Lumax Industries Limited (517206) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Lumax Industries' Q3 and 9-month 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, Chairman and Managing Director. Thank you, and over to you, sir.

Good afternoon, ladies and gentlemen. Let me, on my behalf, extend a very warm welcome to the Q3 FY '21 Earnings Call of Lumax Industries Limited, and also our first investor call for the calendar year 2021. I truly hope we will get better health and happier times ahead. Along with me on this call, I have Mr. Anmol Jain, Joint Managing Director; Mr. Vineet Sahni, CEO and Senior Executive Director; Mr. Naval Khanna, Executive Director, Lumax Management Services; and from the finance team, Mr. Sanjay Mehta, Mr. Shruti Kant and Ankit Thakral. And also, we do have our SGA, our Investor Relations Advisors. The results and investor presentations are uploaded on the stock exchange and the 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 a few highlights of the automobile industry. Growing preference for the personal mobility and the gradual opening of economic activities have added some momentum, and the industry is now seeing good signs of recovery. While the festive season brought back some favor in specific segments, the overall economic scenario would determine the industry's performance going forward. It is a fair estimate that the next fiscal year would be better than the current year because now economic activities are getting back to normal and also the expectation of vaccine availability to all citizens in the near future has risen, which has boosted the consumer sentiments. After the announcement of scrappage policy to government and PSU, in the budget session, it has been extended for private vehicles, too, on voluntary basis. We appreciate this move and expect its positive impact on the industry. The spend on infrastructure projects like roads and public transport will also help build demand for vehicles over a longer period. We are still contemplating the impact of the PLI scheme on the auto and the auto component sector. We expect further clarity from the government and will then be able to evaluate the benefit of the same. We, at Lumax, believe in changing for good, and we have adopted pandemic-driven positive change to operations. COVID-19 has redefined the next normal operating model. And our teams has put in tremendous efforts to keep operations running smoothly, which is why today we are able to get back to a normal level of operations. I would now like to give you a brief overview of our business at Lumax Industries. Our company is engaged in production and delivery of automotive lighting systems to 2-wheeler, passenger cars, farm equipment space and commercial vehicle segment. We are the preferred supplier to OEMs in India and continue to be the market leaders. The feature that differentiates us from our peers is a strong branding and a very good and large manufacturing footprint all over India, including the strategic partnership with Stanley Electric Corporation, Japan, to capture the market share at the right time. We utilized our existing infrastructure to assemble and deliver a final product quickly and efficiently to meet the customers' specific needs. The Bangalore plant of the company secured first position for becoming self-reliant in low-cost automation, localization and R&D activities and second position for digitization in smart manufacturing process control in the ACMA National Case Study Competition held on 4th November, 2020. The Bawal plant of the company also secured third position for digitalization and elimination of the chance of wrong product supply to customers and for CSR activities for supporting society and stakeholders during COVID-19 times in the ACMA competition, held again, in November 2020. 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. Mr. Mehta, please go ahead.

Good afternoon, everyone. Let me brief on the operational and financial performance of the company. The share of the LED lighting stands at 33% of total revenue and that of conventional lighting stands at 67% during 9 months ended FY '21. The product mix for Q3 as a percentage of total revenue is 66% of front lighting, 25% of rare lighting and 9% others. The segment mix for Q3 as a percentage of total revenue is, 63% are passenger vehicles, 31% 2-wheelers and 6% commercial vehicles. Revenue stood at INR 446 crores for Q3 as against INR 383 crores Q3 last year, up by 16%, led by festival season demand and continued positive sentiment. For 9 months, it was INR 922 crores as against INR 1,214 crores in 9 months last year, but down by 24% due to abnormal Q1 of FY '21. The revenue for Q3 stood at INR 435 crores, excluding mould as compared to INR 360 crores last year, up by 21% against industry growth of 16%. For 9 months, the manufacturing revenue stood at INR 885 crores against INR 1,137 crores last year, down by 22% against industry downfall of 25%. The company reported consolidated EBITDA of INR 50 crores in Q3 against INR 44 crores last year, up by 13%. EBITDA margin stood at 11.2% for Q3 as against 11.5% for Q3 last year, down by 30 bps due to raw material increase in the current quarter, the recovery of which is expected from customers in the coming quarters. Profit after tax and share of associate stood at INR 20 crores as against INR 19 crores in Q3 last year, up by 5%. The CapEx during 9 months was INR 29 crores and estimated for the 12 months is INR 50 crores. That is all from my side. We will now open the call for questions.

