FIEM industries : auto ancillary player

Stock Opportunities
1

Dear fellow boarders ,

i recently came across this company. is in the auto ancillary market and gets its revenue from manufacturing headlights and led lights mainly for two wheeler and four wheeler companies. it has a broad clientle which can be seen on the company web page.

They have grown consistently in tough times from fy10-fy13 and sales have increased with a greater increase in margins. The management appears prudent and have been walking the talk.

seems like a good lynch kind of stock where it is present in a boring and not so exciting automotive ancillary sector. and has been increasing it presence.

balance sheet appears good with debt reducing and is also quite low at the same time. the promoters have not diluted equity and have a sizeable holding.

Mar 04 Mar 05 Mar 06 Mar 07 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Trailing
Period 12 months 12 months 12 months 12 months 12 months 12 months 12 months 12 months 12 months 12 months 12 Months
Sales 64.73 99.85 123.60 168.16 177.38 219.49 294.23 417.16 533.47 602.21 714.10
Operating Profit 6.89 9.90 15.67 20.51 21.44 21.55 30.87 37.93 67.66 69.87 88.46
OPM 10.64% 9.91% 12.68% 12.20% 12.09% 9.82% 10.49% 9.09% 12.68% 11.60% 12.34
Other Income 0.26 0.54 0.90 0.96 1.61 0.51 0.79 4.03 0.30 0.35 0.67
EBIDT 7.15 10.44 16.57 21.47 23.05 22.06 31.66 41.96 67.96 70.22 89.13
Interest 1.78 1.98 1.87 1.89 1.95 4.00 3.33 9.50 20.76 12.93 14.44
Depreciation 1.71 2.55 3.62 5.13 7.82 8.82 9.25 12.98 16.88 18.35 21.77
Profit before tax 3.67 5.90 11.09 14.46 13.28 9.23 19.07 19.47 30.32 38.94 52.92
Tax 1.17 2.03 3.63 4.03 4.79 3.05 4.92 4.34 9.17 11.63 15.52
Net profit 1.97 3.20 7.52 13.67 9.34 4.61 10.75 11.43 21.14 27.31 37.40
Adjusted EPS in 4.92 6.40 9.64 11.49 7.78 3.84 8.96 9.52 17.62 22.76 31.17


views invited

regards
divyansh
1 Like
2

cash flow statement

14.65 3.60 7.73 22.47 38.52 19.94 51.91
71.26
Cash from Investing Activity -20.02 -45.39 -29.61 -13.93 -34.72 -82.62 -54.15 -27.74
Cash from Financing Activity 6.03 52.01 11.02 -8.02 -4.06 62.90 6.10 -47.23
Net Cash Flow 0.65 10.22 -10.85 0.55 -0.28 0.22 3.88 -3.71

company is generating good cash flows.

i m still looking out for competition for the same. Lumax appears but they lag far behind on operating efficiencies and product portfolio. also Fiem plans to diversify into led lighting for various uses like signboards (railways bus stands) and street lights etc...
With initial signs of auto recovery the company might be well poised to grow at a cagr of 25-30 % for next3-4 years.

disc: not invested yet ...still contemplating


3

Same here, even I have been studying this company since one week, as per my findings

Some positives apart from what you spotted.

1). c60-75% revenue comes from two wheeler, which is best I like about this company, could be a proxy play on two wheelers. As one can see from the SIAM stats, four wheeler sales are not that steady and have not shown strong growth but two wheeler sales have been growing very strong, at least since Jan’13 as I checked. So the risk to slow down in sales is low.

2). Was going through the ratios on Moneycontrol and working capital cycle is very low, and it was good to see the same mentioned in the company presentation too :), its there under ‘contact us’ or so on the company website. Also, the listing prospectus of 2006 can be found easily by googling and they have harped on the same strength of lower WC cycle,and it is good to see that they have been able to maintain it since then for 7-8 years.

3). They have scattered the manufacturing sites across India, closer to the auto plants, which reduces there delivery time and inventory costs (as mentioned in annual reports and visible in the WC cycle).

4). They are targeting to increase the sales in replacement market. May be this could boost growth, just a guess, but considering the business line of reflectors, lights…which die down or get get damaged sooner than other parts of a vehicle.

5). Margins, FIEM’s margins have been consistent and very strong compared to Minda, Pheonix and I guess Lumax, even the growth. Also, it appears Minda revenue from this segment has been stagnant, as per their investor presentation.

5). From the reports it appears that existing relationships are strong and company is also benefiting from other auto entries into mopeds, scooters and bikes.

