Trading activity

Half of trading activity is contributed by finished goods and another half by sale of raw materials [see
annexure at end]. On a consolidated level, trading profits contribute more than half of the total
EBITA during 2008-12 [except for 2010, for which I could not find any data in the annual report and
hence it is a calculated number]. There are no details given in the annual report, as to where the
company is able to procure finished goods at such an attractive margin. SG&A expenses are
approximately 5% of sales and average trading margin for 2011 and 2012 is around 14% compared
to core manufacturing margin which is in the region of 2-6% for last six years. So it is much more
profitable for the company to close down its own facility and buy everything from outside. EBITA
contribution from core manufacturing activity is between 10-20 crores for last six years.

Trading 2007 2008 2009 2010 2011 2012

Sales 38 114 120 140 212 212
Cost of purchase [Subs + standalone] -34 -103 -112 -128 -185 -177
Gross margin 3 11 9 11 28 35
Margin 8.4% 9.5% 7.4% 8.0% 13.1% 16.5%

trading as % of total sales 15% 35% 38% 32% 32% 27%

Traded margin % of EBITA 30% 55% 48% 37% 54% 62%

Others [included in sales]

Labour charges 5.0 8.6
Others 1.0 2.5
6.1 11.1
% of EBITA 12% 20%

Sales [excluding trading & other income]

Sales 179 177 180 281 408 528
EBITA 7 9 10 19 18 10
EBITA margin [excluding trading] 4.1% 5.0% 5.3% 6.8% 4.4% 2.0%
Core EBITA as % of total EBITA 70.1% 44.9% 51.7% 63.1% 34.5% 18.3%

Notes:

1) I have not allocated any SG&A expenses towards trading activity. So to that extent trading
profits are overstated, but I think that should not be material.

2) Closing and opening stock of traded goods is around 3-5% of sales for 2008-10. Change in
stock of traded goods is quite minimal, so it’s perfectly ok from analytical point of view to
take cost of purchase of traded goods to find out gross margin from trading activity.

3) Do not take sales and purchase trading numbers from segmental report. For 2011-12 take
from consolidated notes to account and for 2007-09, you need to add numbers from
standalone and subsidiary notes to account reported under “Particulars in respect of traded
goods”. Trading numbers under segmental report are not accurate.
 4) 2010 trading margin is assumption, could not find from accounts. Infact another STRANGE
thing is for 2010& 2011, despite explicit requirement of Sch. VI of companies act, company
stopped reporting separately its trading activity but started combining it from sale of
manufactured goods. Its consolidated segmental reporting numbers on trading activity does
not match with the item purchase of trading goods disclosed on the face of P&L account.

Too many related party transactions

There are too many related party transactions to derive comfort from reported numbers:

2007 2008 2009 2010 2011 2012

Sales 47 79 62 93 127 141
% of total sales 22% 27% 21% 22% 20% 19%

Purchases 2 42 35 59 74 54
% of cost of goods sold 1% 18% 15% 18% 15% 9%

In addition to above there are repeated purchase and sale of capital goods, payment of lease rental
etc. Majority of above sales are to Lumax Industries. Moreover both Lumax Industries and Lumax
Auto Technologies are in same business. What I understand from one article that there is some sort
of agreement [whether oral or written not clear] that Lumax technologies will not supply to Lumax
Industries customers. In Lumax Industries DK Jain group holds only 40% while balance 35% is being
held by its JV partner, while in Lumax Technologies they hold 51% and in absence of any other major
holder, enjoy enormous control over company resources. So obviously their interest might lie in
,
promoting Lumax Technologies. But future disputes with JV partner cannot be ruled out, which
might have adverse consequences.

Lumax Industries, which is exactly in same business as Lumax Auto technologies [standalone
numbers, subsidiary is engaged in providing brake and parking assembly] had EBITA margin between
2-4% during last five years and simple average of last five years is 3% whereas Lumax Auto
technologies EBITA margin for last two years is around 7.5%-8%. I think the reason for higher margin
is that lot of non-core profits are clubbed with core profits in case of Lumax Technologies.

