A Deep Dive Into Lumax Industries
Updated: Sep 19, 2020
Note: This article is only for informational/educational purposes and in no way meant to be a stock recommendation or financial advice. Please conduct your own analysis or consult a SEBI registered investment advisor before you undertake any investment action.
The auto sector has been seeing encouraging recovery since July, with major auto makers reporting an improvement in year on year sales degrowth numbers.
For instance, the auto sales plummeted 42 per cent in June 2020 compared to the same month last year – remember, when analyzing financial numbers, it is customary to compare year-on-year figures since businesses face seasonality.
This disparity was reduced in July 2020, when the auto sales registered a decline of 36% compared to July 2019.
In August, the sales de-grew by 26.81 per cent. In fact, the passenger vehicles sales in August 2020 were lower by only 7 per cent compared to August 2019, indicating the recovery may be in pace.
To be sure, some of this could simply be pent up demand as car dealers stock up diminished inventories and consumers proceed with pending bookings. Also, we must consider the low base of last year – the passenger car segment had degrown by 32 per cent in August 2019 over August 2018, while the two-wheeler segment in August 2019 had degrown by 22 per cent over August 2018.
To evaluate whether this auto sector recovery is sustainable going forward, it may help to look at supportive, leading macro indicators that signal a rebound in the economy to pre-Covid levels.
For instance, data reviewed by CNBC TV18 recently showed that daily toll collection via FastTag has reached 98 per cent of pre-Covid levels. This includes toll collection at national highways, highways under state governments, and the transport ministry.
Furthermore, there’s an interesting phenomenon: The share of passenger vehicles in FastTag toll collection has increased to 41 per cent on September 4 compared to 38 per cent in the pre-lockdown phase. The share of commercial vehicles has declined to 59 per cent from 62 per cent earlier.
Keep this data point in mind for the specific small-cap company we will be discussing below. This company has a higher share of revenues from passenger vehicles.
CRISIL Research analysed toll data for over 600 national highway toll plazas and found that the vehicular traffic in June-July reached 80 per cent of pre-Covid levels.
This can also be corroborated through data on e-way bill generation in July, which as per an ICICI’s research report reached 88 per cent of pre-Covid levels of 5.5 crore bills. E-way bills generation is a prominent indicator of economic activity as it suggests a momentum in the movement of goods – these bills are required for transportation of goods with a value greater than Rs 50,000.
Furthermore, as per the report, daily vehicle registrations were at 72 per cent of pre-Covid levels during the week ending August 20. All this is to say that the factors supporting auto sector recovery, at least in shorter term, could be in place.
For this recovery to be sustainable in the long run, however, several factors need to be in sorted out, starting first with taxes.
For instance, the GST rate on automobiles is at 28 per cent, in line with luxury goods. The auto sector has long demanded a 10 per cent reduction in GST. Remember, the government had reduced the GST on electric vehicles (EVs) from previous 12 per cent to 5 per cent earlier, and this led to a rise in EV sales by over 20 per cent – from 1.3 lakh to 1.56 lakh units – in FY20 compared to FY19.
Other factors such as passing the benefit of lower crude prices to consumers or finalizing the long pending vehicle scrappage policy (which mandates scrapping vehicles older than 15 or 20 years) could boost new vehicle sales.
These policy measures are triggers that could lead to a major rerating in auto OEMs (original equipment manufacturers) and auto ancillary stocks.