6). On the growth part, as per March 2014 news, company has purchased land in Ahmedabad to supply the respective parts to upcoming plant of HMSI.

Negatives

1). Company has clearly mentioned in the prospectus that entry barriers are very low. But maybe this is not a threat due to strong relationships with the exiting clients.

2). Not very sure about this, but ROE is not very comforting and wont go low considering low entry barriers and new lines it has got into.

3). Company has also mentioned a weakness as late entry into four wheeler market, and therefore has low market share (can this be its strength in two wheeler market due to early entry?)

Discl: Not invested, but have strong inclination to add into core holdings, ROE is holding me back.

2 Likes
4

I had discussed this name briefly past week on my picks page. Glad a thread has been started now.

http://www.valuepickr.com/forum/your-top-5-picks/120480293#812052176

Let me point out a few things that I have found interesting about this:

)- LED headlamps are 5 times costlier than conventional headlamps for 2 wheelers. Switching to LED has started outside India and expected to gather pace. in India it would start with 4 Wheelers and high end 2 wheelers first. So although this is not a business generally with much pricing power, the asp would get a very material uplift during this gradual switchover (think about it for a moment - this upgrade itself will substantially increase revenues over time). Honda and Hyundai are already testing LED headlamps in 4W sourced from FIEM. LED prowess is likely to enable FIEM to penetrate deeper into the 4W market, which currently is not a material contributor to revenues which are 2W dominated. Eventually, 2W would also adopt LEDs. So this is a 5-7year adoption theme where ASP could go up by 2-3x if not 5x (assuming that global LED prices keep falling due to scale and lower than 100% adoption happens in 2W/4W)

)- Execution appears to be strong. One could compare their growth and margin numbers with any of their lighting peers and FIEM would come out well ahead.

)- They are transitioning their business model. From an auto focused company, in 5 years I believe half of their revenues would come from non auto. And they would eventually make inroads into the B2C market for LEDs, and not just stay as a B2B company since they have the product capability. LED adoption is a 10 year structural trend. That’s why, as I had noted, I expect the margin profile to keep improving because of revenue mix changes. That would drive the ROE increase besides improving asset turnover.

)- R&D focus is evident. Look up info about their design JV in Italy. Their aim appears to be a larger market. And they don’t just white label imported LEDs. They make them in house.

)- Quality. Harley Davidson is not just another bike as enthusiasts would know. They source from FIEM. This is a big vote of confidence on its quality. FIEM also supplies some to Honda Japan and has recently won a contract to supply to Suzuki in Indonesia per an article.

)- How many small companies install robots? FIEM is.

)- Multiple optioanlities is how this investment needs to be evaluated. There are more than one ways of making money. 1. Increased penetration in 2W (Hero has just started sourcing from them and per the article I posted in earlier thread, company is hopeful of gaining share there), 2. Increase share of 4W, which is currently small, 3. institutional LED market, 4. Exports to South east Asia, Japan etc, 5. Consumer LED market, 6. Massive gradual ASP uplift, 7. Entry into other segments like locks, handles, control cables - company has some new JVs already which should start to get into motion in 1-2 years).

The multiple is very reasonable here. I personally believe this can be a 10 bagger.

1 Like
5

valuable inputs from rupesh and r jain

fiem on prelimnary investigation looks worth more digging into. i m bit wary off them trying to diversify. need to look into the dynamics of the new ventures. diversify sometimes leads to deworsify. need to constantly look at performnace of new products and markets entered.

there used to be a company mic electronics which was into signboards and led lighting. the management was very upbeat about the promising future couple of years back. mic electronics has been a wealth destroyer and has hardly made any profit.

so we need to look what can go wrong , cause in business with low entry barriers and relatively less pricing power. things can change pretty fast (makes me uncomfortable)

regards

divyansh

6

It comes down to execution and related diversification. They have executed well in the past and diversification sunder consideration are logical ones in related areas (Quite likely spurred from its OEM partners’ end as often happens with many ancillaries (e.g. Motherson)). As for entry barriers, this business has switching costs. The distributed location of FIEM’s factories across India (which provide a cost advantage through lower logistics costs) together with quality & consistency can serve as a moat. FIEM is deepening its engagements with OEMs - per my understanding Honda for e.g. sources for domestic 2W completely, domestic 4W limited, Japanese 2W one model and has signed MOU for other products. One could argue that relationships can strengthen the moat here (in isolation it wouldn’t be enough but as an additional reinforcing factor to above ones, helps). As for pricing power, the ASP uplift from switch to LED would help a lot over time and will be a consistent tail wind.

