So of our manufacturing -- so this is Anmol Jain. All our manufacturing locations are not specifically addressing any particular segment. The processes are common. And within an infrastructure, there are different production lines, which cater to passenger vehicles, different for 2-wheelers and different from commercial vehicles. I would say that almost close to 75% of the production process would be common. And thus, the final assembly would be different based on segment demand and the payment requirements of the product. So there is a fair bit of backward integration of the processes across segments.

All right. Sir, with regards to raw material and designing, can you throw some light on that as well?

So I think currently, I think Lumax Industries is one company with lighting, although we are leaders in the lighting segment in the country. I think it is a company which actually offers product lighting for all segments, be it CV, passenger cars, 2-wheeler and agriculture segment, right? Second, if you're looking at in terms of the processes, we make lighting and all our processes. There are 3 major steps of the processes, as there's injections, surface treatment and assembly. All our plants are equipped to have all these processes internally. And as Anmol just explained that they -- all these processes are used for all the segments. In terms of the technology, R&D, we have basically a partnership with Stanley Electric as well as the company has 3 R&D centers in Gurgaon, in Pune as well as in Taiwan. And we use that R&D localized capability to cater to all our product development for basically the customer requirements for the Indian market. So we have that engineering capability as well to do that.

Okay. Sir, how much of your lighting systems can be replicated by unorganized players for the replacement market?

Well, I mean, say, from the unorganized player, you have to understand that there is no -- obviously, there is a regulation, and there is enforcement. Over the years, we have been also been using our, let us say, regulations to enforce not just, I would say, aftermarket issues that they found spurious [indiscernible] but also actually educate the consumer to use basically the OEM parts. But if you see now as the technology is shifting and it's becoming more and more LED-oriented, the tooling investments and the technology investment is becoming more and more, and hence, it becomes more difficult to basically get it replicated by the unorganized market.

All right. Sir, is it possible to put some sort of rough figure or some sort of percentage on question?

I don't think we will be able to put estimate in terms of how much we can basically be replicated unorganized market or not. I can just give you an analogy. Our commercial vehicle [ segment ] and Tata truck, which is still on the roads, used our sheet metal and reflector and [ glass ]. Today, I mean, say, a similar type of Tata, the new launches are having a complete revamped new product, which is completely having plastic, electronics and hence, it becomes impossible for the aftermarket to replicate it. Enough on the unorganized sector.

Fair enough. Fair enough, sir. Sir, what sort of difference is there between revenue and profitability in terms of front and rear lighting?

Vineet, would you like to take that?

Yes, I will take that. This is Vineet Sahni. So again, I -- there is no direct answer on fixed profit percentage on front and rear. It depends on the content of the lighting. For example, today, rear lights are also moving towards LED, and front lighting is also moving towards LED, but front lighting is slightly more profitable, but more capital-intensive also as compared to rear lighting. And therefore, you would see the Lumax portfolio, we have a higher share of front lighting as compared to rear lighting.

All right. No, my reason for asking that is sir, that front is close to 70% of revenues, and back is close to 22%.

Yes.

So can you elaborate some further on that, sir?

So we have a -- when you're looking at the distribution about front and rear, please also understand that there is almost 1/3 play of the 2-wheeler. And in the 2-wheeler, there isn't much substantial difference between a front and a rear lighting. In the passenger car space, of course, there is a huge difference, both in terms of technology or even the contribution and the revenue per metric. So it is very difficult to give you a black and white picture in terms of front lighting is more profitable or rear lighting. There are various scenarios where we see the rear lighting on certain models are more profitable than the front and vice versa or in some cases, both front and rear fetch similar margins for the company.

And just to add on to your question, I have a quick add on that rear lamp requires lesser technology, the old -- old types, and therefore, there are more number of players in rear lamp as compared to the headlamp. The quality requirement and technology requirement for headlamp is much higher. And therefore, you see a little distribution of head at 70% and tail at 22% or 25%.

All right. That's very helpful, sir. Sir, just lastly, if I can fit in, how much surplus capacity do you need at any point of time do you have to keep? Is there any such requirement?

So normally, we plan our capacity at 85% to accommodate the peaks, 85% to 90%, 10% to 15% we keep for the peak season. For example, now our production requirement may go up in OEM during festival seasons. So that is how we do the planning.

