Lumax Industries Limited (517206) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Lumax Industries Limited Q1 FY '22 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 of Lumax Industries Limited. Thank you, and over to you, sir.

A very good afternoon, ladies and gentlemen. Let me at the outset wish everyone a good health and a safe wellbeing during this pandemic. A very warm welcome to the Q1 FY '22 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. Naval Khanna, and from the finance team, Mr. Sanjay Mehta, Shruti Kant and Ankit Thakral along with Priyanka Sharma, our Head Corporate Communications; and SGA, our Investor Relations advisers. The results and investor presentations is uploaded on the stock exchange and company website. And I hope everybody has had a chance to look at it. Before we start off with a discussion on the financial performance of the company, I would like to highlight on some of the key challenges prevailing in the automotive industry currently in India. The OEM production in Q1 FY '22 has declined by 36% from Q4 FY '21, due to the unforeseen resurgence of COVID 2.0 in the beginning of the current financial year, resulting into regional lockdowns. The volatity in commodity prices, coupled with chip shortages, has also impacted OEMs to sustain the production in Q1 FY '22. However, the industry has...

Ladies and gentlemen, the line for the management is disconnected. Kindly stay online till I reconnect them. Ladies and gentlemen, we have the management line reconnected to the call. Thank you, and over to you, sir.

Ladies and gentlemen, regret this brief disconnect. Let me just restart. The volatility in commodity prices, coupled with chip shortages have also impacted OEMs to sustain the production in Q1 FY '22. However, the industry has shown signs of recovery from July onwards. The production in the upcoming quarters highly depends on how the pandemic situation takes shape along with the vaccination drive across the country. The volatility of commodity prices, chip shortages may also impact OEM production. 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 solutions to 2-wheeler, passenger cars, farm equipment, space and commercial vehicles subsegment. We are the preferred supplier to OEMs in India and continue to be the market leaders. At Lumax, we have a strong inclination in presence in the design of components and our engagement starts from the design phase, working to offer our customers the best technology solutions. Lighting is not only a crucial aspect of safety, but also has [indiscernible]. We also have a new technology group and design studios with a team of engineers focused only on new advanced technologies and design. Lumax keeps creating new concepts and shares them with the OEMs. Construction at Sanand, Gujarat, is also now at full swing after minor disruptions during the first quarter, owing to the state level lockdown restrictions. We are expecting the plant to be operational by the end of third quarter of this year. The new electronic power facility is expected to commence by the end of second quarter of this year. The new product launches during the quarter, which consists of Lumax lighting are as follows: in the passenger vehicle segment for the XUV 700 of Mahindra & Mahindra, we do supply high mount top lamps, roof lamps and other smaller lamps. In the commercial vehicle segment, in e-ALFA of Mahindra & Mahindra, we are supplying head lamps and the vehcile lamps. And in the 2-wheeler space, for the Maestro Edge 125 Hero MotoCorp, we are supplying the front vehicle lamps. We are hopeful for the upcoming quarter with expectations of revival in demand. The monsoon has also started off well across the nation and economic activities are opening up gradually. At Lumax, we have a well-defined strategy in place to drive the growth and achieve profitability. We are making decisive investments in technology, leading to the path of innovation, which would differentiate us from our peers and also help in expanding customer portfolio. The company has secured new orders worth INR 250 crores from OEMs for their upcoming models as well as localization of lamps of existing models. Out of which INR 50 crores is replacement business and INR 200 crores is new business, which is expected to fully realize in FY '23, '24. The Bangalore plant of the company has been recognized by Toyota Kirloskar Motors for achieving zero-defect supplies for the year 2020. The Pantnagar plant of the company has also won the first position in the competition held by ACMA in the customer complaint category. 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 brief on operational and financial performance of the company during FY '22 quarter one. Operational highlights. The sales of LED lighting expenses is 34% of our total revenues and of conventional lighting expenses 66% during Q1 FY '22. The product mix for Q1 as a percentage of total revenue is 62% of front lighting, 28% rear lighting and 10% others. The segment mix for Q1 as a percentage of total revenue, 65% passenger vehicles, 28% 2-wheelers and 7% commercial vehicles. The consolidated financial performance for Q1, the revenue stood at INR 314 crores for Q1 '22 as against INR 504 crores for Q4 FY '21. The revenue for Q1 '21 stood at INR 78 crores. I'm giving both the figures of the last Q4 and Q1. Excluding mould sales, the revenue for Q1 is at INR 301 crores against INR 491 crore in Q4 FY '21. The revenue for FY '21 Q1 stood at INR 74 crores. The company reported consolidated EBITDA of INR 9 crores and loss after tax and sale of assets at INR 10 crores in Q1 FY '22. The CapEx during the quarter was INR 9 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 Abhishek Jain from Dolat Capital.

From last couple of quarters, the company is facing significant pressure on the gross margin. Is it because of the hard OEMs negotiation with the [indiscernible]? And can we predict that it will be difficult to pass on the entire RM inflation to OEMs?

