Yes, and hold a significant chunk in my PF. Like the management and the business. But, currently reeling under the double whammy of midcap turmoil and auto sector headwinds.
They also are trying to get rid of the unsuccessful LED luminaries business.
Will take time to rebound, but when it does feel it may be a strong rebound (views may be biased)
is it something very wrong with the stock? MF and FII on qoq decrease there holding alot and it is the retail investor whose holding has increased?
PL share data which shows this
I have started tracking this company since last one week or so. In my opinion this company is attractively priced mainly due to:
Recently came across research report by Monarch Netwroth Capital.MNCL-FiemIndustries-InitiatingCoverage-06062019.pdf (2.7 MB)
Request members to provide there opinions.
Disc: not invested. only tracking
Is it possible for people who are tracking the company from long time to put some light on:
1/ Future growth levers for the company?
2/ Management Quality?
3/ Any plans to sell/spin off non-Auto LED business?
4/ Any future plans for diversification like LED in the past?
Disclosure: Tracking, not invested
Eventhough the company has good historical financials, the stock price is continuously declining from oct 2016. Anyone have any thoughts on that?
I invested in this company 2 weeks back below 300/- .Cannot comment on the share price move now or in future about its movement but for long term a good company to invest for sustainable growth / return .I wrote my investment thesis for this company -see if it helps in anyway
Reasons for my investment in Fiem industry :
I like to invest in companies which has huge headroom for growth (ie size of prize is higher ) .I also like to invest in any of the top 3 players in the segment .
Risks :
Valuation âI purchased at 294 ,then the PE was 5.4 compared to 21 ( last 5 years average ) .Price to Book value then was 0.75 .Price to sales is only 0.30 .If you calculate payback of profits for next 5 years ,it will be more than present market cap. As per Ben Graham valuation model the stock should have a market cap anything between 800-1200 cr ,currently at a market cap of 475 cr and hence there is reasonable margin of safety in buying for long term .
Update on Fiem :
Fiem Industries Q4FY20 Concall Update â Nirmal Bang Securities
Outlook: Positive
⢠Coâs primarily supplies lighting, mirrors, canisters and back angle sensors to 2W industry(95% sales to 2W).
⢠2W industry degrew by 18% in FY20 against a growth of 7% in FY19. Co was able to perform much better than industry by declining just 5% (sales of Rs. 1377 Cr) as co increased its wallet share with HMSI & Suzuki.
⢠Although HMSI volumes declined by 13%, Coâs sales to HMSI declined by only 1%.
⢠Suzuki was the only OEM to post positive growth of 7%. Coâs sales to Suzuki grew by 19%.
⢠Co expects 2W industry to recover due to pent up demand. Production levels in June was at 40% of June 2019. Order projections from customers continues to increase and co expects production to reach 100% levels by festive season.
⢠Apart from existing business that will grow in correlation to OEM performance; co also expects additional business of Rs. 275 Cr based on its order projections for new products over next 3 years.
⢠Working with Yamaha & Suzuki for their export markets (Eg: Yamaha, Italy and Suzuki, Japan)
⢠Co improved its EBITDA margins by 60 bps in FY20 despite a decline in sales in FY20. Co has reduced salaries by 25% across all employees since the onset of covid to curb opex.
⢠Borrowings have declined from Rs. 171 Cr in FY19 to Rs. 83 Cr.
⢠Coâs supplies from China are at ~10% especially for LED lamps.
⢠Co invested Rs. 58 Cr in fixed assets in FY20 and wont be incurring much capex in FY21. Based on current capacity, co can achieve sales of over Rs. 1700 Cr.
⢠LED mix within lamps formed 39% of sales in FY20 and is likely to increase to 50% in FY21. Sensors sales were at Rs. 55 Cr & Canister sales were at Rs. 5 Cr.
Coâs share in respective OEMs â
⢠HMSI â HL (head lamp): 39%, TL (tail lamp): 81%, Winker: 84%, RVM: 100%
⢠TVS â HL: 73%, TL: 74%, Winker: 85%, RVM: 50%, RR: 100%
⢠Yamaha â HL: 87%, TL: 87%, Winker: 33%, RVM: 51%, RR: 100%
⢠Suzuki â HL â 78%, TL â 78%, Winker: 22%, RVM: 100%, RR: 100%
⢠Co has a 26% stake in JV with Aisan holding 69% & Toyota Tsusho holding 5%. This JV will manufacture fuel injection systems. Arrangement is such that every year Fiem will get fees of 10% (Rs. 2.6 Cr) of its amount invested (Rs. 26 Cr). Installed capacity of the plant is 2.4 mn and at present it has just started and utilization is just 5% today.
Stock is trading at FY20 P/E of 9.2x (adjusted for normalized tax rate)
So now, Fiem has Ampere, Revolt, Okinawa and Ola in the bag.
EV 2W canât have Halogen lights so they need to have LED lights i see a structural change in the industry from halogen to led lights and see fiem benefiting from it. Any Views on it?
