Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank loan facilities and commercial paper programme of Lumax Auto Technologies Ltd (LATL; part of the Lumax group) at ‘CRISIL A+/Stable/CRISIL A1+’.

 

Performance in fiscal 2021 has been impacted largely on account of subdued performance in the first quarter of fiscal 2021. Revenue had de-grown by 75% y/y in the first quarter of fiscal 2021 due to the nationwide lockdown for a large part of the quarter. Negative operating leverage resulted in negative Earnings before Interest, Tax, Depreciation and Amortisation (EBITDA) during the quarter. Utilization in first quarter was only 25% of pre-covid level. With gradual relaxation in lockdown restrictions however, utilisation improved from second quarter onwards. Utilisation in July, August and September were 75%, 90% and 100% respectively of pre-covid levels. In the third quarter of fiscal 2021, company reported its highest ever quarterly revenue. Driven by improvement in utilisation level as well as cost saving initiatives undertaken by the company, EBITDA has also improved sequentially.

 

Over the medium to long term Lumax group is well positioned to benefit from the expected volume recovery supported by its healthy segmental diversity and various strategic investments to cater to the emerging trends in the automotive industry. Additionally, variations in OEM demand is mitigated by steady after-market business. Revenue from continuing business is expected to grow at a healthy rate of 9-11% over the medium term supported by sustained revenue growth from existing products line such as lighting, automatic gear shifter and sheet metal business and incremental revenue from new products including Urea tank and oxygen sensors. Benefitting from healthy growth in the aftermarket business and change in product mix towards higher margin LED lighting, operating margin should gradually improve to around 9.8% over the medium term.

 

Financial risk profile and liquidity continue to remain healthy. The group has maintained a lean balance sheet over the years. Networth has improved over the years and gearing remains robust. Supported by repayment of existing debt and prudent funding of capex and working capital requirement, credit metrics should remain healthy over the medium term.

 

Expected cash accruals of Rs. 90-100 crore expected over the medium term should be sufficient to fund minimal debt repayment as well as working capital requirement. Additionally, company will also have ~Rs. 100-120 crore surplus cash to take care of any exigencies. Bank line utilisation was low in the 12 months through December 2020, and provides additional headroom in the event of short-term funding requirements.

 

The ratings continue to reflect the Lumax group's established market position, strong relationships with key customers and healthy financial risk profile, because of strong capital structure and sound debt protection metrics. These strengths are partially offset by customer concentration risk in revenue and vulnerability to volatility in raw material prices.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of LATL with its subsidiaries and joint ventures. These companies collectively referred to as the Lumax group, are in similar line of business, have common management and significant operations and financial synergies.

 

Please refer Annexure - Details of Consolidation, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths

• Established market position and strong relationships with key customers

LATL, has an established market position in the auto lighting products industry and strong relationships with key customers: Bajaj Auto Ltd (BAL; CRISIL AAA/FAA/Stable/ CRISIL A1+), Maruti Suzuki India Ltd (MSIL; ‘CRISIL AAA/Stable/CRISIL A1+’) and Lumax Industries Ltd (LIL). The group mainly supplies two-wheeler and three-wheeler lighting products and two-wheeler chassis to BAL, and four-wheeler gear shift assemblies to players such as MSIL, Toyota Motor Corporation, Honda Motor Company, and Renault-Nissan. In an effort to further diversify the product offerings, the group has commenced supply of swing arms for two-wheelers and trailing arms for three-wheelers. A network of over 400 distributors across India for aftermarket sales further strengthens business risk profile. Moreover, the group continues to pursue JVs to augment their product profiles and to expand geographically.

 

• Healthy financial risk profile

Financial risk profile continues to remain healthy. The group has maintained a lean balance sheet over the years. Networth has improved over the years and gearing remains robust. Backed by steady revenue growth and profitability, net cash accrual is expected to increase to Rs 90-100 crore over the medium term. Supported by repayment of existing debt and prudent funding of capex and working capital requirement, credit metrics should remain healthy over the medium term.