[Operator Instructions] The first question is from the line of Ashutosh Tiwari from Equirus Securities.

So firstly, on the mould sales, what is the number for the 9 months? Is it like INR 37 crores?

Yes.

And sir, this is considerably over than last year, INR 77 crores in 9 months. So is it -- I mean, is there something to read into it? Or this is just like it normalize next year? I mean, I want to -- basically, I want to understand that whether in terms of new model on this we're working upon, is there a drop over there? Or I mean, it will probably be more, say, it will normalize going ahead?

Last year, the mould sales was INR 77 crores, 9 months ended. And this year, it was INR 37 crores. So because of Q1 and Q3 pandemic, the mould sale has been extended, and we are expecting in Q4 or coming FY '22.

So I'm Vineet Sahni this side. I'll answer your question. See, mould sale, otherwise, will be normal as last year. Only thing is that certain new launches have been a little bit postponed because first quarter, there was nothing in the industry. So overall, nothing has changed, except the pattern. That's it.

Okay. And also I want some color on the competitive intensity in this 4-wheeler lighting space, I think Magneti Marelli is also aggressive and so is Minda. So are you seeing any kind of pricing pressure in this sector or also market share loss in, say, OEMs like Maruti and all? Or that is not a big threat per se?

So again, Vineet this side. So I would say that nothing significant change. Whatever pressures on pricing were there in last few years, they are continuing because of competition. Nothing has changed as such in this year. So we continue with the same pricing competitiveness among the suppliers.

Okay. And lastly, on the margins. So where do you see -- let's say, what are your targets for, say, over the next 2, 3 years, that you are going to reach? In terms of margin, also considering the fact that the recently even oil bases have gone up, so plastic prices would have also gone up. So can that impact the near term, and say, for next 2 to 3 years, what margin then we are looking at?

So we have been focusing on the double-digit EBITDA percentages as we have been telling always and increasing it gradually step-by-step process to something like 11% to 12%, step by step. So we want to retain the margin in double-digit numbers. Pressure of raw material will come, but we have customers who would compensate for that. There is a lag into this. However, that gets compensated.

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

I hope I'm audible.

Yes, you are.

Yes, you are.

Sir, my question was on our key customer, Maruti. So if you see Maruti's production growth in this particular quarter has been about close to 28%. This is versus the 14% growth in our revenues for -- coming in from Maruti. So what could explain the -- is it just the model mix that has impacted our number this quarter? That is question number one. The second question is on the overall industry versus Lumax. So the expectation is that the overall LED penetration is expected to go up to 50% from the current levels of 35%, which is what Lumax is also is at. So just wanted some color from the management that what is -- what will drive this increase in LED for Lumax? I mean, are you looking at incremental market shares from your existing customers, like Maruti? Because that is -- that will be imperative because they form a very high percentage of your overall revenues. So how do you -- how will you manage to gain market share from your wallet share from your existing customers in the wake of very competitive environment?

So this is Anmol Jain. I'll take the first question regarding the Maruti Suzuki numbers vis-à-vis our numbers. Maruti, as you rightly said, in Q3, grew by 29%, whereas our revenue with Maruti grew by 16%. And this is mainly on account of the model mix, whereas the Baleno and the Brezza model were high contributors to Maruti numbers, where Lumax is not present on these 2 platforms and hence the disparity between our numbers and Maruti numbers. I'll request someone else to take the #2 question about the LED penetration and wallet share going forward.

So this is Deepak here. So let me just give you. Also just to supplement what Anmol said, right? If you look at our other, basically, customers, and this is also a correlation in our marketing strategy. So for example, if you see in the 9 months, Tata Motors has probably garnered a lot of market share. Their growth also has been about almost 40%. However, our account with Tata actually grew almost close to 55%, 57%, and it's also significant in other players like, for example, in Hero as well. So I think clearly, there is obviously a volume mix or a model mix, which is centric. In lighting, usually, now you have per model, per supplier maybe one for lighting in terms of headlights and second for tail lights. However, with customers, usually, wherever we are -- and we have a high market share based on the capacities, investments like, for example, Maruti Suzuki, there is an understanding that they will keep the overall pie, kind of, consistent with basically wherever the standardized basis. But however, we find that with technology innovations, specifically in LEDs, there are segments where I think Lumax has clear opportunity. For example, it is there in FES, in commercial vehicles, in farm equipment, agro segment. Also in certain accounts, like, for example, MG Motors, for example, in the TVS and 1 or 2 others, specific counts where we were not having high wallet share. We have started to penetrate, and you'll see probably garnering more market and more basically top line and bottom line. So that's been a very clear-cut strategy. You have to well understand that the lighting company, Lumax Industries, does have a high market share in basically India. However, we are going now specific to clients where we were not there or were not having in segments, in particularly where there were not too much a technology play and I think the LED transition is helping us in there.