The one reason is the electronic component, more uses of electronic components. And yes, the commodity prices have also increased. So the increase what is billed in Q1 FY '22, it is expected to be recovered through the next 9 months. And basically, because of the COVID reason, the settlement of raw material also is taking slight time.

So RM inflation will continue to be at a higher side in second quarter as well as -- so can we expect that, again, there will be some pressure on this gross margin side, what we have seen in this quarter?

So we do not expect -- this is Anmol Jain. We do not expect any significant change in the gross margins. The raw material consumption, if I look at the annualized raw material consumption for the last year, it was approximately...

Sorry, to interrupt sir. Line for the management just got disconnected. Kindly stay online till I reconnect them. Ladies and gentlemen, we have the management line reconnected to the call. Thank you and over to you, sir.

Yes. Apologies for this inconvenience friend. I was talking about the gross margin, and I was referring to, if you look at the full year of 2021, our gross margin or the raw material consumption was at 63%, and for Q1 FY '22, it still stands at about 63.6%. If you compare it from Q4 consecutive quarters, yes, it has gone up by about 1.3%. But we are very hopeful that in the subsequent quarters, we will be able to recover whatever raw material escalations have been caused due to inflationary measures. We have contractual agreements with most of our OEMs on a back-to-back arrangement on the escalation of raw material prices. So I don't see gross margin being a challenge going forward.

Okay. I got it. Sir, a shortage of the semiconductor to persist in the coming quarter, as also indicated by the Maruti. So in this environment, what is your revenue growth target for FY '22?

Well, I think for FY '22, let's talk about the industry, basically, growth target was somewhere between 15% to 20% during the start of the fiscal year. Then basically, corona 2.0 happened, and I think the industry per se has actually reduced the target from 15% to 20% to about 10% to 15%. Of course, it's on a much lower base, if I look at it from FY '20. Now our assessment is that for the full year, we should be better than basically the industry target, given the new order books also as well as basically a better recovery from July, August. Full year, it's actually extremely difficult to predict. There are multiple volatilities, because of COVID 3.0 variability, semiconductor shortages. But at least for the next 3 months, July, August, September, I think what we are looking at is a sustained production run, not basically having any major disruptions coming in. As and when I think our OEMs will share more feedback on the semiconductors, we will basically be find -- aligning our plans accordingly.

Okay, sir. So sir, as you mentioned that you won the new business of around INR 200 crores. So who are the key clients from where you got this business? Is it for the -- this MG Motors, and Kia?

So primarily in the pass car, MG Motors is one of the key customers where we have got basically new business awarded. We've also got basically businesses awarded in the 2-wheeler segment, which is with TVS as well as with Royal Enfield. So these are some new customer additions, which are there. Of course, I will not be able to talk about model specific issues. But then also, of course, we are pushing from our current customers to get certain new orders on their current and new platforms.

And sir, you are also looking to enter into the SBS's channel. So just wanted to know what is the progress right now?

As I had mentioned in the last time that we are basically going to be discussing with the customer in a step-by-step manner. We are going to start the production in '22, '23. I think the total market size of this is approximately INR 600 crores as a potential. And we basically are very close to getting now firm LOIs with 1 customer, hopefully, in this quarter.

So you're -- it will start to reflect in the profit and loss account only from FY '23 or the second half of FY '22?

Yes. FY '23, yes. '22, '23, once we get the order.

Okay, sir. Sir, my last question is related with the depreciation that has gone down quarter-on-quarter basis. So what is the reason?

If you look at capacity utilization during the Q1, definitely the depreciation calculated on a fixed basis. So accordingly, it has been...

So roughly run rate would be around INR 17 crores in the coming quarter, right, sir? INR 17 crores to INR 18 crores?

Yes. Yes.

The next question is from the line of Hasmukh Gala from Finvest Advisors.

[indiscernible] entire team of Lumax Industry, sir, we do understand that times are very tough for the auto industry as well as the company. I hope you are able to hear me, sir?

Yes, Hasmukh, we are able to hear you.

Yes. Now what I was looking at, you did say that you hope to beat the industry estimate target. Now if I look at a similar position in FY '21. In Q1, we reported a net loss of INR 31.6 crores. And in the remaining 3 quarters, we posted a debt of INR 50 crores turning the tables on the positive side. Now I think the loss that we have now reported INR 10 crores seems to be quite manageable. So what will be your view, subject to this chip shortage, I think, has created a havoc in the auto industry and several other sectors as well. How do you see things shaping up in FY '22? And then how -- and continue to that, and how are you planning to spend INR 160 crore CapEx, which you have planned?