Ultimately though it’s a judgement call. Every stock has an embedded call option. The loss is limited to your capital, while potential gains can be immense ‘if’ things go right. This is a game of optimists.

2 Likes
7

Initiated posn in the stock at cmp 590…plan to take it to 5-10 percent after performance review of 2-3 quarters.

I like when small companies strategise and pave through tough times. Also FIEM has crossed the sales figure of 500+ crores ( hints at reliable and resilient business plan and execution) .

Turn around of auto sales and investment mood augurs well for such fast growers.

Regards

Divyansh

8

Reviving this thread with Sep’14 Q results:

Q2 Sep 14 Revenue 210.47 cr vs. 179.12 Cr last year (17% growth y-o-y)

Q2 Sep 14 EBITDA 25.90 Cr vs 21.84 Cr. last tear (18% growth y-o-y)

Q2 Sep 14 EPS 10.67 vs. 9.08 last year (17% growth y-o-y)

Corresponding numbers q-o-q look as follows:

178.92 Cr (17% groeth q-o-q), 22.08 Cr (17% growth qoq), 6.73 (34% growth qoq)

But VP standards, these are mediocre growth numbers :), but with turnaround in auto industry, can these numbers improve?

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Discl: Invested at 570 levels

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Narration Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14
Period 12 months 12 months 12 months 12 months 12 months 12 months 12 months 12 months 12 months 12 months
Sales 99.85 123.6 168.16 177.38 219.49 294.23 417.16 533.54 602.21 718.42
Operating Profit 9.9 15.67 20.51 21.44 21.55 30.87 37.93 67.66 69.87 88.48
OPM 9.91% 12.68% 12.20% 12.09% 9.82% 10.49% 9.09% 12.68% 11.60% 12.32%
Other Income 0.54 0.9 0.96 1.61 0.51 0.79 4.03 0.3 0.35 0.67
EBIDT 10.44 16.57 21.47 23.05 22.06 31.66 41.96 67.96 70.22 89.15
Interest 1.98 1.87 1.89 1.95 4 3.33 9.5 20.76 12.93 14.44
Depreciation 2.55 3.62 5.13 7.82 8.82 9.25 12.98 16.88 18.35 21.79
Profit before tax 5.9 11.09 14.46 13.28 9.23 19.07 19.47 30.32 38.94 52.92
Tax 2.03 3.63 4.03 4.79 3.05 4.92 4.34 9.17 11.63 15.52
Net profit 3.2 7.52 13.67 9.34 4.61 10.75 11.43 21.14 27.31 37.4
Adjusted EPS in 6.4 9.64 11.49 7.78 3.84 8.96 9.52 17.62 22.76 31.17
Dividend Payout 0.00% 0.00% 18.14% 26.55% 53.80% 23.16% 21.96% 14.24% 14.54% 15.94%
% growth from last year
Sales 23.79 36.05 5.48 23.74 34.05 41.78 27.90 12.87 19.30
NP 135 81.78 -31.68 -50.64 133.19 6.33 84.95 29.19 36.95
EPS 50.63 19.19 -32.29 -50.64 133.33 6.25 85.08 29.17 36.95
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Some thoughts from above numbers:

1). Although the sales have shown impressive growth, EPS has failed to follow it.

2). Till March 11, the OPM kept oscillating between 9%-12%. When OPM margin was 12%, the EPS and NP growth numbers look impressive. For last 2 years, OPM hasn’t gone down below 11%.

3). The interest payments are not tuned to Sales growth making some years look bad. Case in point being - Mar 09, Mar 11

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FY15E FY16E FY17E
847.74 1000.33 1180.39
105.97 135.04 171.16 Assume 18% sales growth
12.50 13.50 14.50
0.5 0.5 0.5
106.47 135.54 171.66
17.33 20.79 24.95 Assume 20% interest payment growth
26.15 31.38 37.65
62.99 83.37 109.05
18.90 25.01 32.72
44.09 58.36 76.34
36.74 48.63 63.61
18.00 18.00 18.00
17.90 32.36 30.80
17.88 32.36 30.80
Some academic exercise - every % point increase in OPM adds ~15% to EPS growth (assuming 18% growth in sales).
13

Kotak mutual fund recently bought 1 lac share at price of 740.