[Operator Instructions] The next question is from the line of Sanjay Shah from KSA Securities.

So my question is regarding our electronic plant in Bawal facility and how much -- what is the progress in that? Because last time, you cited about some delay to reach a lot of opportunity, and you'll agree with me on auto electronics side. Can you highlight, sir, on that?

So Vineet, you can please take that question?

So this is regarding electronics. So electronics is growing up as we had shared earlier. So the new products are moving towards LED. And therefore, whenever it is an issue of LED, so PCB comes into picture. And that is why PCB is being designed in-house, and that is supporting us in our process. So anything else you want to know [ in the setting ]?

I think I want to know what progress are we towards strength. Are we doing any CapEx and coming out with new products on that side? And do we have the capacity and in product facility?

Yes, we are setting up -- I think we shared world-class infrastructure in electronics in a place called Bawal near our plant. And this should be functional in quarter 1 of next year. We postponed it because of the current condition. The infrastructure is ready. We would be creating this facility which is one of its kind in electronics. And this should be functional in Q1 of next year because as we see a good potential coming in electronics.

So what is the CapEx we have spent now? And what balance CapEx are required to be spent on that site?

So Sanjay, if you could support that, balances is how much?

Yes. Actually, the INR 75 crores we are spending on this project. And almost, we have already done the CapEx of INR 50 crores out of that amount. The balance is already purchase orders are there. So during this year, we will have that balance of around INR 25 crores on this project.

The next question is from the line of Abhishek Jain from Dolat Capital.

So during this quarter, there's a significant jump in material expenses for sales. So is it because of the pretty good inventories, there are nonmaterial expenses added? Or is it because of the increase in RM prices?

Mr. Mehta, would you like to take that, please?

Sir, it is because of the inventory was there, so basically it of that.

So nonmaterial expenses also added in this part in raw material expenses?

So actually, if you see the sales, which is as explained, it's not at all in the quarter. So definitely the dispensing -- our dispensing requirement, all these things, it increased all the expenses, the raw materials with other expenses, capital utilization is not there at all.

Yes, yes. So how much is the current inventory with you, which needs to be liquidated in second quarter?

So we are having the inventory of almost around the second quarter -- it is in the first quarter, we begun with almost around 250 days, now it's almost around inventory -- I'm talking about the raw material inventory. Finished good maybe around -- if you see the sales volume, it's maybe around 45 days. Right now, you see -- not almost it is clear finished goods, therefore, the production is ramping up.

And what is the normal inventory?

Normal inventory finished goods, we are carrying almost around 8 to 9 days.

Okay. Okay. Sir, so your import content is high in LED segment. So what is the arrangement for the rupee depreciation?

So we are not, in fact, taking the rate onto our import, because it is back-to-back to the customer understanding. So largely, we are not going for the hedging of the foreign exchange.

So is it passed on to...

Pardon?

Is it passed on fully to every customers?

Largely, it is inline of revenue...

I will -- let me handle. It depends on the arrangement with the customer. Not all customers have similar arrangements. Somewhere, there is back to back, somewhere it is negotiation and somewhere we take a risk of natural hedging. So if it goes down, we don't take from customer; if it goes up, then also we don't take from customer. So it depends on customer to customer.

So what was that ForEx loss in the first quarter?

So exactly first quarter, I don't think we had enough sales to have any ForEx loss as such.

So I'm talking about the raw materials inventory and all. Because there you have enough inventory right now. So I just wanted to know that how much hedge you have taken during this quarter and where it is from?

I think it is not only one. It is maybe around INR 1 crore, INR 2 crores. Because what happened, the inventory was carried on from the -- we keep on booking the ForEx monthly basis. And this particular quarter is not that fine, so then ForEx loss are maybe INR 1 crore, INR 2 crores.

Okay. Sir, as you are talking about the adding 2 products like HVAC panel and electronic cable as well, so can you throw some more light on how big business opportunity in these products? And when can you start your production on this?

So this is Anmol Jain. So answering to both your questions, number one, the electronic facility, as mentioned before, is basically for captive backward integration use to manufacture the PCB for the lighting. So to that extent, it is not a revenue generator. But as you have seen in the trailing quarter, the profitability margins of the company have also risen because of this move of backward integration. So that is on the electronic side. On the HVAC side, yes, we do see a good market opportunity over the next 3 to 5 years because most of these products are currently imported. We are right now in the discovery stages with our OEM customers, and perhaps also we'll be entertaining some RFQ shortly. So we do expect that the production of this should start somewhere in FY '22, later part of FY '22.

