Investor’s Eye

December 28, 2018

Index
Sharekhan Special - IDFC Bank - Capital First
Viewpoint - Lumax Auto Technologies

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 Sharekhan Special
IDFC Bank - Capital First
Merger complete; Retain Neutral view
Key points
ŠŠ Merger of IDFC Bank and Capital First
complete; To create a new entity: The merger
of IDFC Bank (IDFCBK) and Capital First (CAPF)
has been completed, with December 31, 2018,
being the record date. Consequently, holdings in
CAPF stock shall get converted into appropriate
number of shares in IDFCBK. The new combined
entity will be called IDFC First Bank and equity
shares of IDFCBK will be issued to the existing
shareholders of CAPF, which shall rank pari
passu with the existing shares of IDFCBK. With
the delisting of CAPF, we drop our coverage on it.
The share swap ratio will be of 139 shares of
IDFCBK to 10 shares held in CAPF. The deal
values CAPF at 2.1x its FY2018A book value,
while it values IDFCBK at 0.88x its FY2018A
book value. The combined entity will be at ~1x
its book value (arrived on a pro forma basis
from FY2018 reported balance sheet figures).
The merger will be creating a combined loan
asset book of Rs. 1.03 lakh crore for the merged
entity – IDFC First Bank – with net worth of
Rs. 44,056 crore. The board of IDFCBK has
approved the appointment of V Vaidyanathan,
Founder and Chairman, CAPF, as Managing
Director and Chief Executive Officer of the
merged entity.
ŠŠ Outlook: We believe despite near-term
uncertainties on the business amalgamation,
there can be significant strategic long-term
positives for the entity. CAPF has been successful
in developing and growing its business and loan
book at a healthy pace, along with keeping good
control on the asset quality. Thus, management
has demonstrated its capability and quality;
and now helming a bank potentially can be a
strong win-win for both the entities in the long
term.
Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.
December 28, 2018 2
ŠŠ Valuation: Considering the share swap, we
believe the merged entity is valued at ~1x its
FY2018 (proforma) book value, which we opine
is reasonable. Though the merger creates a
stronger entity and is strategically positive for
the long term, we see limited upside in the near
term. Hence, we have a Neutral view on the new
combined entity.
ŠŠ Merger mutually beneficial for the long term:
We believe while for the near term, there may
be challenges, the merger will be positive in the
long term for the combined entities.
IDFCBK will be better off by gaining on the
expertise of CAPF management and will
look to develop further lending products for
the retail segment. The bank will be able to
achieve a higher retail book acquisition. Recent
challenges before the NBFC segment in terms
of ALM management and their cost of funding
for CAPF will be addressed to a large extent by
the merger with a bank. CAPF currently has a
funding profile, primarily funded by term loans
and cash credit (43.3% of total borrowings) and
NCDs (41.8% of total borrowings), the rest being
funded via commercial papers (CPs). With the
merger, CAPF will have access to cheaper bank
funds, which will not only help it see reduced
cost of funds, but also be complimentary for
IDFC First Bank (IDFCF) to grow its retail base
by cross-selling benefits. IDFCBK, despite
its efforts, has been able to reach at 13.3% of
CASA ratio since its relatively short period
of existence. The bank’s funded book is also
largely wholesale heavy, with infrastructure
(29% of the total funded book) and corporate
(39% of the total funded book) and retail only
15% of the book.
 Viewpoint
On growth highway

Key points
Lumax Auto Technologies
ŠŠ LAT to capitalise on consumer shift towards
View: Positive | CMP: Rs185 premium products, upcoming regulatory
changes to open new avenues: Lumax Auto
Technologies (LAT) is well positioned to
Company details outpace the automotive industry’s growth. The
Market cap: Rs1,261 cr automotive industry is fast moving towards LED
lighting, which will substantially benefit LAT (as
52-week high/low: Rs224/127 it supplies circuit boards to Lumax Industries).
NSE volume: (No of shares) 0.72 lakh Share of LED currently stands at 25-30% and is
expected to reach about 50% levels in the next
BSE code: 532796 two years. Further, given increased congestion
and driver fatigue, the passenger vehicle (PV)
NSE code: LUMAXTECH
industry is increasingly moving towards AMT
Sharekhan code: LUMAXTECH transmission from manual transmission, which
will benefit LAT. AMT penetration currently
Free float: (No of shares) 3.02 cr
is in early double digits and is witnessing
exponential growth, with AMT having almost
thrice the realisation compared to manual
Shareholding pattern
transmission. Further, upcoming BS6 regulations
Institutions (would come in force from April 2020) provide
2% Corporate Bodies a huge opportunity for LAT. The company will
9% supply oxygen sensors for the two-wheeler
(2W) segment as fuel injection would become
Foreign mandatory post BS6 norms. Further, LAT will
Promoters
17% supply telematics for CV players once the
52%
regulation comes into effect. In addition, order
wins in the air filter segment and new product
introduction in the aftermarket space would
Public and Others boost revenue. We expect LAT to post 15%
20% topline growth in FY2020.
ŠŠ Operating leverage; Better product mix to
drive margin expansion; Expect 140 BPS
Price chart improvement during FY2018-FY2020; Return
220
ratios to improve substantially: Revenue of LAT
is expected to clock strong double-digit growth
200
over the next two years, attributable to a host of
180 new opportunities opening up. The standalone
business also is on a strong footing and is
160
likely to add meaningfully to topline growth.
140 Strong revenue growth would bring in operating
120
leverage. Secondly, the likely improvement
in product mix augurs well for LAT’s margins.
100
Accelerated growth in the lucrative aftermarket
Aug-18
Dec-17

