The Hindu Business Line : Lumax Auto Technologies: Invest

An investment can be considered in the initial public offering of Lumax Auto Technologies (LAT); it is being offered at Rs 75 per share. At this price, the stock would trade at a multiple of 15-16 times its expected per-share earnings for FY-07 — not too demanding in our view — after factoring in the expansion in equity, post the current offer.

Company background

The promoter group of LAT is also the one behind Lumax Industries (LI), the automobile lighting major. LAT's principal customers are Bajaj Auto and LI, which account for about 90 per cent of its revenues. LAT also has a 100 per cent subsidiary, Lumax DK Auto Industries (LDK), which caters to requirements of certain components for Maruti, apart from manufacturing corrugated boxes for LI.

Proceeds from the offer would be used to part-finance the expansion plans of LAT and its subsidiary. Plans include a lighting plant in Uttaranchal, a levelling motor plant in Haryana, a chassis assembly unit in Pune, expanding existing facilities at Pune and Aurangabad, and modernisation of the R&D centre at Pune.

Investment argument

While excessive reliance on one customer for a sizeable chunk of revenues poses a risk, such revenue concentration is inevitable given the swathe of component players angling for business from just three principal two-wheeler manufacturers.

We view LAT's business profile positively given that its principal customer — Bajaj Auto — has consistently demonstrated its understanding of the domestic market with a series of successful launches across product categories in recent years. We expect the momentum at Bajaj to be sustained. That should rub-off positively on the prospects of LAT.The subsidiary company, which accounted for 20 per cent of revenues but 30 per cent of earnings in FY-06, should act as a cushion in case of a downturn in the two-wheeler market.

An increase in the subsidiary's contribution would also be positive, as it enjoys better margins than the parent company (13 per cent in FY-06 versus 5.5 per cent for the parent company on a standalone basis).

For the quarter ended June, the subsidiary chipped in with about 30 per cent of consolidated revenues; as a consequence, consolidated margins have inched towards the 9-per cent mark (7.7 per cent in FY-06).

Also, given the nature of relationship that the company enjoys with leading players (Bajaj and Maruti), it could be expected that LAT will parlay the experience gathered through these engagements with other OEMs (original equipment manufacturers) as well.

Valuation and view

At 15-16 times expected per-share earnings for FY-07, the stock appears not to be too stiffly priced.

Coupled with other metrics such as a return on shareholder funds of close to 30 per cent, a market cap-to-sales ratio of 0.7 at the offer price and a consistent dividend paying record (even a dividend of 20 per cent post expansion would translate into a reasonable yield of about 3 per cent), we think there is scope for upside.

Key risks to our recommendation would include an escalation in input costs and LAT's inability to pass on the same to its customers, apart from a sharp demand deceleration in the two-wheeler segment.

Offer details: About 30-lakh shares are being offered at a fixed price of Rs 75 though an initial public offering, which opened on December 14, and closes on December 21. Centrum Capital and Bigshare Services are the lead manager and registrar to the offer respectively.

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