 

Weaknesses

• Customer concentration risk in revenue

Sales to BAL, MSIL, and LIL collectively contribute around 60% to total revenue. Despite strong customer relationships, revenue and margin will remain vulnerable to a change in the business plans of a major client. As a strategic volume partner to BAL, the Lumax group faces demand fluctuation risk on an ongoing basis, which leads to volatility in revenue and margin, especially when capacity is underutilised.

 

• Vulnerability to volatile raw material prices

The main raw material used for making plastic powder is polypropylene (PP), which is a downstream petrochemical product. Hence, the price of PP is directly linked to crude oil rates, which are highly volatile. Also, steel prices have been volatile in the past 4-5 years. Given that most customers are OEMs, the group does not have the cushion to fully pass on increase in input rates as price revision happens annually.

Liquidity: Strong

The group enjoys strong liquidity driven by expected cash accruals of Rs. 90-100 crore in fiscal 2022 and 2023 and cash equivalents of Rs 100 crore estimated as on March 31, 2021. LATL also has access to fund based limits of Rs 112 crore, utilized moderately over the 12 months ended December 2020. The company has long term repayment obligations around Rs 6 crore each in fiscal 2022 and 2023 with capex of around Rs 50-60 crore per annum. Cash accruals should be sufficient to fund repayment obligations and capex requirements. Further, with a gearing of 0.15 times estimated as on March 31, 2021, the group has sufficient gearing headroom, to raise additional debt if required. Its bank lines are expected to meet its incremental working capital requirements, which are assessed to be minimal.

Outlook Stable

CRISIL Ratings believes that the Lumax group's revenue will grow at a steady pace over the medium term along with steady margins, supported by its diversified product mix and established customer base. The group's financial risk profile is expected to remain healthy supported by healthy growth in cash accruals, modest capex and working capital requirements.

Rating Sensitivity factors

Upward factors:

• Sustained revenue growth of over 12-15% while maintaining healthy operating margin supported by diversification of customer base and product mix leading to healthy cash accruals of around Rs. 100-120 crore
• Sustenance of healthy credit metrics  -  gearing below 0.5 time

 

Downward factors:

• Sharp decline in revenue by over 15% and deterioration of operating margin to below 7% due to slowdown in end-user industry, adversely impacting the group's cash flows
• Unexpected changes in procurement strategy by key customers, resulting in suboptimal capacity utilisation
• Large, debt-funded capex for acquisition or substantial investment in unrelated ventures/real estate leading to deterioration in key credit metrics – gearing above 1 time

About the Company

The Lumax group is part of the DK Jain group of companies.

 

LATL was incorporated in 1981 as Lumax Auto Electricals Pvt Ltd, and renamed Dhanesh Auto Electricals Pvt Ltd in 1988 and Dhanesh Auto Electricals Ltd in 1998. The company got its current name in 2006. LATL has two main divisions: lighting systems and sheet metal components, gear shifters, and moulded parts. Lighting products (head lamps, tail lamps, and blinkers) are manufactured in Pune, sheet metal components (mainly chassis for BAL's two-wheelers) in Aurangabad and moulded parts (for HMSI) in Bengaluru. The company's aftermarket division (domestic and export) trades in auto components such as lightings, accessories, and audio and navigation systems.

 

Lumax DK Auto Industries Limited (LDK), incorporated in 1997, is a wholly owned subsidiary of LATL and was merged with the latter in December 2018. The company manufactures auto components, including gear shifter assemblies, head and tail lamp assemblies, moulded parts, and parking brakes. The bulk of revenue comes from supply of lighting products and moulded parts to BAL, and the remaining from gear shifter assemblies and parking brakes for MSIL. Manufacturing plants are in Pantnagar and Manesar. The gear shifter business was demerged, effective April 2014, into Lumax Mannoh Allied Technologies Limited (LMAT), which is a 55:45 JV between LATL and Mannoh Industrial Co Ltd, Japan.