Okay. My last question is related with your interest cost that has jumped significantly. Can you throw some more light on it?

Sanjay, can you address that, please?

Yes, yes, because of higher utilization of the working capital limit, because of the disturbance in the working capital cycle in the Q1. But over the coming time when the capacity utilization is increasing, we are hopeful that it will be reduced substantially going forward.

The next question is from the line of Vimal Gohil from Union Asset Management.

Please, pardon me, I joined the call a bit late, if I'm repeating the questions. I just wanted to understand if the change in mix that we've seen this quarter from the LED lighting mix going down, would you attribute that to -- largely to your sales from HMSI going down to nothing temporarily this quarter?

I think this is the main reason there. You all said -- it's fair to assume that not just HMSI, but also in other customers. Maybe the models which have really gained traction on production are the entry-level vehicles, which not necessarily have LED lamps. So it's just a model mix which is the contributor to the lesser LED contribution. But going forward, as things normalize, we do expect things to come back to where they used to be.

The models where we are -- so the models where the LED content is higher, has the -- as you just highlighted that probably in August, you've seen some revival. Has that revival -- has LED also participated in that revival?

Yes, it has.

Okay. Sir, the next question was on gross margin. I mean you've seen a sharp contraction in this particular quarter. This was -- as you said, this was driven by mainly higher inventory usage in this particular quarter. What is the outlook there? Do you see gross margins normalizing going forward? And also, are the gross margin deterioration because of the mix of replacement, or of -- sorry, of conventional and LED?

So these gross margins for this quarter, I would say the expense, it's an abnormal quarter where there was a lot of inventory also, which was kind of taken care into the accounts. I would say that this is an anomaly. Going forward, the gross margin should be normalized, what they have been in the previous quarters. Going forward in the Q2 to Q4, you will see these material consumption should be normalized.

But the reduction in gross margins is not largely because of the rise in prices, because the crude prices have been sort of subdued in the last kind of quarters.

It's not the pricing. It's more about the revenue dropping and the inventory, which was accumulated in the first quarter.

Right, and because of the lower production per se?

That's correct.

That's right, sir. I got your point. And sir, the next question was really on localization. Any -- are we on track to sort of improve -- increase our localization content, reduce imports -- try and reduce the -- reduce your dependence on imports as we go ahead? Any change of plans over there?

No. I think the company has always had a fair amount of focus on localization. And of course, I mean, say, with this whole COVID, we recognize that we need to fast track localization with alignment of our customer needs. And hence, I mean, as you said, the in-sourcing of basically the LED PCB. And going forward, we're also evaluating other opportunities where we can basically derisk ourselves and do import substitution. So it's as progress as per plan. Maybe we might fast rack it a bit as well.

Right. So where are we in terms of localization, in terms of percentage of content or maybe percentage of our cost? How much is the imported content right now?

So again, there is some basically lighting for the 4-wheelers as well as the 2-wheelers. So if you see basically the localization opportunity in the 4-wheelers, it's something around about 20% or so; and in 2-wheelers, it will be about 5%.

Right. And when you say fast track, what was the plan earlier? And what is it now? If you can just highlight that.

So fundamentally, we see that we would basically be localizing primarily on the LED content. Because the LED on the headlamp is 60% of -- is basically still, I mean, say, imported and almost about 30% is on the 2-wheeler side. And this, we wanted to basically have a localization of about 30% to say. This, I think, will be faster.

Okay. Any time line there, sir?

Probably you would see fast-tracking. So our original plan was for about a 12 -- a year or so. We may basically cut it to about 9 months. You have to understand the localization needs alignment with customers. So it has to go through the whole testing protocols. So it's not this that you can just do it tomorrow. So hence, I mean, say, we would be fast-tracking it from that perspective, given the customer needs as well.

Understood. Understood. Perfect. Sir, last 2 questions. If you could just give me the gross and net debt on books for the quarter and what is the CapEx outlook for FY '21?

So I will tell Mr. Mehta, along with his finance team to address it.

So we are carrying on those around INR 53 crores of long-term debt, and the working capital is almost around INR 320 crores. The debt equity ratio is around 0.15.

