Lumax Industries Ltd Q2 FY2023 Concall Summary

Key Takeaways

• Record revenue, volume-led: Q2 FY23 was the highest-ever quarterly revenue, with 38% of H1 manufacturing growth coming from volume and 11% from value, aided by festive and monsoon demand.
• Mahindra becomes a material growth engine: Mahindra & Mahindra grew ~70% and became the third-largest customer, driven by new wins on Scorpio and Thar platforms where Lumax previously had no presence.
• Margins improved on operating leverage: H1 EBITDA margin rose 340 bps YoY to 9.9%, though gross margins continued to shrink; management targets a 12–13% margin through gross margin focus and RMC improvement, with the Bawal SMT facility having already contributed 100–150 bps.
• Order book tilts toward EVs: The INR 1,000 crore order book, to be executed over 2–3 years, is 50% from EV vehicles, and LED lighting now contributes 35% of revenue with a 50-50 target in 3–4 years.
• What to watch next quarter: Whether post-festive softening in 2-wheelers materializes, the pace of price settlements from OEMs that lag ~6 months, and the capex plan disclosure promised for next quarter.

Demand Environment

• Passenger vehicles leading the recovery: The passenger car segment is expected to surpass FY18–19 peaks, with Maruti, Mahindra, Tata and the Korean group comprising 90% of the TD segment; compact SUVs are the most aggressive sub-segment.
• Entry-level segment turns: For the first time, the entry-level segment saw an uptick, driven by new Alto and Creta launches where Lumax supplies headlights on the Alto.
• 2-wheelers: festive boost, then softening: The festive season was better than expected, but post-festive softening is anticipated in the coming quarter; rural demand is kicking in with a 6–8 month lag and should support uptake by Q4.
• CVs and tractors: Commercial vehicles have picked up and are expected to cross almost 0.1 crore after a long time; the tractor industry holds stable.
• Semiconductor supply easing: OEMs are now sourcing inventorized semiconductors for 3–4 months, giving at least a 6-month visibility, which supports sustained production.

Deepak Jain: "But what I can definitely say that we are bullish and we expect this kind of revenue pull to continue."

Customer & Platform Wins

• Mahindra & Mahindra: Lumax secured preferred lighting partner status for Mahindra's next two platforms, on top of new business wins on Scorpio and Thar where it previously had no presence; wallet share is expected to increase further.
• Maruti Suzuki, Tata Motors, Honda, Hero, TVS: Maruti grew 30%+, Tata 76%, Honda 2-wheelers 38%, Hero 35%, TVS 48% in H1 FY23 vs H1 FY22; TVS is an example where Lumax was not present and has "basically gone high."
• Volkswagen/Skoda: Acquired as a new customer, primarily for Skoda's Indian project going forward.
• MG Motors: Lumax is almost 100% on MG and invested in Sanand expansion last year primarily for MG's Astor product; MG continues to have a strong market foot.
• Suzuki two-wheelers: Business recently acquired, adding to the two-wheeler portfolio.
• Customer wallet share strategy: Remain 100% on Hyundai-Kia; sustain 40–60% wallet share with Maruti, Mahindra and Tata; grow in spaces where not present; keep the same control in two-wheelers.

Deepak Jain: "We had basically not been on those platforms, so these are new business wins for us. Of course, with the whole market turning in into an SUV space, Mahindra still leads and is coming back with this."

Margins & Profitability

• EBITDA margin walk: H1 FY23 EBITDA margin improved 340 bps YoY to 9.9%; Q2 improved 110 bps to 10.2%, driven by operating leverage and value-driven revenue.
• Gross margin pressure persists: Gross margins continued to shrink despite the good quarter, with total RM impact on margins at ~80 bps; price settlements with customers lag ~6 months and are expected to come through over the next two quarters.
• Margin target and path: Management aims for 12–13% margins through stronger focus on gross margin and RMC improvement; margins have already improved ~100–150 bps from ~8–8.5% three years ago, attributed to the Bawal electronics PCB plant.
• Bawal SMT facility: Investments are executed but revenue was delayed; the facility is now operational and should contribute going forward.
• Import content: Total imports are ~20% of revenue (up from ~16% in FY22), driven by electronics and advanced plastics not available in India; localization of SMTs and PCBs is underway, though key small components like ICs, resistors and capacitors will still be imported.

Deepak Jain: "I mean there are two factors for it. Number one, I think, clearly, there should be a more stronger focus on our gross margin, and that means improvement on our RMC."

Product & Technology Transition

• LED lighting mix: LED contributed 35% of H1 revenue; management maintains a target of 50-50 LED vs conventional, with the order book expected to reach that split in 3–4 years.
• EV order book: 50% of the INR 1,000 crore order book is from EV vehicles; passenger cars are now seeing an EV uptick after 2-wheelers led adoption.
• Electronics and PCB capacity: Two more lines are to be added to the electronics PCB plant, which will further enhance value realization.
• Czech Republic R&D center: Opened with ~15 people, primarily for advanced electronics; it will assist in gaining more orders, specifically from customers like Mahindra and Tata, and mirrors a similar Taiwan office opened six years ago for project management and electronics.
• HVAC business: On target with a single customer order; SOP in Q4 2023 and revenue realization expected in '23–'24 at around INR 35 crores; strategically important as the next product post lighting that Stanley offers globally.

Deepak Jain: "I think we continue to maintain that, going forward, we will be having in the next three to four years, about 50-50 LED vis-à-vis conventional."

Associates & Strategic Partnerships

• SL Lumax performance: Contributed almost INR 16 crores in H1 FY23; the collaboration with Stanley Electric has paid rich dividends both financially and strategically.
• SL Lumax sustainability: Management does not view the 11.5% PAT quarter as a one-off; historically SL Lumax has maintained 5–6% PAT for the full year, and the quantum of profit will enhance as revenue grows.
• Stanley Electric visit: After almost 3.5 years, management visited Japan and had "extremely encouraging discussions" on business acquisition, technology development support, and potential future global scenarios where India could be used.
• Hyundai-Kia exposure: Together they have almost 20% market share and are expected to have strong sustained growth; Lumax wants to remain 100% on this account.

Deepak Jain: "I don't think there is a one-off. I think, again, as I said they keep on doing in terms of pricing. I never look at this quarter-on-quarter basis. I always you see do it on the financial full year kind of visibility."

Capacity & Capex

• Capacity expansion plan: Under Board discussion; likely to expand nearer to Mahindra & Mahindra in the Pune/Western region; will consolidate capacities in NCR for Maruti Suzuki with Kharkhoda close to Dharuhera and Bawal plants; some capacity balancing in Gujarat and Western region.
• Capex plan disclosure: The overall capex plan for FY23 and FY24 is still under deliberation; management will disclose it next quarter after reviewing order books with customers.
• Czech Republic acquisition: Acquired 100% ownership of subsidiary Lumax Industry, Czech to strengthen technology and innovation capabilities.
• Equity size: No current plans to change equity size, though the suggestion will be considered.

Guidance & Commitments

Key Metrics