Lux Industries Ltd is well-poised for growth on the back of increasing share of premium products. Buy for target price of Rs 1802: SMIFS

Lux Industries Ltd.
Brands like Lux Cozi, Lyra & ONN are doing well

Lux Industries Ltd. (LUX), reported weak performance in Q2FY23 in a challenging business environment of volatile raw material prices. Revenues in Q2FY23 increased by ~1.4% YoY, however volumes declined by ~8% YoY (volumes in H1FY23 grew by ~3% YoY). Growth in volumes in H1FY23 was driven by brands like Lux Cozi, Lyra & ONN. Gross margins were impacted due to consumption of high cost raw materials as the company was not able to pass on the incease to its customers. Company witnessed healthy traction for its men’s premium brand “ONN” (contributed ~6% of sales in H1FY23) up ~48% YoY & women’s brand “Lyra” (contributed ~16% of sales in H1FY23) grew by ~46% YoY. Management believes that prices of both cotton and yarn seems to have stabalised which should help to improve sentiments of the distribution channel going forward. We expect performance of the company to improve on a QoQ basis due to some stability in cotton yarn prices. The board of directors have approved appointment of Mr Udai Kumar Agarwal as Chief Operating Officer of the company w.e.f Nov 14th, 2022. We remain positive on Lux’s long-term growth prospects for its strong brand equity and long-standing operations in the innerwear industry. We maintain our “Accumulate” rating on the stock with a price target of Rs 1,802 per share.

H1FY23-Key Earnings Highlights

▪ In H1FY23, the company reported a ~15.3% YoY increase in sales led by a volume growth of ~3% YoY. Company sold 141.5 mn pieces of garments of which ~67% pieces were sold between brands Lux Cozi and Venus.

▪ Gross margin for H1FY23 declined by ~635 bps YoY to ~31.8% on account of volatile & increase in raw material cost which is mainly cotton yarn.

▪ In H1FY23 EBITDA declined by ~37.9% YoY to ~Rs 1,395 mn. EBITDA margin for H1FY23 declined by ~992 bps YoY to ~11.6%, mainly led by decline in gross margins and increase in advertisement expenditure which increased by ~43% YoY at ~Rs 970 mn.

▪ PAT for H1FY23 declined by ~43.7% YoY to ~Rs 927 mn. PAT Margin was at ~7.7% vs ~15.8% YoY.

Continued focus on advertisement & marketing

In H1FY23 company spent ~Rs 970 mn on advertisement which is ~8.1% vs ~6.6% YoY of sales. As a part of marketing initiatives, company has roped in Sourav Ganguly as the brand ambassador for Lux Cozi. Lux Venus has been re-branded and re-launched with Salman Khan being onboarded as the brand ambassador. After gaing strong response from the dedicated television advertisement of lingerie product range under brand Lyra, the company launched targeted ads for its women wear and winter wear products category. Management believes that these marketing initiatives should help the company in gaining further traction in the market.

Outlook and Valuation:

▪ We believe, company is well-poised for growth on the back of increasing share of premium products (mainly Lyra and ONN), new product launches and growing retail & online presence.

▪ We have valued the stock at 15xSep’24e EPS of Rs 120.1 (rolled over from March’24), to arrive at a target price of Rs 1802 and maintain our “Accumulate” rating on the stock.