Lumax Industries Quarterly Update (Q2FY21)

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Lumax Industries declared results for the second quarter of FY21 — that is, for the three months ending September 2020. The results, though sequentially better, have not fully recovered compared to the same quarter last year.

You can read the results here. Before we proceed, please 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.

Let’s begin with looking at the

INCOME STATEMENT

1. Revenues

On a year on year basis, Lumax’s total income reduced 7 per cent from Rs 430 crores to Rs 401 crores (see screenshot below — the numbers are in lakhs).

While this is better than the previous quarter (Q1FY21) when the total income had reduced by a staggering 80 per cent to merely Rs 81 crores owing to lockdown and supply issues, this sequential improvement was expected as the economy resumed post the unlock.

It may also help to note that the management had mentioned in its conference call in August this year that it does not expect peak sales to recover before FY2023 (see screenshot below).

This was on the revenue side.

2. Expenses

Lumax’s raw material expenses have gone up by 2.6 per cent from Rs 228 crore to Rs 234 crore. Its finance costs have also gone up by approx 66 per cent (see screenshot below).

As we will see in the cash flow statement, this increase in finance costs primarily seems to be an increase in the working capital requirements during the half year.

In response to a question on its increasing finance costs in the previous quarter as well, the management had this to say during the August concall:

That said, Lumax’s “employee benefits expenses” (which mainly comprise salaries) as well as “other expenses” (which normally include travel, advertising, marketing, auditing, stationery, and so forth) have also reduced between 6 to 8 per cent (see screenshot below).

3. Profit

Lower total income combined with higher raw material expenses and finance costs led to a reduction in net profit by 65 per cent, from Rs 20 crores in Q2FY2020 to Rs 7 crore in Q2FY21. The pressure on profit had been partly offset by better cost optimisation measures, mainly in employee and other expenses.

BALANCE SHEET

There are two takeaways from Lumax’s balance sheet as of Sept end 2020.

One, the company is still facing pressure on the working capital front.

This is evident from the increase in (1) inventories from Rs 179 crore in March 2020 to Rs 184 crores in September, and (2) trade receivables from Rs 173 crores in March to Rs 187 crores in September. Both inventories and receivables block cash that could otherwise have been reinvested or distributed as dividends (see screenshot below).

Two, the higher working capital requirements have partly resulted in depletion of cash by about Rs 5 crore and bank balance by nearly Rs 30 crores.

In addition, the company has been paying its dues to suppliers. This is evident from a decrease in payables from Rs 315 crores to Rs 285 crores. This also implies a depletion in cash reserves.

Let’s look at the cash flow statement to understand this better.

CASH FLOW STATEMENT ANALYSIS

As the screenshot below shows, an increase in the company’s trade receivables is subtracted from the cash flow statement as it implies an “outflow” of cash — we recorded sale transaction but the cash is still “receivable” from the customer.

An increase in inventories also implies an outflow of cash — the unsold goods block cash that could otherwise have been used elsewhere.

Similarly, a decrease in trade payables, which means the company paid cash to the suppliers, reduces cash. It is therefore subtracted from the cash reserves.

These transactions reduced the cash flow from operations (CFO) for Lumax. In fact, the company recorded a negative CFO of Rs -24 crore for the first half of the year.

Furthermore, the company also incurred a capital expenditure (also called capex) of Rs 29 crore in quarter ending Sept 2020, shown as a negative figure since it implies an outflow of cash. See the screenshot below.

So a negative Rs -24 crore CFO and negative Rs -29 crore capital expenditure totals Rs -53 crore “outflow” of cash.

How did the company fund these outflows?

For one, through utilising the maturity proceeds from bank deposits of Rs 30 crore plus and interest received of Rs 1.17 crore. (See screenshot above).

The company also took a bank loan of Rs 26.64 crore and cash credit facility of Rs 46.98 crore during the period. A positive figure shows an inflow of cash.

So,

-53 crore outflow from capex and working capital (mainly higher inventories, higher receivables and lower payables)

+ 30 crore inflow of bank deposits

+ 1.17 interest received (likely from investments)

+ 26.64 crore inflow from bank loan

+ 46.98 crore inflow from cash credit facility

= an inflow of Rs 51.79 crores.

Out of Rs 51.79 crores, the company also repaid an older loan principal of Rs 37 crore and interest of Rs 14.53 crore, as evident below.

These repayments of earlier loans reduced our earlier inflow of Rs 51.79 crores into merely Rs 26 lakhs.

But the company also had existing cash reserves as of the beginning of the year of Rs 7.95 crores.

So what did the company do? It paid dividends of Rs 5.58 crores.

This begs the question: Instead of paying dividends out of existing cash reserves, shouldn’t the company have simply used those reserves to fund its working capital instead of borrowing from the banks?

IS THE COMPANY BORROWING TO PAY DIVIDENDS?


The question is, why did the company choose to pay dividends at a time when it is struggling to maintain sales, expenses, profits, and working capital requirements? Remember, the promoters own 75 per cent stake.

Instead of paying dividends, it could have simply borrowed Rs 5.58 crore less from banks! Why pay dividends when you can avoid paying interest on bank loans? That’s not a good sign.

Finally, note this:

Paying remuneration to the management “in excess” of the threshold prescribed under the said regulation? This regulatory threshold, if I’m not mistaken, is 10% of profits. So the remuneration being paid is in excess of this — at a time when the company is not yet out of the woods?

Just some questions to ask the management!

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.



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Harsh Vora
Harsh Vora is a proprietary investor & day trader with more than 10 years of experience in financial markets. He is a finance graduate from the Marriott School of Management, BYU and a public policy graduate from The Takshashila Institution, Bangalore, where he won the best academic performance award. Occasionally, he teaches economics to its students.
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