Focusing On ADAS And Alternative Fuels Will Drive Future Potential

Key Takeaways

• Strategic joint ventures and new product categories aim to drive revenue growth through increased vehicle content and innovative offerings.
  
• Expansion into electric and alternative fuel markets, supported by a strong order book, positions Lumax for significant future growth and enhanced profit margins.
  
• The company's growth is threatened by reduced expenditure, segment-specific challenges, and risks from reliance on Mahindra's model launches.

Catalysts

Manufactures and sells in automotive components in India.

• Lumax Auto Technologies is focusing on increasing content per vehicle, introducing new product categories, and expanding offerings through joint ventures, which are expected to drive top-line growth, potentially increasing future revenue.
  
• The company aims to leverage its position as a trusted partner for OEMs and enhance R&D capabilities, focusing on cutting-edge technologies like ADAS and software, which could lead to higher-margin products and improved net margins.
  
• The company has a robust order book of ₹1,050 crores with new business accounting for 90%, suggesting strong future revenue growth, especially with 40% of this order book linked to electric vehicle markets.
  
• The growth in the mechatronics domain and the ambition to double revenues in this sector by tapping opportunities in new model launches indicates potential revenue and earnings increase.
  
• Lumax’s acquisition strategy, as demonstrated with GreenFuel Solutions, shows a focus on higher-margin, emerging markets like alternative fuels (CNG, LNG, hydrogen), which can significantly impact future earnings and profit margins.

Lumax Auto Technologies Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Lumax Auto Technologies's revenue will grow by 14.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.0% today to 6.0% in 3 years time.
• Analysts expect earnings to reach ₹2.8 billion (and earnings per share of ₹36.65) by about February 2028, up from ₹1.6 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹2.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.3x on those 2028 earnings, down from 24.6x today. This future PE is lower than the current PE for the IN Auto Components industry at 29.7x.
• Analysts expect the number of shares outstanding to grow by 0.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.1%, as per the Simply Wall St company report.

Lumax Auto Technologies Future Earnings Per Share Growth

Risks

• The slowdown in capital expenditure due to general elections and consumer sentiment affected by environmental factors like heat waves and heavy rainfall could negatively impact revenue growth.
  
• A low single-digit growth expectation for the passenger vehicle segment could limit revenue potential and affect overall earnings if the segment does not outperform expectations.
  
• Subdued performance in the commercial vehicle segment due to delayed government spending and infrastructure projects could impact revenue from this segment.
  
• The flat growth in the aftermarket segment indicates a risk to the overall revenue and profitability if the anticipated recovery does not materialize.
  
• Dependency on Mahindra for a significant portion of the IAC India division's revenues carries risk if Mahindra's anticipated new model launches underperform or are delayed, potentially impacting earnings and margins.

Valuation

• The analysts have a consensus price target of ₹672.75 for Lumax Auto Technologies based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹767.0, and the most bearish reporting a price target of just ₹483.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹46.7 billion, earnings will come to ₹2.8 billion, and it would be trading on a PE ratio of 24.3x, assuming you use a discount rate of 14.1%.
  
• Given the current share price of ₹561.15, the analyst price target of ₹672.75 is 16.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.