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CD Equisearch Pvt Ltd Mar 22, 2016

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Fiem Industries Ltd.

No. of shares (m) 11.96

Mkt cap (Rs crs/$m) 951/143.0

Current price (Rs/$) 795/12.0

Price target (Rs/$) 895/13.5

52 W H/L (Rs.) 828/475

Book Value (Rs/$) 222/3.3

Beta 1.3

Daily volume (avg. monthly) 28790

P/BV (FY16e/17e) 3.4/2.9

EV/EBITDA (FY16e/17e) 8.7/7.5

P/E (FY16e/17e) 16.3/13.8

EPS growth (FY15/16e/17e) 15.3/37.2/18.3

OPM (FY15/16e/17e) 12.5/12.8/12.9

ROE (FY15/16e/17e) 20.1/23.2/22.7 /11.3/11.2 ROCE(FY15/16e/17e) 15.5/16.8/16.8

D/E ratio (FY15/16e/17e) 0.5/0.7/0.4

BSE Code 532768

NSE Code FIEMIND

Bloomberg FIEM IN

Reuters FIIN.BO

Shareholding pattern %

Promoters 70.0

MFs / Banks / FIs 9.2

Foreign 0.0

Govt. Holding 0.0

Non-Promoter Corp. 5.5

Total Public 15.4

Total 100.0

As on Dec 31, 2015

Recommendation

ACCUMULATE

Analyst

SUMIT BAGARIA

Phone: + 91 (33) 4488 0055

E- mail: [email protected]

Figures (Rs crs)

FY13

FY14

FY15

FY16e

FY17e

Income from operations 606.42 720.47 825.47 1018.13 1173.94

Other Income 0.35 0.67 0.90 2.00 2.00

EBITDA (other income included) 70.66 89.05 103.66 131.80 153.99

Net Profit after EO 27.83 36.92 42.57 58.40 69.08

EPS(Rs) 23.27 30.87 35.59 48.83 57.76

EPS growth (%) 30.8 32.7 15.3 37.2 18.3

Company Brief

Fiem is one of the leading manufacturers of automotive lighting &

signaling equipments and rear view mirrors in India. Fiem is among the

first company in India to introduce LED lights in two wheelers.

Quarterly Highlights � It reported income from operations of Rs.698.13 crores during 9MFY16,

growth of 17.9% (YoY). Income from operation grew by 27.5% in

Q3FY16 as compared to Q3FY15, buttressed by the newly

commissioned LED segment (Q3 revenues booked: Rs.45 crores; 9M: 56

cr). It expects to report Rs. 150 crore revenue from the LED segment in

FY16.

� Despite weakish dispatches from two wheeler industry, it managed to

report a healthy growth in revenues from automotive segment due to

addition of new clients and healthy dispatches from their key clients-

HMSI and TVS Motors.

� EBITDA margins increased marginally to 12.7% in 9MFY16 from 12.3%

in 9MFY15. Owing to growing share of LED business Q3 margins

jumped to 13.2% (Q2:12.6%/Q1:12.3%).

� Net profit grew substantially by 30.9% in 9MFY16 as compared to

9MFY15 backed by strong sales growth and higher margins. Thanks to

revenue recognition of high margin yielding LED business net profit

grew by an astonishing 55.3% in Q3FY16.

� We expect a better year for the two wheeler sector, which will

eventually affect the company positively, as rural demand is expected

to pick up on the back of increased government spending to boost the

rural economy. Implementation of recommendations of the Seventh

Pay Commission is also expected to increase the urban as well as rural

demand for two wheelers on back of increased discretionary spending.

� The stock currently trades at 16.3x FY16e EPS of Rs.48.83 and 13.8x

FY17e EPS of Rs.57.76. Backed by modest recovery in two wheeler

industry and pick up in EESL’s LED tenders, earnings are expected to

grow by a respectable 18.3% next fiscal. Yet risk of growing

competition in LED business looms. We assign ‘accumulate’ rating on

the stock with a target price of Rs. 895(previous target of Rs.698)

implying 15.5x FY17e earnings (peg ratio of 0.6), over the next 6-9

months.

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CD Equisearch Pvt Ltd


[

Outlook & Recommendation

Industry

The Indian two wheeler industry saw a halt in its growth trajectory (0.2% growth) in CY2015, after having grown

tremendously over the last decade. The sector recorded an impressive volume growth of 10% CAGR in last 10 years but

started witnessing a slowdown as soon as calendar year 2015 began.