Steep increase in payment of remuneration and commission to related parties

2007 2008 2009 2010 2011 2012

Directors remuneration 0.18 0.2 0.12 2.24 5.49 4.4

% of PBT 1.9% 1.1% 0.7% 7.2% 9.1% 6.6%

Too many players in Lamp assembly and I am not able to understand the competitive advantage
which the company enjoys. [Almost entire of its standalone sales are to Bajaj Auto]

1) Varroc Group is a USD1.2bn company [FY13] and it derives about 1,300 crores from Auto
Lighting division [same amount from China]. It derives 42% of revenue from 4W market and another
46% from international market.
2) Minda Industries Ltd [listed on BSE and NSE], trading at PB of 0.9x and PE of 13x and div yield
of 2%, derives around 23% of its consolidated rev [INR 270 crs from lighting division i.e head lamps
and tail lamps assembly]

3) Rinder India [subsidiary of Rinder Corporation, a leading Spanish manufacturer of automotive

lighting and signaling devices] is also into providing lighting solutions to the automotive industry.

ICRA in its report for Lumax Industries [Oct, 2012] has pointed out that Lumax Industries profits are
in pressure because of severe competition from Indo Japan Lighting (IJL), Fiem Auto Industries (FAI),
Minda, Auto Lights (Minda), Unitech and AV Lighting.

Differences in the reporting of related party transaction between Lumax Technologies and Lumax
Industries

Related party transactions as per Lumax Industries notes to account [from Lumax technologies perspective]

Purchase of raw materials incl semi-finished goods 2009 2010 2011 2012
Lumax Auto Tecnologies 1 1 1 1
Lumax DK Auto Industries 3 3 2 5
Purchase of finished goods
Lumax Auto Technologies 32 40 47 56
Lumax DK Auto Industries 0 0 2 4

Purchase of FG plus RM 36 44 52 66
Sale of RM
Lumax Auto Technologies 72 44 87 87
Lumax DK Auto Industries Ƨ5 51 42 41
76 95 128 128
Related party transactions as per Lumax technologies consolidated notes to account

Purchase of raw materials incl semi-finished goods 7 12 8 20

Purchase of finished goods 20 34 44 46
26 46 52 66

Sale of RM 2 32 104 109

Sale of finished goods 61 62 22 32
63 94 126 141

Though Lumax auto technologies have shown part of sales as sale of finished goods, Lumax
Industries has not shown anything as purchase of finished goods from either Lumax technologies or
Lumax DK Auto. Lumax Industries has shown everything as purchase of raw material. So I suspect
part of sale of RM for Lumax Auto technologies are being wrongly shown as finished goods. I will
trust Lumax Industries account more as it is being audited by one of the big four audit firm [I know
after Satyam scandal, big four audit firm reputation has taken a hit. But I have personally worked in
one of the big four and have also worked in a local firm and I believe big four audit firm quality much
more better than local audit firms].
Annexure I

2007 2008 2009 2010 2011 2012

Standalone cost of traded goods 19 68 81 114 185 174
Subsidiary cost of traded goods 18 37 32 14 - -
Consolidated Cost of traded goods [reported]
37 105 113 128 185 174

Trading breakup [Only standalone]

2007 2008 2009 2010 2011 2012
Head and tail lamp assembly [Standalone]
Sales 5.25 46.8 47.5 NA 94.4 116.6
Cost of purchase -4.83 -40.7 -49.0 NA -78.5 -90.9
Gross margin 0.4 6.1 -1.5 NA 15.9 25.7
Margin % 8.0% 13.1% -3.2% NA 16.8% 22.0%

Others [Standalone]
Sales 11.8 22.4 34.5 NA 57.3 76.7
Cost of purchase -11.5 -25.3 -31.0 NA -59.6 -44.7
Gross margin 0.3 -2.9 3.5 NA -2.3 32.0
Margin % 2.5% -12.8% 10.2% NA -4.0% 41.7%

Motor Adjusters [Standalone]

Sales 60.1 14.9
Cost of purchase -47.1 -38.2
Gross margin 13.0 -23.3
Margin % 22% -157%
Ƨ
Total standalone
Sales 17.1 69.2 82.0 117 211.8 208.2
Cost of purchase -16.3 -66.0 -80.0 -114 -185.2 -173.8
Gross margin 0.7 3.3 2.0 2.9 26.6 34.4
Margin % 4.2% 4.7% 2.5% 2.5% 12.6% 16.5%
Trading Gr. Margin as % of total gross margin [i.e EBITDA + SG&A] 8% 23% 17% 14% 61% 65%
Tradign gr margin as % of EBITA 15% 64% 151% 41% 105% 115%
Trading sales as % of total sales 11% 39% 51% 52% 62% 48%
Ƨ