The last quarter concall is a must read. The catalyst Fiem needed for the next growth phase seems to be playing out now. 60:40 or 70:30 Led mix would be very beneficial.
avg halogen lights cost 800-1200 bucks and avg led costs 2500-6000 so change in revenue mix could mean higher volume with higher realization
A lot has been reported about the upcoming EV boom in India over the next decade. And this is one of the few small-caps that can actually be a play here. This can be a proxy play to EV story. I just want to share my point of view on this one.
Industry
It can be the case that 2W Auto Industry growth may be low. In fact, it has been poor for the last 5 years. If one looks at the charts, the industry sold around 1.6 units in FY15 and 2.11 Cr,1.74 Cr units in Fy19 and 20 respectively. Meanwhile, the electric scooter market is still a niche market. It sold only 25k units last year. But 29k units have been sold in the first six months of 2021. So, the market is on a growth trajectory and this trend leaves a lot of room for interpretation for future growth rates. Having said that, it needs to do a lot of catching up on traditional scooters. And there are a few issues hindering that. The major ones I can think of are:
Traditional scooters are priced much cheaper than most electric scooters. And that is after subsidies allotted to them. The per km cost of running a petrol scooter is around Rs 2.5 whereas for EV is below Rs 0.5 at max. That is a long-term benefit for EVs. But being expensive up-front is a hindrance here for their adoption.
Lack of electric charging infrastructure will hinder growth here. It will be more of an issue in rural areas without access to reliable and consistent electricity.
The company is the market leader in many of the 2W segments. They are the sole supplier to Ola, Okinawa, and Electrotherm. In the con calls, they regularly give a mention of the market share of each of their components in every company they supply. They have strong competitors by the name of Lumax Industries and Rinder. Rinder is owned by Minda Industries, which is a strong company financially. But Lumax is their major competitor here. Lumax also supplies 4W vehicles and its share in 2W is lighting is less than Fiem. Fiem has a much better balance sheet and OPM than Lumax. So, I am willing to bet they can hold off the competitors based on what I have read. But I can be wrong on this. So, will have to watch out for this.
Management
Managements in small caps are often hard to judge. The management paid themselves upwards of 5Cr last year on profits of nearly 50 Cr. They nearly pay themselves as much as it is permissible by the law for the last 2-3 years. That itself is not a red flag but surely is not something positive. Also, they get themselves something near 2-3 Cr in rent every year. Apart from that accounting doesnât seem to have many issues (please do tell if you find any). Promoters have increased their stake in the last two years but have not bought back shares since the pandemic. Also, the company has low mutual fund stakes in it. A positive thing to note is the way the management has grown revenues over the last ten years (from 300 Cr to 1450 Cr) which does show some ability of them to scale.
One more area of concern is the low OPM. The Margin is in the low double digits and has been traditionally in the range of 9-12% with being 14% at the latest. This low OPM is usually the case in auto ancillary companies. Management expects OPM in the range of 11-12% in the future. So, it is just the nature of the industry one has to deal with.
Revenue
Revenue will likely get a huge boost. The price of a conventional lamp according to them is between 800 to 1500 whereas an LED one is 2000 to 6000 depending upon the customer. They claim that they can expand capacity as quickly as around 4-5 months. And their CAPEX plans are dependent upon customer requirements (and they claim to have enough land). So, this makes their fortune indirectly dependent upon EV 2W volumes (and of course, their ability to retain customers). One must not forget they also supply lighting for traditional scooters as well. So, the overall 2W market volumes are important for them.
Final word
Electric scooters will be a crowded market. Currently, it has Ather, Hero, Ampere, Ola, Bajaj, TVS, Yamaha, and more recently Tata has also decided to enter this space. This is in addition to the ICE bikes that already have immense popularity. Wouldnât surprise me if there are a few funerals in this space a few years down the line.
The demand will probably not increase like a hockey-stick chart as some may want to envision due to price and competition from traditional scooters for some years. So, I suspect the volume growth in this industry will be something to watch out for. I predict it will be moderate for a few years.
It makes more sense to buy an ancillary company that will have good prospects and robustness to competition. The fact that it is the sole supplier to many companies such as Ola, Escorts Kubota, Okinawa, etc does give some comfort. The balance sheet is cash-rich and management has been aggressive in the past. In the con calls, they have stated that they wish to pursue aggressive CAPEX plans in the future. So, would not expect good dividends or buybacks from this one. They are targeting exports too in addition to roping in new customers like Hero. Currently, it has 5 projects in mass production for export and two products for India. And they are working on four new models to be introduced in the next few years apart from 35 new projects presently.
The valuations are not cheap but surprisingly not expensive too (even if you consider a potentially high-interest rate environment in the future). Available at 16XPE and 13-14X FCF. If one looks at Auto ancillary companies, many of them stand to suffer from disruption as some products will be irrelevant in the case of an electric car/ scooter. The products it manufactures are foolproof from EV disruption. But instead, intends to gain from it as revenue per product would increase 1.8 to 2 times on shift from halogen to LED (July concall).