So this, sir, INR 320 crore of working capital that will have come down moving forward?

I guess, it will definitely come down, as I mentioned, because of Q1 and the abnormal situation. Moving forward when the utilization will increase, definitely, it could come down.

Vimal, we would request that you please come back in the question queue for any follow-up questions as we have several participants waiting for their turn. [Operator Instructions] The next question is from the line of Pritesh Chheda from Lucky Investment.

Yes, so sir, slightly a broader question. So this gross block that we have of about INR 1,200 crores and plus the CapEx that we have for backward integration at Bawal. So a broader question, this INR 1,200 crore of gross block, what is the peak revenue it can generate? And that peak revenue with the localization plans that we have, what will be the margins that the company can achieve?

Anmol Jain here. So with the kind of gross block, I believe we should be looking at close to anywhere between 1:1.822 assets-turnover ratio. So considering INR 1,200 crores to INR 1,300 crores, I would say, anywhere around INR 2,000 crores top line should be achievable with the current gross block, with the kind of LED penetration and transition we are seeing currently. In terms of margins, as you know, that the company has been attaining close to double-digit EBITDA margins. And we do expect this should, perhaps in the coming few years, expand by another perhaps 200 to 300 bps. The idea is to close -- an inch close towards the teenage EBITDA -- teen EBITDA in the next few years.

So the 10% that we have should move closer to 13%, 14% on the peak revenue on the backward integration this year?

More like 12%, 13%, yes, that is the endeavor.

And any outside thought or educated guess, the peak revenue, when do you think you could achieve? Is it 2 years down the line or 3 years down the line? Any thoughts there.

It is difficult to forecast with the current situation at hand, as you know that for the full year, the industry would still be showing a degrowth in the current fiscal year. This is over and above the 18% degrowth the industry saw last year. So if you're looking at a 40% or de-grown in 2 years, the first and foremost question would be how soon can we recover that 40% de-growth. And only then, we can talk about growth. So to give you a very broad-based picture, and this is my personal assessment, I do not anticipate that peak revenues being achieved maybe sometime in FY '20 -- later part of FY '23.

Peak revenue of your capacity, right? That's what you are referring.

That's correct. I mean, FY '21 is a degrowth. I am saying FY '22, we might just come back to where we were. And FY '23, we might look at a growth story again, where we could be maximizing our revenue potential with the numbers I have just mentioned to you.

Pritesh, we would request you to please come back in the question queue for any follow-up questions. The next question is from the line of Sunil Kothari from Unique Investments.

My heartiest congralutions for very good [ numbers ]. Sir, we talked a lot about renewed perspective in the annual report. So if you can qualitatively talk -- or I mean, more about what is changing? Or what -- we are talking about changing our approach to growth, maybe cost plus agility. If you can you a little bit talk about this thing.

On a broader sense, I think when we talk about the renewed approach, I think, number one, it is not necessarily talking about the growth or the external environment. It is talking about the internal way we are doing things. There is obviously a very strong focus on consolidating capacities, a very strong focus on our cost structures, a very strong focus on redefining the shop floors based on the flexibility and agility, which are required in these unfortunate times. So we are looking at more internal issues. Obviously, the external factors, we still have a very strong product development, order book. As we go forward, we do expect that with the growth bouncing back in 1 to 2 years, coupled with our internal reorganization of our resources, we should be in a much stronger position as a company than what we are today, both in terms of our cost structures and margins. That is a broad sense of what we mean by redefining and relooking at the approach with where the businesses are today.

Great, sir. Sir so basically, it is internal exercise -- on internal side. Will it change your breakeven point, the lower fixed costs, anything quantitatively if you can talk what type of cost we have taken, which is sustainable and likely to remain at a lower in terms of percentage level.

Yes, absolutely. I think in quarter 1 itself, the team has done a great job in looking at all avenues to reduce the fixed cost of the organization, and we have been able to reduce the breakeven points. And hence, even with negligible revenues, the loss which we have provided or which we have reported is not as significant as what we had anticipated when we started the lockdown. And as the revival comes back on a month-per-month basis, we are seeing a much positive result than what we had anticipated before. So you're absolutely right that the breakeven point will be reduced going forward. And as growth comes back, we should be in a much stronger position.

