We are recommending Buy on our Actionable ViewPoints "Lumax Auto Technologies" as per following:-
CMP: Rs 185 Target: Rs 222 (20% Upside)
Key Points:
Lumax Auto Technologies: Viewpoint – On growth highway
· LAT to capitalise on consumer shift towards premium products, upcoming regulatory changes to open new avenues: Lumax Auto Technologies (LAT) is well positioned to outpace the automotive industry's growth. The automotive industry is fast moving towards LED lighting, which will substantially benefit LAT (as it supplies circuit boards to Lumax Industries). Share of LED currently stands at 25-30% and is expected to reach about 50% levels in the next two years. Further, given increased congestion and driver fatigue, the passenger vehicle (PV) industry is increasingly moving towards AMT transmission from manual transmission, which will benefit LAT. AMT penetration currently is in early double digits and is witnessing exponential growth, with AMT having almost thrice the realisation compared to manual transmission. Further, upcoming BS6 regulations (would come in force from April 2020) provide a huge opportunity for LAT. The company will supply oxygen sensors for the two-wheeler (2W) segment as fuel injection would become mandatory post BS6 norms. Further, LAT will supply telematics for CV players once the regulation comes into effect. In addition, order wins in the air filter segment and new product introduction in the aftermarket space would boost revenue. We expect LAT to post 15% topline growth in FY2020.
· Operating leverage; Better product mix to drive margin expansion; Expect 140 BPS improvement during FY2018-FY2020; Return ratios to improve substantially: Revenue of LAT is expected to clock strong double-digit growth over the next two years, attributable to a host of new opportunities opening up. The standalone business also is on a strong footing and is likely to add meaningfully to topline growth. Strong revenue growth would bring in operating leverage. Secondly, the likely improvement in product mix augurs well for LAT's margins. Accelerated growth in the lucrative aftermarket segment and improving traction from the new business (air filters, gear shifters, oxygen sensors and seat frames), which attract a double-digit margin, are expected to boost OPM's over the next two years. We have factored in a 140 BPS margin expansion over FY2018-FY2020 and expect OPM to reach 10.5% by FY2020. Given the margin expansion, improved operational efficiency and reduction in debt, we expect LAT's ROE to improve significantly from 11.8% in FY2018 to about 16% levels in FY2020
· Valuations: Initiate coverage with a Positive view: LAT is one of the leading auto component manufacturers focused on domestic markets. The company is likely to benefit in a big way from the upcoming regulatory changes and shifting consumer preferences. The company has a well-diversified product portfolio and enjoys established relations with most of the leading auto OEMs spread across the 2W, 3W, PV and CV segments. Technical tie-ups with leading global component players fasten the access to latest technologies so as to fully capitalise on existing as well emerging opportunities. Strong topline growth (20% CAGR over FY2018-FY2020) and operating performance would be reflected in the bottom line as well with PAT likely to report a robust 34% CAGR, making it one of the fastest growing auto component companies. We initiate viewpoint coverage on the stock and expect 18- 20% upside over the next 8 to 10 months.
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