Slowdown in the industry was mainly due to poor demand for motor cycles, which saw a decline of almost 6% in the first

quarter of CY2015. The scooter segment on the other hand recorded an impressive growth of over 18% in the same

period. The second quarter too, wasn’t any better for two wheeler industry as it recorded a modest growth of 0.6% (YoY).

The scooter segment which had maintained a double digit growth for months also came down to single digit growth in

this quarter.

Source: SIAM Source: Ace Equity

Thanks to growing demand for its Activa brand of scooters, HMSI (70-75% of lighting requirements catered by Fiem)

outpaced the industry by posting 3.4% growth in CY15. However, motorcycle segment remained a cause of worry for

most of the players in the industry.

Source: NDTV, CD Equisearch Source: TVSM, CDEquisearch

TVS Motor Company which contributes 26% of the company’s revenue, recorded a growth of 5% in CY15, backed by new

launches. In CY15, TVSM’s market share improved by 30bp yoy to 13.5%. TVS Motors outpaced the domestic two

wheeler industry in CY15 and is quite confident to do so going forward, which can help Fiem to report a robust growth

in sales.

However, we expect a better year for the sector which will eventually affect the company positively, as rural demand is

expected to pick up on the back of increased government rural spending to boost the rural economy. Implementation of

the recommendations of the Seventh Pay commission is also expected to increase the urban as well as rural demand for

two wheelers on back of increased discretionary spending.

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DELP Programme

Energy Efficiency Services Limited (EESL), a public energy services company under the administration of Ministry of

Power, Government of India (GoI), created a benchmark in the month of November by crossing the four crore mark of

distributing LED bulbs in India within a span of 25 days after hitting three crore mark in October 2015. Eight crore

LED bulbs has been distributed so far across 125 cities in India. In Delhi, around 60 lakh bulbs have been distributed

till now. In addition to Rajasthan, Delhi, Maharashtra, Uttar Pradesh, Andhra Pradesh and Himachal Pradesh, EESL’s

flagship initiative DELP has now reached Uttarakhand, Jharkhand and Karnataka.

The DELP programme, through a combination of aggregation and transparent procurement, has achieved a rapid

decline in LED prices. EESL has been able to slash procurement prices by 75 per cent and is able to pass this discount

benefit to the consumers. In addition, government plans to bring down the LED bulb price in the retail market

(currently Rs. 300) so that there is sustainable market for LED bulbs. Online retailer Snapdeal has joined hands with

EESL for selling LED bulbs at Rs.99 per unit. Recently, EESL entered an agreement with IIFC Projects Ltd. under

which IIFC will act as a financial and technical advisor to diversify and expand the business portfolio of EESL.

GOI’s continuous focus towards LED lightings and to bring down India’s power demand through DELP Programme

can help Fiem to increase its exposure to LED business. The Company is currently more inclined towards institutional

orders floated by the way of tender auctions. However, it is planning to increase its exposure in the retail market at a

later stage.

Source: EESL

Capex Plans

Fiem has set up a new manufacturing facility in Gujarat for manufacturing of automotive lighting and plastic parts

etc. and supplying to newly setup plant of (HMSI) in Gujarat. This facility has started its commercial production from

the month of January. It is also expanding its capacity in Tapukara plant (Rajasthan) for manufacturing of LED

lighting products such as LED bulbs, LED street lights, LED tubes etc. It is expanding its capacity in LED segment to 2

lakhs bulbs per day from the present capacity of 60,000 bulbs per day, 500 street lights per day to 1,000 street lights per

day and 1,000 down lighters per day.

Strong R&D

Fiem will be introducing LED bulbs with a chargeable battery - standby 4hrs. It is also going to introduce high class

smart bulbs. All these products will be rolled out with its own technology. Such inclination towards LED technology

and government’s push towards LED lightings can help the company to explore the plethora of opportunities that will

come its way.

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Financial & Valuation

Backed by robust order from EESL for LED lightings, total revenue soared by 17.9% in 9MFY16 as compared to a year

ago period. The company expects to almost complete couple of LED projects in hand by FY16 and recognize revenue of

Rs. 150 crore; reported revenue of Rs.55 crores so far this fiscal. Fiem has outperformed the two wheeler industry in

terms of revenue growth in 9MFY16 backed by the strong volume growth of its key clients- Honda Motorcycle and

Scooter India and TVS Motors, contributing about 70% of the company’s revenue. We expect this to continue going

forward.