Great, sir. And if you can -- I'll ask one more thing. Sir, you mentioned during your opening remarks from -- or replied to somebody, this capacity utilization here month-on-month, if you can repeat again.

So the capacity utilization, I would -- what Deepak was mentioning, well, in the month of July, our manufacturing revenues would be 80% of last year's July. In August, it should be upwards of 90% of last year, August. And in the September month, it should be 100% of last year or we might even cross that 100% to show some growth on a year-on-year basis.

The next question is from the line of Nikhil Upadhyay from Securities Investment Management Pvt. Ltd.

And good work for the team to report such number in a difficult period. Sir, my questions are basically 2. And one clarification, did you mention we were also looking at entering electronics cable? Because I understand we are looking at entering the HVAC segment. Is electronics cable also a segment we are looking at?

No. So we basically, overall, would like to complement and get the products which Stanley Electric, Japan, is basically making. Of course, they're leaders in lighting. And HVAC panel would be the next product, which we would basically be launching with their support in India. So not electronic cable. I did not talk of that.

Okay. Fine. Secondly, sir, if we look at like -- we've done a good job over the last 3, 4 years in terms of localizing our production capacities. And a lot of it is already visible in our improvement in margin. Now if I have -- I'll just take a bit longer-term perspective here, that if we look over the last 15, 20 years, and in this industry, there have been changes like from halogen lamp and then conventional lamp and now LED. And every time -- so probably we have a good first-mover advantage as of now. But over a period in multiple calls also, you've mentioned that the cost difference, price difference is around 3 to 4, can settle down around 2 to 2.5. My question is from the competitive perspective that if we have to understand our cost structure and the way we have done the import substitution and have a first-mover advantage, so where would be our competitors in terms of their cost structure? Would we be like very most competitive at the pricing point or the price -- value proposition, which we can provide to our OEM players? If you can just help me understand on those 2 aspects.

I'm not clear -- I mean, sorry, you did get a bit indistinct. Can you just give a little bit specific point what would you want me to answer.

My point was that over the last 3, 4 years, we've been doing a lot of localization and improving our cost structure. So we're reducing our import content, and a lot of indigenization has happened on the cost structure. Now a clear benefit of it is like that will help us become more cost competitive versus someone who is importing. And in this industry, in our previous calls also, we have mentioned that the price differential, which we are looking at currently of 3 to 4x versus the conventional lamp, that will probably come down to 2, 2.5x.

Correct.

So we have a first-mover advantage in terms of the localization. I just want to understand that what would be our cost differential or value proposition versus our competitor to our OEM? So is it like for the competitors also to bring in the same cost dynamics or cost competitiveness, if we take 3, 4 years, where would they be or in terms of vis-à-vis our pricing or cost of production on the LED part?

Yes. So let me try and address it in about 2, 3 areas. Number one, I think lighting technology, you've seen that every almost a decade goes through a radical shift, and this is not just in India. It's globally, which is there. We obviously have a competitive advantage, as you have mentioned also, first-mover advantage due to the relationship which we enjoy with Stanley Electric. And you also have to understand the Indian market is also largely dominated by the Japanese OEMs, which also do give us those technologies, and hence, we are able to utilize their global relationship to get that first-mover advantage and do the local indigenization and offer similar kind of products to the other non-Japanese OEMs as well. In terms of the cost structure, I think it's a continued effort. We are very clear that we will continue to have localized technologies, which are suitable for the Indian market. And we would also use that technology to also have skill building in our team, so that we are able to give a much more localized. We personally feel that as the technology becomes more complex, for example, LED is becoming more and more electronics. Going forward, again, it would be when the Indian market would be ready for it, but there would be a lot of sensors, a lot of software, a lot of basically controlled unit integration also in the lighting systems. So we are pretty confident that we will have that kind of skill, and we are slowly developing and investing in that. Of course, the investment portfolio as well as the capacity and capability to invest because as the technologies develop, you have to invest a lot more to localize these technologies. And hence, the financial -- healthy financial balance sheet is also very, very important. And if I compare it with the other competitors into the market, I mean, say, that definitely for Lumax Industries is a competitive advantage. And last is the segment distribution which Lumax enjoys, where we actually do cater to all segments, be it 2-wheelers, 4-wheelers, fast cars and even our recent entry into the commercial vehicles as well as to the agriculture space to actually, again, with this technology shift happening, we would be able to garner more market share in these segments as well to what we are currently having. So I think that's the overall way. And of course, with volume, our cost structure gets more distributed. We have invested over the years a lot in localized R&D capability to becoming technologically self-reliant and also have basically invested in Taiwan office for R&D. So I think all those investments, as the scale goes up, as basically all segments start adopting, we will be able to have a much more efficient cost structure than today.

