Broker's call: Lumax Ind (Buy)

Target: ₹1,607

CMP: ₹1,296.85

Stroked by the pandemic, Lumax Industries intends to slow down its capital expenditure with cash conservation in mind in the current fiscal, majority of which will be utilised towards the electronics facility – this is a sharp fall from around ₹167 crore in FY20. In the first half this fiscal, Lumax spent ₹29 crore on capacity enhancements.

The outstanding expenditure towards the Bawal plant is ₹17 crore out of a total ₹75 crore which will be completed this year. While it wouldn’t add to the top line, it is a margin accretive project and would help improve EBIDTA margins over the next few years to 12-13 per cent, which is currently languishing at around 10 per cent.

With the increasing focus on LED lighting in the automobile industry, backward integration to PCB (printed circuit board) becomes more important as it gives the OEM greater confidence in their product.

As ‘sales velocity’ picks up in passenger vehicle and two wheeler sectors, proximity to OEMs would make its business model difficult to replicate for outsiders – a sort of barely puny competitive advantage.

On balance we recommend ‘buying’ the stock with a revised price target of ₹1,607 (previous target of ₹1,513) based on 21x FY22 earnings over a period of 9-12 months.