Source: CD Equisearch Source: CD Equisearch

It continues to report stable margins, which reflects the management’s efficiency in operating the business. Operating

margins increased marginally (+30bps) so far this fiscal not least due to growing revenue share of LED segment. LED

margins are higher (15.5% vs. 12.5% for auto) because most of the components are manufactured in house.

Source: CD Equisearch Source: CD Equisearch

Fixed asset turnover ratios are likely to improve to 2.7 by FY17 from current ratio of 2.5, due to high utilization of

existing LED facility. We expect ROE to expand to 22.7% in FY17 from 20.1% in FY15 because of healthy growth in

profits.

The stock currently trades at 16.3x FY16e EPS of Rs.48.83 and 13.8x FY17e EPS of Rs.57.76. Backed by modest recovery in

two wheeler industry and pick up in EESL’s LED tenders, earnings are expected to grow by a respectable 18.3% next

fiscal. Yet risk of growing competition in LED business looms. We assign ‘accumulate’ rating on the stock with a target

price of Rs. 895(previous target of Rs.698) implying 15.5x FY17e earnings (peg ratio of 0.6), over the next 6-9 months. For

more information please refer to our earlier report dated 9th October, 2015.

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Risks & Concerns

Client concentration risk

A significant portion of Fiem’s auto component revenue comes from two clients namely HMSI and TVS Motors (45%

and 26% of revenue). Any slowdown in off take from these two clients can hurt its revenue significantly.

LED business-revenue visibility

As Fiem is more inclined towards institutional orders of EESL, any slowdown in flow of EESL tenders could impact

revenues of LED business.

Cross Sectional Analysis

Company Equity* CMP Mcap* Sales* Profit*

OPM

(%)

NPM

(%)

Int

Cov

ROE

(%) Mcap/Sales P/BV P/E

Lumax 9.35 418 391 1242 29 6.4 2.4 3.4 15.0 0.3 1.9 13.3

Fiem 11.96 795 951 931 51 12.6 5.5 6.3 20.9 1.0 3.6 18.6

Phoenix 28.02 94 263 221 19 14.6 8.5 8.6 10.2 1.2 1.4 14.1 *figures in Rs. Crores; calculations on ttm basis

Source: Ace Equity, CD Equisearch Source: Ace Equity, CD Equisearch Source: Ace Equity, CD Equisearch

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Financials

Standalone Quarterly Results Figures in Rs. crs.

Q3FY16 Q3FY15 % chg 9MFY16 9MFY15 % chg

Income From Operations 258.59 202.87 27.5 698.13 592.27 17.9

Other Income 0.59 0.64 -7.8 1.32 0.89 48.3

Total Income 259.18 203.51 27.4 699.45 593.16 17.9

Total Expenditure 225.16 178.40 26.2 610.77 520.05 17.4

EBITDA (other inc. incl.) 34.02 25.11 35.5 88.68 73.11 21.3

Interest 4.24 2.88 47.2 10.64 8.87 20.0

Depreciation 8.39 7.66 9.5 24.25 22.90 5.9

PBT 21.39 14.57 46.8 53.79 41.34 30.1

Tax 5.72 4.48 27.7 16.03 12.49 28.3

PAT 15.67 10.09 55.3 37.76 28.85 30.9

EPS(Rs) 13.10 8.44 55.3 31.57 24.12 30.9

Consolidated Income Statement Figures in Rs. crs.

FY13 FY14 FY15 FY16e FY17e

Income From Operations 606.42 720.47 825.47 1018.03 1173.94

Growth (%) 13.3 18.8 14.6 23.3 15.3

Other Income 0.35 0.67 0.90 2.00 2.00

Total Income 606.77 721.14 826.37 1020.03 1175.94

Total Expenditure 536.11 632.08 722.72 888.23 1021.95

EBITDA (other income incl.) 70.66 89.05 103.66 131.80 153.99

Interest 12.97 14.45 12.05 15.30 16.72

Depreciation 18.35 21.79 30.72 33.07 38.59

PBT 39.34 52.81 60.88 83.43 98.68

Tax 11.63 15.54 18.40 25.03 29.61

PAT 27.71 37.27 42.49 58.40 69.08

Extraordinary Item -0.12 0.34 -0.09 0.00 0.00

Net Profit 27.83 36.92 42.57 58.40 69.08

EPS (Rs) 23.27 30.87 35.60 48.83 57.76

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Consolidated Balance Sheet Figures in Rs. crs.