Just one small question. When we say that our front lighting is 64% and the rear lighting is 22%, that would be by value.

Correct.

Can you help me understand by volume, so if there is a -- just keeping it basic, like if in Pulsar, there is a LED front light which we are providing. Would the OEM go to someone else for a tail light? Or would the -- does it like for the whole product or the whole product we get all the lighting? Or is it like a piecemeal approach which an OEM takes?

Okay. So the sourcing has significantly changed over the years. When I say over the years, the sourcing strategy at one point of time used to be, okay, on one model, like I'm just giving example, Pulsar. You could have 2 headlamp suppliers or 2 tail lamp suppliers. Now it is probably model-specific. However, within that model, I mean, say, the OEMs do again derisk itself probably does on the front-end lighting to someone and rear end lighting to someone else. But it does not mean that front end is again distributed to 2 players. It's probably then captured with one player itself. And overall, there's a broad base for almost all OEMs, a strategic sourcing, which basically defines who their strategic partners are and how much, from the total buying, they would basically be having a share balance with the competitors as well. So I think that's where the current is. So very simply to put your -- answer your question, if you have basically 1 model, headlamp would go to 1 basically supplier, a taillamp usually goes to other supplier. However, in our case, we have seen -- and I give an example, like we do have cater to the complete model on the lighting end.

Nikhil, we would request you to please come back in the question queue for any follow-up questions, since we have several participants waiting for their turn. The next question is from the line of Anubhav Rawat from Monarch Networth Capital Limited.

Sir, just a couple of questions on a related party transaction. So sir, in FY '19, we had around INR 217 crores of purchase of raw materials from Lumax Auto Tech, and it came down to about INR 98 crores, right? So this is, I presume, before we acquired their assets. So is this sort of the rough number of INR 100 crores? And will this be the normal run rate, right? Or will it further come down?

Sanjay, do you want to take that?

Yes, sir, because I think you're comparing the 2 years to the last year, there was LED, which we have transferred that plant to now in -- I mean, sold that -- to them. So I will just want to -- just because both the companies are audited by the Big 4. So what about the related party transaction is taking place, it is on the arm's length basis and it is a further need as to the requirement of a particular time. But it's not less or high. It depends on the circumstances.

Okay. Okay. Understood. And sir, just wanted to understand, we have LED for raw materials from Lumax Ancillary Limited and Bharat Enterprises. So what is the nature of these purchases?

We are purchasing wire harness from the Lumax Ancillary and Bharat Enterprises, because of the stringent quality control required in that.

Okay. And what about Lumax Ancillary Limited, sir?

Wire harness, both -- from both, wire harness.

The next question is from the line of Pankaj Bobade from Axis Securities.

Sir, 2 questions. First one, you mentioned that the opportunity for imports -- substitution of imports is just 20% for 4-wheelers and 5% for 2-wheelers. But we also mention that the margins would increase by 2% to 3% over the next 2 to 3 years after normalizing of the demand. So there is a disconnect between these 2 things. Could you throw more light on this? And secondly, do we have any scope for benefiting from the China Plus One strategy followed by various OEMs?

Okay. So I think your -- I'll answer the first question first. I think you're presuming that all the margin improvements will only come by localization. I think that's not the case in point. I think the margin improvement plan is primarily driven by better volume optimization; better product mix, transitioning towards LED; very, very cost-efficient programs, which we are running in the company and have been fast tracked because of this COVID-19 experience; and of course, due to the import substitution. So it's a mix of all the parameters and a consistent approach towards cost rationalization, which would actually help us on margin improvement, given that we expect demand to further firm up and hopefully, I mean, say, go. So as growth comes in, I mean, say, we should get a better margin. Second point, I think you're talking about China Plus One strategy. I think we'll have to very closely monitor and watch. How, I mean, say, our OEMs are basically going to respond towards that, and will they be shifting more and more certain products which could have export opportunities. As we have to also understand that in global relationship, we have a very strong partnership with Stanley, which we have to respect their territories. So we will continue to evaluate that and see whether and foremost, we would have certain export opportunities which comes through for the company.

