Sharekhan Bullish On This Multibagger Small Cap Auto Ancillary Stock, Buy For Robust 38% Gains

Sharekhan has assigned a buy call on Lumax Auto Technologies Limited (Lumax Auto) stock for a target price of Rs 356 per share for a potential upside of up to 38% upside from its current level. Lumax Auto is a small-cap auto ancillary sector company with a market cap of Rs 1,765.63 crore. The company reported Q2FY2023 results above expectations, led by higher-than-expected revenue growth, partially offset by a slightly lower EBITDA margin than expected.

Stock Outlook & Returns

Wednesday, 23 November, the Lumax Auto stock last traded at Rs 258.20 per share on NSE, 1.57% above the previous close. It touched its 52 week high on 15 September 2022 at Rs 311.35, and 52 week low on 22 November 2021 at Rs 136.25, respectively. 

The shares surged 3.86% in 1 week. In the past 1 month, it fell by 1.38% and in 3 months it surged by 4.24%. Over the past 1 year, the shares surged, giving 84.56% positive returns. The stock has delivered good returns on long-term investments. It has given 155.64% multibagger returns in the past 3 years, and 105.18% positive returns in the past 5 years. 

Q2FY2023 results

Lumax Auto Technologies Limited's (Lumax Auto's) Q2FY2023 results were above expectations, led by higher-than-expected revenue growth, partially offset by slightly lower EBITDA margin than expected. Revenue, EBITDA, and PAT exceeded expectations by 6.9%, 4.4%, and 16.2%, respectively. We continue to maintain our positive view on Lumax Auto on account of improving demand scenario for two-wheelers (2Ws), and three-wheelers (3Ws) and continued growth improvement in passenger vehicles (PVs) and commercial vehicle (CV) segments.

The company is one of the top suppliers for most original equipment manufacturers (OEMs) and commands a dominant market share per product per OEM. Led by strong relationships with OEMs, the company benefitted from new model launches of Maruti's Brezza, M&M's new Scorpio, Toyota's Hyryder, PSA's Citrogen C3, and Volkwagen's Virtus. Management continues to maintain its revenue guidance of 20-30% in FY2023E and expects its EBITDA margin to normalise at ~13% over the next couple of years.

Key positives & negative

Key Positives - Consolidated revenue continued to grow strongly by 20.9% y-o-y in Q2FY2023, led by robust performance of subsidiaries as well as the standalone business. The company benefitted from new model launches of Maruti's Brezza, M&M's new Scorpio, Toyota's Hyryder, PSA's Citrogen C3, and Volkwagen's Virtus.

Key negative - EBITDA margin for Q2FY2023 was 20bps lower than expectations at 10.7%.

Management Commentary

Management remains optimistic and expects revenue to grow by 20-30% in FY2023E, led by a robust order book, new launches, and continued growth momentum in the existing product portfolio. The company's order book stands at ~Rs. 700 crore, which will be booked in P&L over the next 3-4 years. Out of the total order book, ~Rs. 560 crore (80%) consists of new orders, while the balance Rs. 140 crore (20%) is replacement business.  Management expects EBITDA margin to improve and targets 13% EBITDA margin in 1-2 years on a sustainable basis.

Valuation & Risks- Maintain Buy with an unchanged PT of Rs. 356

Lumax Auto is expected to benefit from strong underline demand from its clients in the 2W, PV, and CV space, driven by an expected recovery in the automotive segment and expansion of the product portfolio. Management has guided for a positive outlook, expecting 20-30% growth in FY2023E, driven by recovery in the automotive industry, widening of the product portfolio, and increasing wallet share from existing clients. Operating profit margin (OPM) is expected to remain firm, led by operating leverage and cost-control measures. The company expects EBITDA margin profile to improve gradually to 12-13% over the next 3-5 years. The stock is trading below its historical average at a P/E multiple of 10.4x and EV/EBITDA multiples of 6.4x its FY2024E estimates. We retain Buy on the stock with an unchanged PT of Rs. 356.

According to the brokerage the key risks to the buy call would be a slowdown in the economy and increased raw-material prices can put pressure on growth and margins and lead to a decline in our projections.

Disclaimer

The stock has been picked from the brokerage report of Sharekhan. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.