Sources of Funds

Share Capital 11.96 11.96 11.96 11.96 11.96

Reserves 156.11 184.89 215.32 263.65 321.22

Total Shareholders Funds 168.06 196.85 227.28 275.61 333.18

Long Term Debt 76.19 57.96 51.47 140.00 102.00

Total Liabilities 244.26 254.80 278.75 415.61 435.18

Application of Funds

Gross Block 384.47 425.12 480.00 600.00 650.00

Less: Acc. Depreciation 91.81 112.08 145.54 178.61 217.20

Net Block 292.66 313.04 334.46 421.39 432.80

Capital Work in Progress 1.48 0.03 4.63 9.65 0.00

Investments 0.02 0.02 0.02 0.02 0.02

Current Assets, Loans & Advances

Inventory 48.68 42.35 51.39 75.00 84.00 Trade Receivables 69.34 76.76 86.75 106.89 123.26 Cash and Bank 1.60 2.02 3.44 5.26 5.98 Short term loans 10.98 14.53 12.38 21.08 21.08 Other Assets 0.55 0.76 0.45 0.75 0.95 Total CA & LA 131.14 136.42 154.40 208.98 235.27

Current Liabilities 154.88 161.77 180.72 207.00 206.15 Provisions 7.37 9.85 12.22 5.43 14.27 Total Current Liabilities 162.25 171.62 192.94 212.43 220.42

Net Current Assets -31.11 -35.20 -38.54 -3.45 14.85

Net Deferred Tax -24.21 -27.51 -27.61 -29.00 -29.00 Net long term assets 5.44 4.42 5.80 17.00 16.50 Total Assets 244.26 254.80 278.75 415.61 435.18

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Financial Ratios


Growth Ratios(%)

Revenue 13.3 18.8 14.6 23.3 15.3

EBITDA 3.9 25 17.2 27 16.8

Net Profit 30.8 32.7 15.3 37.2 18.3

EPS 30.8 32.7 15.3 37.2 18.3

Margins (%)

Operating Profit Margin 11.6 12.3 12.5 12.8 12.9

Gross profit Margin 9.5 10.3 11.1 11.4 11.7

Net Profit Margin 4.6 5.1 5.2 5.7 5.9

Return (%)

ROCE 12.2 15.2 15.5 16.8 16.8

RONW 17.8 20.2 20.1 23.2 22.7

Valuations

Market Cap/ Sales 0.4 0.7 0.9 0.9 0.8

EV/EBITDA 5.1 6.9 8.4 8.7 7.5

P/E 8.1 13.3 17.7 16.3 13.8

P/BV 1.3 2.5 3.3 3.4 2.9

Other Ratios

Interest Coverage 4 4.6 6.1 6.5 6.9

Debt Equity 0.8 0.6 0.5 0.7 0.4

Current Ratio 0.8 0.8 0.8 1.0 1.1

Turnover Ratios

Fixed Asset Turnover 2.1 2.4 2.5 2.7 2.7

Total Asset Turnover 2.5 2.9 3.1 2.9 2.8

Debtors Turnover 8.9 9.9 10.1 10.5 10.2

Inventory Turnover 11.3 13.9 15.4 14.1 12.9

Creditor Turnover 7.7 8.3 8.7 8.9 8.6

WC Ratios

Debtor Days 41 37 36.1 34.7 35.8

Inventory Days 32.2 26.3 23.7 26 28.4

Creditor Days 47.6 44.2 41.9 40.9 42.6

Cash Conversion Cycle 25.6 19.1 17.9 19.7 21.5

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Financial Summary- US Dollar denominated

million $ FY13 FY14 FY15 FY16e FY17e

Equity capital 2.2 2.0 1.9 1.8 1.8

Shareholders funds 30.9 32.8 36.3 41.4 50.1

Total debt 24.7 19.8 18.7 30.8 22.1

Net fixed assets (incl CWIP) 54.1 52.1 54.2 64.8 65.1

Investments 0.0 0.0 0.0 0.0 0.0

Net current assets -5.7 -5.9 -6.2 -0.5 2.2

Total assets 44.9 42.4 44.5 62.5 65.4

Revenues 111.4 119.1 135.0 153.1 176.5

EBITDA 13.0 14.6 17.0 19.8 23.2

EBDT 10.6 12.3 15.0 17.5 20.6

PBT 7.3 8.6 10.0 12.5 14.8

PAT 5.1 6.1 7.0 8.8 10.4

EPS($) 0.43 0.51 0.58 0.73 0.87

Book value ($) 2.6 2.7 3.0 3.5 4.2

*income statement figures translated at average rates; balance sheet and cash flow at year end rates; projections at current rates

All dollar denominated figures are adjusted for extraordinary items.

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