And how about this Atmanirbhar call given by PM? So do we see any opportunities growing for us, may not be only in LED segment or lighting segment, or in any other product segment?

So this company, Lumax Industries Limited, will be focused on lighting segment, which basically will be catered along with our partners to Stanley. As I just mentioned that the HVAC panel is a new opportunity, which we are evaluating. Atmanirbhar, I think let me clarify that we actually see that as not just localization, but how do we enhance competitiveness, so that Indian manufacturing can be recognized world over. I think that's the key, and we are always in dialogue with Stanley that how do we basically improve our competitiveness. And at any given opportunity, if Stanley feels that we can use the Indian manufacturing base to cater to export requirements for the global processes, we would be very happy to do that.

Pankaj, we would request you to please come back in the question queue for any follow-up questions. The next question is from the line of Ashutosh Tiwari from Equirus Securities.

Firstly, let's just -- the Honda Activa model has shifted to both halogen and LED, two variants, the BS-VI completely LED. So what are volumes you're seeing over the last 2, 3 months? Was it accelerated? Halogen is a much bigger share in that model or LEDs also has decent shares?

So maybe, Vineet, you can answer that, please?

One important thing is that in the first quarter, we should not take as a marker for anything because different customers with different strategies, so I don't think...

No. I'm not talking about first quarter. I got your point because your sales are not there. I'm talking about the recent months.

Yes. So recent months, both LED and halogens are taking the priority from customers. First, the vehicles related to halogen society, because of the rural market, but now we see a significant increase in LED also.

Okay. So this Activa, the 40%, 50% would be a really sustainable basis like going ahead over next 3, 4 months?

Yes.

Let me say answer it in a very different perspective. Deepak here. The market agility is so much that you really don't know, especially on a model which is basically having both. And currently, the halogen is there; tomorrow, the LEDs. We personally feel that LED will come back very fast, because as the market normalizes, it is very, very difficult when you have given customer a choice on a specific model of a higher technology, they basically would revert back to older technology. And though, I mean, say, there is always a price differential on model and a price pressure, but we have to see. You have to also understand that the recent transition would be a fix, as obviously put in a lot of price pressure on the vehicle pressure. And of course, it was further compounded by COVID-19. So I think we'll have to wait and watch. It would be very difficult for us to say that all this and I mean, say, it's all going to be halogen, or it's all going to be LED. But the point is that how the company will quickly react to the agility. And hence, we have those LED light than the capacity. But if the, let's say, LED requirements or halogen requirements shoot up considerably, we will be able to cater to more the demands.

Okay. No, actually, just want to understand how the things are moving right now. Obviously, what we've seen in recent months is that, let's say, really the dealer segment of motorcycles, the higher-price model is selling more. So there's no down-trading seen so far, maybe it may not be that they show really very different from BS-VI. So I just want to understand that part. Secondly, obviously...

Yes, we also agree with that stance. But again, I'm saying it's too premature to just to take a 3 or 4 months outlook on this.

Got it. Secondly, obviously, we are localizing the PCB and other electronic parts of LED. And also with COVID, you must have -- you must have taken a lot of cost-cutting measures. So will it be fair to assume that when our revenue goes back to FY '20 level, maybe in FY '22, that time, the margin should be reasonably higher than what, let's say, maybe around 1% or even higher than that when compared to the FY '20 levels?

Absolutely. I think, Anmol, in previous -- I mean, say, just had mentioned that, that we would aspire to basically reach higher-margin levels of what we have been basically doing.

So '22, sir, we can see better margins when things normalize maybe?

It also depends on the market conditions, though. A lot depends on market conditions.

Yes, yes, obviously when things are normalized, you'd already do it.

Due to time constraints, that was the last question. I would now like to hand the conference over to Mr. Deepak Jain for closing comments.

Well, I would like to thank everyone for joining on this call. I would like to restate that this quarter was an exception, and we remain confident to grow with the numerous opportunities and outshine the market. I hope we've been able to respond to all your queries adequately. For any further information, please request to get in touch with SGA, our Investor Relations adviser. Stay safe and healthy. Thank you once again.

Thank you. On behalf of Lumax Industries Limited, that concludes today's conference call. Thank you for joining us, and you may now disconnect your lines.