14

Went through AR 2014. Following are some points:

Statistics:

  • Indian auto industry size is expected to grow from $54 billion in 2013 to $150 billion by 2020
  • India has low penetration of motor vehicles (18 per 1000 in 2010) and it is projected to grow (110 per 1000 by 2030)
  • Two wheeler scooter segment is showing growth of 20% + in India and FIEM is a major supplier to scooter segment.
  • The company has in-house R&D and they are developing solutions, improving energy and cost efficiency etc.
  • The LED industry size is projected to double from 5k cr in 2014 to 10k cr in 2016.
  • By 2020, 75% of indoor lighting is projected to LED based vs. 7% in 2008.
  • The initial cost of LED is high but the prices fell by 30% and will continue to fall further (Risk ?)

Company:

  • FIEM has relationships with all the two wheeler vendors in India except one or two
  • The LED users in India by size are - Govt (Street Lights, In Cabin Lights, Railway Stations), Commercial Sector (Hospitality/Retail Sector, SEZs, Factories), Automobile sector.To tap into first two sectors, company has developed indoor and outdoor LED products as well as IPIS (Integrated Passenger Information Systems).

Revenue Split across clients:

Vendor Percentage
Honda 44.5
TVS 25.18
Replacements 11.15
Suzuki 3.78
Mahindra 3.72
Royal Enfield 2.42
Other 9.25

  • Revenue Split by Products:
  • Product Percentage
    Lights, Signalling Equipments and Parts 66.6
    Rear View Mirror and Parts 12.83
    Plastic Moulded Parts 12.82
    LED and Misc 7.75

  • The company has 8 plants across India (Tamil Nadu - 3, Haryana - 2, Karnataka -1, Himachal -1, Rajasthan -1 ) and 9th one is in construction in Gujrat
3 Likes
15

Can seniors/experts help scrutinise above data and provide opinions?

I’ll try to find some information of competitors and try to post an analysis.

16

Competitor 1: Minda Industries

Minda industries is auto ancillary company with following divisions - Switches (Main business), Lighting, Battery, Auto Cap, Fuel Cap, LED.

  • For FY2014, 22% of the sales of Minda Ind. was contributed by Lighting division i.e. ~374 Cr.(vs. 473 Cr of FIEM lighting division).
  • The lighting products of Minda see to be mainly non-LED and they seem to have large portfolio into 4-wheeler products.
  • The LED division contributes ~2% to revenue (as per [2]) and from [1] this mainly seems to be coming from TN from “Chief Minister’s Greenhouse Mission” (LED Home Lighting Project)

References

[1]http://www.mindagroup.com/images/downloads/Minda%20Annual%20Report%202013-14%20Final.pdf

[2]http://economictimes.indiatimes.com/minda-industries-ltd/stocks/companyid-5459.cms

I will also research on other competitors and update.

Key questions I’d like to get answers on:

  • Why do auto/non-auto segments want to move to LED?
  • How does cost and life of LED products compare vs. non-LED products?
  • Is there anything that puts FIEM to advantage against other competitors?
  • How about threat from China to LED industry?
1 Like
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@R. Jain,

Thanks for your detailed analysis.

I have following questions:

The cost of LED lights is 5 times more than non-LED lights. How about life of LED lights vs. non-LED? Does installing LED increase the battery life of say 2-wheeler/car batteries?

Also, how much % price would increase in 2-wheelers if they choose to install LED vs. non-LED? Does that get passed to end customer? is LED lights only a high-end play?

18

Very good investor presentation on FIEM website:

Pasting the link here for reference:

http://www.fiemindustries.com/Fiem%20-%20Investor%20Presentation%20-%20November%202014.pdf

One interesting thing to follow would be to track contribution of LED to revenue. Currently just 7% revenue comes from LED segment but from data - it seems they have developed ~100 LED products.

19

Very informative presentation. Fiem for sure looks as steady performer which has the potential to throw positive surprises.

20

From BSE/NSE announcer on money control

“Fiem Industries Limited has informed the Exchange that Company on January 03, 2015 have received Letter of Award from Energy Efficiency Services Ltd. (EESL) for supply of Self Ballasted 7W LED Bulbs to be supplied at West Godavari and Srikakulam - Andhra Pradesh. The Company has participated in the tender and Letter of Award is for supply of 7.74 Lac 7W LED Bulbs and the total contract value is Rs. 11.53 Crore. The bulbs will be supplied in next around three months period. Apart from existing business of Auto Components, Companys management is relentlessly working to build future growth drivers in the form of two new businesses of LED Luminaires and Integrated Passenger Information System with LED Display (IPIS) for Railways and Buses.”