Fair enough. Sir, just one question. It was very encouraging to see growth coming back very nicely in our Honda 2-wheelers account over the last 2 quarters. If you could just tell me what has led to this? I mean, have you gained back market share? Or did we -- or something else has happened there?

Vineet, would you like to answer that? Or I can then go ahead.

Yes. I will take. So this is basically what we have just explained as we penetrated into LED segment, we have got certain orders.

Mr. Sahni, we're not able to hear you.

And therefore, our shares with HMSI has increased.

I'm so sorry, sir. I lost you in between.

Supplier the first source for the high-technology maps with HMSI today.

Mr. Sahni, sorry to interrupt.

Yes. So let me -- this is Deepak here. I think his audio was not very clear. I think particularly, it has been on certain models, not on HMSI side, that we have basically been there and with their testing open enough, they've actually sold more these kind of models. And hence, I think we were already there. And I think based on customer growth of almost 4%, we actually grew about 25% on HMSI. So I think that's one of the reasons for HMSI.

Sir, just one last data point question from my side. If you could just highlight what is the gross debt level and the net debt level on the balance sheet currently? That would be all from my side.

So we are having the gross debt of almost around INR 300 crores and net debt of around INR 290 crores. That is including the working capital of INR 280 crores. So term loan is around INR 10 crores.

Next question is from the line of Abhishek Jain from Dolat Capital.

Sir, as you are looking to enter into the HVAC panel and electronics cable business, so just wanted to understand what is the progress and what sort of the CapEx you have done for this.

So the CapEx plan for that DCP plant is around INR 85 crores, and we have already done almost INR 60 crores of that.

Okay. And when it is expected to be commissioned?

It is in Q2 FY '22.

And what sort of the revenue can we assume for the FY '22?

Sorry to interrupt. Are you asking about the new Bawal facility? Or about HVAC product?

HVAC product.

Okay. Though Mr. Sanjay Mehta was referring to -- about the new Bawal facility in which the CapEx is INR 85 crores.

Okay. And what about this HVAC panel CapEx?

The HVAC panel, as I mentioned last call as well, I think there is an understanding now with Stanley Electric that we would probably get this in its time our product portfolio. We are expecting a market opportunity in next 3 to 5 years. We are still under the discussions with OEM. The electronic facility, which basically they just spoke about, that actually will also have the infrastructure and house the HVAC panel. However, we are still expecting the production to start somewhere in the later part of FY '22. Once we confirm the orders from our OEMs, we will then be able to make a disclosure on that.

So just to supplement what Deepak mentioned, we are in advanced stages of discussions for HVAC orders. Phase I, we will probably do a -- just local assembly or a pass-through and then with -- maybe over the next couple of years, we will get into the localization and value addition mode. That's when the investments will kick in.

Okay. Got it. Sir, my next question is related with the PLI scheme. So what sort of the direct benefit you are looking from the PLI business? As you know that export is quite negligible. So do you qualify for the taking benefit of PLI?

Abhishek, let's get the PLI scheme first because still the contours with the PLI scheme is still not clear. And I think the industry is very much looking forward to first get the PLI scheme. You're absolutely right that it is mainly to drive on export champions. And based on what thresholds and filters there would be, once the scheme is out, we would be able to then take a better assessment.

Okay. Sir, my last question is relatively to current utilization and order books for the quarter 4.

It is around 85% current utilization of the capacity.

And how much order visibility for the quarter 4?

For quarter 4, we have a strong order book. We are expecting a pretty significant jump in quarter 4 in our revenues. At end of quarter 4, we should be almost close to 95% capacity utilization for which the investments made and in the forthcoming times will actually help in getting a incremental revenue next year.

So as most of the companies are talking about the shortage of the semiconductor, so will it impact the production of the passenger vehicle in quarter 4?

