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  • Stock Recommendation | FIEM INDUSTRIES LTD – BUY – Target Price : 800

    Publish date: FEBRUARY 13, 2019

    FIEM’s 3QFY19 results came in ahead of our expectation. Revenue growth remained strong despite slowdown in two wheeler production. EBITDA margin though lower YoY, was highest since 3QFY18.

    FIEM reported strong 16.5% YoY increase in revenues in a relatively weak two demand environment. Apart from volume growth, factors such as increasing business with some clients and LED adoption contributed to growth for the company. On a YoY basis EBITDA margin remained low, but the same witnessed improvement QoQ, supported by decline in raw material cost pressure. Net profit at Rs126mn remained unchanged YoY and was down 14% QoQ on account of lower revenues.


    Two wheeler demand in the past few months have seen significant slowdown. From 3QFY19 levels, we expect demand to improve gradually going ahead. For FIEM, additional revenue growth is expected to come from shift of halogen lamps to LED lamps. In 9MFY19, rising raw material cost had an impact on company’s EBITDA margin. Recent softness in input cost augurs well for the company’s margin in the coming quarters. We retain BUY with revised price target of Rs800 (earlier Rs902).




    FIEM reported strong revenue growth in an otherwise weak two wheeler demand environment. On a YoY basis, FIEM reported 16.5% increase in its revenues. During the same period production growth for FIEM’s two wheeler customers grew by 6% YoY (total two wheeler production was up by 10% YoY). FIEM’s outperformance to customer’s volume growth can be attributed to increasing business share with customers (like Yamaha India, TVS Motors) and transition to LED lamps (costs 2x-3x of halogen lamps). In comparison to 2QFY19, revenue decline can be ascribed to fall in two wheeler production. FIEM derives more than 90% of its revenues by supplying products to the domestic two wheeler OEM’s. Automotive lamp accounts for ~65% of the company’s auto segment revenues. LED luminaries’ (non-auto) segment saw improved revenue in the quarter (Rs103mn in 3QFY19 vs Rs28mn in 3QFY18).

    Raw material cost for the company has been rising for majority part of FY19 and that has led to lower gross margins as pass through with customers happens with a lag. As a result, gross margins declined for three consecutive quarters before witnessing some recovery in 3QFY19. Softening in input cost and pass through of earlier rise in raw material cost led to part improvement in gross margin on a QoQ basis. On a YoY basis, gross margins remained weak as entire pass through of raw material rise is yet to happen. Led by lower gross margins, EBITDA margin contracted YoY for FIEM. EBITDA grew by 3% YoY. Led by muted growth in operating profits, PAT at Rs126mn, remained unchanged. Over 2QFY19, lower net profit is on account of decline in revenues.


    FIEM’s revenues in 9MFY19 is up by 20% YoY as against 11% two wheeler production growth (9% production growth by FIEM’s customers). Industry growth outperformance for the company has come from increased business share with its customers (Yamaha and TVS Motors) and transition from Halogen lamps to LED lamps. The price differential between LED and Halogen lamps is 2x-3x. Two wheeler industry is gradually transitioning from halogen lamps to LED lamps and this trend is expected to continue in the future. Many of FIEM’s under development projects are LED based and these are expected to feature on future launches by OEM’s. We thereby expect healthy revenue growth for the company going ahead.

    FIEM’s EBITDA margin performance remained weak and below expectation, primarily led by continuous rise in raw material prices. Given that the price negotiations with customers happens with a lag, the company had to absorb the rise in the past few quarters. However, there has been correction in raw material prices for the company and we expect the positive impact of that to flow in coming quarters.

    Due to overall slowdown in two wheeler demand, we have revised our FY19-FY20 earnings estimates lower by 3-6%. We retain BUY on the stock with revised price target of Rs800 (earlier Rs902). We value the stock at a PE of 16x (earlier 17x) on FY20E earnings.




    High dependence on few clients - FIEM’s revenue dependence is high on Honda Motorcycle and Scooters India (HMSI) and TVS Motors (TVSM). Slowdown in sales for HMSI and TVSM can have significant impact on FIEM’s financial performance.

    Increase in input cost – In the event of rising input cost, company’s earnings gets impacted. While the company has raw material cost pass through with the clients; the same happens with a lag of 3-6 months.


    FIEM is one of the leading manufacturers of automotive lighting and signaling equipment for the two wheeler segment in India. Apart from automotive lighting, FIEM's product portfolio comprises of rear view mirrors, sheet metal parts and plastic components for two /four wheeler segment. FIEM generates ~99% of its revenues from the automotive business and small revenue comes from the LED segment. Within the automotive space, FIEM is largely an OEM focused company with 93% of revenues coming from domestic OEM's and two wheeler segment accounts for 95% of revenues. For FIEM, Honda Motorcycle and Scooters India Limited (HMSI) and TVS Motors (TVSM) are the top clients. In the LED business, the company has presence in LED luminaries and Integrated Passenger Information System (IPIS). FIEM has nine plants across India catering to various clients.


    BUY - We expect the stock to deliver more than 12% returns over the next 12 months
    ADD - We expect the stock to deliver 5% - 12% returns over the next 12 months
    REDUCE - We expect the stock to deliver 0% - 5% returns over the next 12 months
    SELL - We expect the stock to deliver negative returns over the next 12 months
    NR - Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only.
    SUBSCRIBE - We advise investor to subscribe to the IPO.
    RS - Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon.
    NA - Not Available or Not Applicable. The information is not available for display or is not applicable
    NM - Not Meaningful. The information is not meaningful and is therefore excluded.
    NOTE - Our target prices are with a 12-month perspective. Returns stated in the rating scale are our internal benchmark.


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