Apr-18

Dec-18

segment and improving traction from the new

business (air filters, gear shifters, oxygen sensors
and seat frames), which attract a double-digit
Price performance
margin, are expected to boost OPM’s over the
next two years. We have factored in a 140 BPS
(%) 1m 3m 6m 12m margin expansion over FY2018-FY2020 and
expect OPM to reach 10.5% by FY2020. Given
Absolute -2.8 5.9 43.0 11.0
the margin expansion, improved operational
Relative to Sensex -3.6 7.2 39.8 3.8 efficiency and reduction in debt, we expect
LAT’s ROE to improve significantly from 11.8% in
FY2018 to about 16% levels in FY2020.
December 28, 2018 3
Sharekhan Viewpoint

ŠŠ Valuations: Initiate coverage with a Positive
view: LAT is one of the leading auto component
manufacturers focused on domestic markets.
The company is likely to benefit in a big way from
the upcoming regulatory changes and shifting
consumer preferences. The company has a
well-diversified product portfolio and enjoys
established relations with most of the leading
auto OEMs spread across the 2W, 3W, PV and CV
segments. Technical tie-ups with leading global
component players fasten the access to latest
technologies so as to fully capitalise on existing
as well emerging opportunities. Strong topline
growth (20% CAGR over FY2018-FY2020) and
operating performance would be reflected in
the bottom line as well with PAT likely to report
a robust 34% CAGR, making it one of the fastest
growing auto component companies. We initiate
viewpoint coverage on the stock and expect 18-
20% upside over the next 8 to 10 months.

Valuation (Consolidated) Rs cr
Particulars FY16 FY17 FY18 FY19E FY20E
Revenues (Rs cr) 905.2 965.4 1111.5 1382.6 1590.0
Growth (%) 8.1 6.7 15.1 24.4 15.0
EBIDTA (Rs cr) 68.4 73.1 101.6 137.3 166.9
OPM (%) 7.6 7.6 9.1 9.9 10.5
Net Profit (Rs cr) 31.8 40.9 53.3 79.8 95.3
Growth (%) 8.7 28.6 30.4 49.8 19.4
EPS 4.7 6.0 7.8 11.7 14.0
P/E (x) 39.6 30.8 23.6 15.8 13.2
P/BV (x) 4.5 3.4 2.8 2.4 2.1
EV/EBIDTA (x) 18.8 17.0 11.9 8.7 7.0
ROE (%) 11.3 11.0 11.8 15.4 15.9
ROCE (%) 16.5 13.6 17.7 21.6 22.9

Company background: is present in the 2W and 3W segments (50% of

Lumax Auto Technologies (LAT) is part of Lumax
– D K Jain Group. The company is a leading auto
component manufacturer with a well-diversified
product portfolio. Some of the products include
intake stems, integrated plastic modules, 2W chassis
and lighting, gear shifters, seat structures and
mechanisms, LED lighting, aerospace and defence
engineering services, aftermarket, electrical and
electronics components, telematics products and
services, and oxygen sensors. LAT supplies to most
of the leading automobile OEMs in the country and
1HFY2019 sales), passenger cars (29% of 1HYF2019
sales) and aftermarkets (13% of 1HFY2019 sales).
The company has 14 manufacturing plants at five
different locations across the country catering
to the exports and aftermarkets segments. The
company is amongst the few integrated players in
India, possessing the combination of robust R&D
capabilities, technological competence and ability
to design and manufacture products. LAT is the only
company in the country having the competencies to
manufacture and supply gearlever for electric cars.

Segment revenue mix – 1HFY2019 (% of sales) Product wise revenue mix - 1HFY2019 (% of sales)

Aftermarkets
Lighting
Others 13%
24%
8%
Moulded parts
Aftermarkets 16% other misc
13% 8%
SMT Chasis & frames
Passenger 2/3 W 10%
16%
Car 50%
Intake systems Gear Shifters & parking
29%
3% brakes
10%

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

December 28, 2018 4

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