I think, again, let me put it like 2 ways. There is industry specification. And then there is a company specification. The semiconductor issue is a real issue. It's a global issue, and it may impact the industry going forward in Q4. However, when it come to Lumax Industries, most of our, basically, electronic parts are being sourced and protected by Stanley Electric. So we don't see any direct impact. However, if the vehicle industry in passenger cars or other segments, even including 2-wheelers, do get impacted, then because the intricacies of the supply chain, there may be some rationalization on volumes.

Next question is from the line of Viraj from Securities Investment Management.

I just had a couple of questions. First, just coming back to the semiconductor shortage, the chip shortage. If one were to understand this up a little better, so we participate in multiple segments. You have 2-wheelers, PV, CVs and probably to some extent in farm as well. So I wanted to understand the impact on across different segments. Where is it more severe? And where is it relatively less affected as of now?

So I think basically, what our understanding is that the shortage of semiconductors is not only on passenger cars, CVs and 2-wheelers, all 3 segments will get impacted. However, it has to be more granular in terms of which customers may get more impacted. Our assessment shows that there could be more impact on customers like Mahindras and Tatas, because of their single source policy where some of the OEM -- or some of the Tier 1s have had certain constraints. But you have to also understand that given the overall India consumption of semiconductors, it is not so significant as it is in other markets. So there is an availability and opportunity to also stock order it and basically keep certain stocks. So that's where it is. And as I mentioned before, the overall industry estimate is that in Q4, there could be some impact to about close to 10% to 15%. But again, I think the OEMs and Tier 1s, which are directly impacted, are working very hard to see other sources and procurement opportunity.

Okay. That's very helpful. Second question is, you talked about us gaining shares in HSMI (sic) [ HMSI ] and TVS. So can you just provide some perspective who are we gaining from? And how is the pipeline looking with those customers now?

Vineet, would you like to answer this? To TVS?

So TVS has 1 competitor, which was predominant for years into TVS. So we have been able to make headway there and gain market share and primarily due to technology, primarily due to LED technology that we have offered to TVS at a competitive cost. And with that, we have been increasing our market share with TVS. And the plan is to grow bigger with TVS.

Okay. So what will be our wallet share with, say, TVS and HSMI (sic) [ HMSI ] now?

So in HMSI, we are around 55% to 60% in headlamps and around 30% plus in taillamps. Our TVS -- we have just made an entry, so we are at around 10%, 12%, and we have plans to enhance that.

So the presence so far has only been on the non-LED part, and now we are kind of gaining share in there. Am I right to think in that way?

No. We entered through LED parts, like, there models like NTorq and all. So that was our entry pitch, actually, on higher technology.

Okay. Just last 2 questions. One is on the margin side, post integration of the PCB unit, whole idea was that we are much more backward-integrated and that should aid a certain amount of margin at a certain utilization. Now since you're expecting close utilization by Q4, how should we look at the overall margin, sustainable margins, say, over a long-term? I understand, in the near term, there may be some RM pressures. But if we have to look at over, say, next 2 to 3 years, what is the sustainable margin profile a company can be at?

So as explained before in the earlier question, we are targeting to sustain a double digit numbers, and we want to move in near term, step-by-step, to around 11% to 12% EBITDA level. That's our plan.

Okay. And last question was on the debt part. So I understand large part of it is still working capital net. But any -- do we have any road map or any plans in place to further bring it down? Or we are comfortable with this kind of a...?

So Sanjay, would you like to speak? But I think we are at this moment, comfortable with -- at our debt equities and the debt that we have taken. And if you see primarily the debt being reflected is a short-term working capital debt. We do not have any long-term debt, very, very insignificant.

At present this is nil. The debt equity ratio is 0.03 and I think by end of March, it would be zero. The only debt we're carrying is the working capital management.

Next question is from the line of Aditya Makharia from HDFC.

Yes, I just had 2 questions. One is our market share in the car business is around 45%, is what I understand. Who would be the next 2, 3 players? And are they close to us in terms of market share? Or is there a significant gap?

Okay. So this I can explain. See, if you consider the group companies, which is us and our associate company, SL Lumax, our market share is significantly higher because as SL Lumax serves the Korean customer, that is Hyundai and Kia? Right? So if you take cumulative, the market share goes up to around 65% to 70%, which means that all other players have big gap from our side.

Okay. And this is both in headlamp and taillamp, what you're saying?

So head, we enjoy major share; and in tail, it is more distributed because tail is less complex as compared to headlamp. So tail, there are a couple of players more than headlamp. So in headlamp, we are predominantly high. In tail, it is equally distributed.

Okay. So you're saying we've 65% market share effectively?