So let me first take the first question. I think clearly, our revenue, you're right. I mean, say, we were actually seeing good signs of recovery in the month of July, I'm expecting personally not really any demand suppression coming forward. There would basically be production realignment based on the volatility like chip shortages, which we'll be very closely working with our OEMs. However, as I mentioned, the revenue outlook for the year, what we are at least expecting is much better, a double-digit, high basically growth coming in, if basically the corona 3.0 comes in also, we do as an industry feel that we have sufficient experience to actually manage that. And hopefully, with the vaccination, it would not be as severe as COVID 2.0. Second, I think if you're also looking at the profitability, if you see in this quarter itself, I may say we are consistently trying to focus on reducing our fixed costs. And at least try and get as much recovery as possible in the next 9 months, so that at least our EBITDA margins are a healthy double digit. So that's, I think, our target internally. And at least as of now, we are not basically dissuaded by the fact that there are variabilities, but we still are planning to stick to the target. In terms of our investment of about INR 160 crore, I'll let Anmol basically take that.

So Hasmukh, this is Anmol Jain. So just to supplement on what Deepak has mentioned, I think we do anticipate and based on what we have seen in the month of July and so far in the month of August, we have come back to capacity utilization of almost 85% to 90% across all our facilities, which is a very encouraging sign. So we do expect that for the full year, our revenue forecast should be anywhere between, considering the new order book as well, better than industry growth, we anticipate anywhere around 25% to 30% revenue growth for the full year despite the Q1 deficit. And frankly, we do expect that we should come back as close as possible to the 2018-'19 levels of profitability in terms of absolute amount. That is at least the internal target. So thereby crossing a 3-digit PBT.

We had done INR 104 crores in FY '19.

So that is our endeavor that we come back to FY '19 level of PBT. And obviously, our EBITDA margin should be on a double-digit basis. So that is our endeavor, and we are doing a lot internally in terms of cost-cutting and rationalization of costs with the added benefits of capacity utilizations and enhanced capacity utilization, we should be able to offset in the subsequent quarters. Coming to your question of CapEx, so the majority, almost 50% of the CapEx was related to the brownfield expansion in Gujarat facility, which is pretty much on track. There have been slight maybe a month's delay because of COVID 2.0, because of shortage of oxygen, et cetera. However, we do anticipate that this plant would soon probably in -- by the next quarter, go online and hence, the capitalization will start appearing on the books. So that would be the major chunk of it. Apart from that, the electronic facility, which is also pretty much in the last stages of commissioning will also have certain capitalization of approximately INR 20 crores, INR 25 crores, which would also come into play. So we do expect that maybe there would be almost close to 80% to 90% of this INR 160 crore annual plan, this will actually get capitalized during the subsequent quarters in the books of accounts.

Okay. And sir, one last question from my side. We understand that Hyundai is trying to get into Gurgaon area like they have set up a big office. So what are their plans? How does it spell out for our SL Lumax?

SL Lumax will continue to strategically basically focus on Hyundai. I think it's too early to say about their plans in the NCR. They've already just established an office. So I mean, I think as and when -- I mean they discuss and decide more about their plans, and you probably will hear through media, we will align with them. Hyundai remains for the group, a very key and strategic customer. And we will continue to basically service them as a single source full capability supplier.

Okay. So are they going to set up a plant in Gurgaon, sir? Hyundai?

I would not be able to comment on it beyond what the media release shows.

Okay. Okay. And just rejoined to these SL Lumax also you see similar progress as we are expecting in Lumax industry?

Sorry?

For SL Lumax also, are we expecting similar performance as we are expecting in Lumax industry in terms of the revenue growth trajectory and the margin level?

Yes, because SL Lumax is very closely linked with 1 single customer, which is Hyundai and TR. So that, I think, as based on their performance, they would be expecting that, of course.

The next question is from the line of Ashutosh Tiwari from Equirus Securities.

So firstly, on this -- you said the electronic costs also increased along with the RM cost. So is that also a pass-through to OEMs or we face challenges in passing that?

No. I think all the inflatory costs are actually our contractual discussions with the OEMs. I think the raw material as well as more on the electronic components, there has been a much more steeper price increases as compared to a regular kind of a flow and also because of shortages of chips, I think electronic components also have actually seen a disruption in the supply demand. So we continue to basically discuss with our OEMS beyond also contractual obligations to actually ask for price appreciation.

Okay. Okay. And secondly, on this electronic facility, which you said will come on board in the next quarter mostly. So post that, when we localize some of these things, there will also be some margin expansion possibility from that side?

Yes, Ashutosh, we have said that earlier that I think once after in-sourcing, you could definitely see a margin expansion on our basically performance. And this will continue to basically do our localization efforts on electronic components, which basically will have certain basically -- you have to also understand that as much as we reduce our imports, the dollar and rupee parity also plays in, because you are able to basically then have a better control on the rupee value.

Okay. Okay. I got it. So with that, how would our -- basically in case of LEDs what is the import content right now, if you can just reveal those numbers and how that will change for the next odd years?

LED, we will continue to basically import, because there are no local sources of LEDs per se. But I think our emphasis and focus remains is that we would basically have the imported content on a PCB, which are certain electronic components and value add that we should basically be able to do. So just to let you know and give an example, I mean, say on a headlamp, I mean say, our import content on LED is almost about 60%, and there's an opportunity of about 30% for localization. And on a tail lamp, it's about 30% where about 15% is the localization opportunity.

Okay. And I was referring to that only import content for LED lamp or not, just LEDs?