 

Lumax Integrated Ventures Pvt Ltd (LIVL), incorporated in fiscal 2016, is an investment company and a wholly owned subsidiary of LATL. It is the engine for LATL's non-auto business. The company has a wholly owned subsidiary, too—Lumax Energy Solutions Pvt Ltd—which deals in LED lighting products. It has also entered into a JV with SIPAL SpA (Lumax SIPAL Engineering Pvt Ltd), which deals in defence services. LIVL holds 51% equity with management control over the JV, while SIPAL SpA holds the remaining 49% equity.

 

Lumax Cornaglia Auto Technologies Pvt Ltd (LCAT) is a JV between LATL and Officine Metallurgiche G Cornaglia, SpA, Italy, through the Italian company's subsidiary, Cornaglia Metallurgical Products India Pvt Ltd. The JV commenced operations in fiscal 2008 and manufactures and supplies air-intake systems and exhaust systems to automotive manufacturers. The manufacturing facilities are in Pune.

 

Lumax Gill-Austem Auto Technologies Private Ltd (LGAT) manufactures, assembles and sell various types of seating mechanisms, seating frame structure and seat assemblies to automobile manufacturers. LGAT was formed as a 50:50 JV between Lumax Auto Technologies Ltd (LATL) and Gill-Austem group in 2013. Gill-Austem group was also an equal JV between Gill Industries Inc. (USA) and Austem Co. Ltd (Korea) that is engaged in the manufacture and sale of components such as seating mechanisms, seating assemblies and head restraints for the automotive industry. The JV Agreement was terminated in October 2020 post Gill Austem LLC filing for bankruptcy. LATL has acquired its shares in the JV. Consequent upon the acquisition, the LGAT has become wholly owned subsidiary of LATL.

 

Lumax Management Services Pvt. Ltd (LMSPL) is engaged in providing corporate support services to the DK Jain group companies. LMSPL provides services like Research and Development, SAP-ERP support, IT/ITES support, skill development and human resource support services to Lumax Auto technologies Limited (LATL) and Lumax Industries Limited (LIL).

 

Lumax FAE Technologies Private Limited was established in July 2017 by LATL and FAE to manufacture oxygen sensors for the Indian automotive industry, with LATL owning 51% and FAE 49%. The facility being set up at Manesar, Haryana, will have the capacity to manufacture 2.5 million oxygen sensors.

 

Lumax Ituran Telematics Pvt Ltd is a 50:50 JV between LATL and Ituran, Israel. It was formed in fiscal 2017 to produce telematics products.

Key Financial Indicators (Consolidated)

As on / for the period ended March 31		2020	2019
Revenue	Rs Crore	1146	1193
PAT	Rs Crore	59	69
PAT margin	%	5.2	5.8
Adjusted debt/adjusted Networth	Times	0.20	0.13
Interest coverage	Times	10.81	36.77

*CRISIL Ratings adjusted numbers

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs Cr)	Complexity level	Rating Assigned with Outlook
NA	Cash Credit*	NA	NA	NA	80	NA	CRISIL A+/Stable
NA	Vendor Bill Discounting Limits	NA	NA	NA	40	NA	CRISIL A+/Stable
NA	Non-Fund-Based Limits	NA	NA	NA	12	NA	CRISIL A+/Stable
NA	Commercial Paper	NA	NA	7-365 days	50	Simple	CRISIL A1+

*Interchangeable with working capital demand loan

Annexure – List of entities consolidated

Entity Consolidated	Extent of consolidation	Rationale for consolidation
Lumax DK Auto Industries Ltd	Full	Subsidiary
Lumax Integrated Ventures Ltd	Full	Subsidiary
Lumax Management Services Pvt Ltd	Full	Subsidiary
Lumax Mannoh Allied Technologies Ltd	Full	Business synergies, common management
Lumax Cornaglia Auto Technologies Pvt Ltd	Full	Business synergies, common management
Lumax Gill-Austem Auto Technologies Pvt Ltd	Full	Business synergies, common management