This is something that can also be storified in the future (due to EV trend) that can lead it to become overvalued. Valuations, along with low-debt & cash-rich BS do add a lot of comforts here. It has certain competitive advantages with regards to reputation as manufacturers would want to work with someone consistent and trustworthy. Makes it hard and time-consuming for new players to enter here. Maybe, all it needs is a few strong tailwinds in this space to light up this scrip. But seems like a really interesting scrip to watch out for and certainly worth tracking.
Disclosure: Partially Invested. Have provisions for increasing stake in future based on conviction. Would be grateful for some counter-views that can lead to better understanding here.
Thanks for a great deep dive. I agree with most of it. I have also been studying fiem. Two key variables to understand here imo :
These are 2 questions keeping me from pulling the trigger.
Another thing folks should keep in mind is that for large scale manufacturers like ola, the market is not india, itâs the world. Remains to be seen how successful they end up being, but aspirations wise if they can hit even a fraction of their total installed
eventual capacity, and if fiem remains a top supplier, it can make a material difference to fiem top & bottom line.
They also supply to Hero Electric
Thanks for the reply. You posed some really good and valid questions.
You are right about Industry tailwinds that will ensure PE rerating and top-line growth.
My view is on the first question is: Right now, the market is in its early phases. Tracking standalone macro indicators in my opinion can be misleading and can lead to mistaking correlation for causation. An electric scooter revolution has not happened anywhere in the world except âŚâŚâŚâŚ China.
I do think one can analogize the pattern that took place in China and apply it to India. We can try to see the indicators that led to its boom over the last 10 years (Before expanding on that, I am aware that this analogy may have many holes as India is not China but still, this can be worth a perspective).
China had many things going for it. It had a really strong decadal GDP growth and per capita income growth combined with strong companies/start-ups pouring money and government subsidies/support which has led to its boom. Not to forget the great infrastructure of roads in most of the major Chinese cities that also help influence demand.
So, I do think to anticipate the demand, one has to take all the factors into context which makes forecasting extremely hard.
But China is a little different than India and some measures they take will be unimaginable from Indian context. A few things I learnt somewhere on a forum while scrolling on internet:
There is a ban of gas-powered motorcycles in major Chinese cities. Laws which govern electric scooters are a lot less strict. Such extreme measures are unlikely to happen in India.
Moreover, Gas powered Motorcycles are considered âvehiclesâ there and the drivers have to drive in vehicles lanes, obtain a licence, follow the same traffic rules and pass an annual inspection. Canât see that happening here.
One thing that will certainly boost this space is larger government subsidies and better infrastructure as it did in China. Currently, FAME-II subsidies are Rs 15,000 for electric two wheelers. On the contrary, any removal of subsidies will deal a big blow to manufacturers. (Indian governments do have a tendency to surprise you from time to time).
India is a price-sensitive market as of now. Moreover, the public probably needs confidence in buying an electric scooter (or kind of social proof that this thing will work well. Most people I know still have second thoughts on buying an electric scooter). I would bet on the odds that their market share will grow with GDP growth and industry shift over the longer term. But donât know when.
The second question is a really important one. Because it signifies having some sort of moat with respect to competitors.
I think many factors combined together have led it to break into EV scooter supply chain. I do think a major factor is how the management runs its business. They mentioned how they got Ola business.
Basically, in any business, any new customer comers or any OEMs give business, based on, QCDDM, how is your quality, how is the quality rating with the existing customers, how is your factory, how much you are better equipped than your other, how is your design capability, how is your basically electronic capacity, as I told earlier that we were the first in India to put up the SMT line. Today we have most of thing in-house which our competitor doesnât have. So, basically, it depends how better you can do as compared to your competitors. So, based on QCDDM, they select you and based on that we got the order from Ola also.
I presume a culmination of all these factors helps and not a single factor alone. The good news is that they have broken into the supply chain of most EVâs (most recently Hero) and retained customers at large which does show some advantage, even though I canât exactly pinpoint which was their X-factor.
(Incidentally, most concalls often have âLucky Investment managersâ posing many questions, which means famed investor Ashish Kacholia is also closely tracking this space)( Also, most concalls have questions on the financials and numbers, not on the technical side/advantages of business which is disappointing)
The geographic location of factories also helps (but to an extent I think, not much). It helps that they have a few plants in the South (3 TN, 1 KAR) and North(2 HR,2 RAJ, 1 PB). Only one in Gujarat. They said of this advantage for Ola order.
Yes, as you know, that our Hosur plant is strategically located near Ola factory in South India. We are thus very well positioned to handle the Ola business. And moreover, whenever the capacity is required, as I told earlier, we have enough land. So, it can be built in four to five months it can start production, as to their requirements.
They also do mention that price dynamics play some part in their contracts and that explains why most auto ancillaries are squeezed in OPM numbers.
They claim that they give a lot of focus to R & D and some advantage on that front. They did mention it once. (May 2019 concall)
Basically, our products come into esthetics. If you remove lamps and mirror out of any vehicle, it becomes a structure of steel or plastic. So, basically, the development of the lamp is very, very imperative and if you donât have the R&D in-house, then you canât compete in the market. Because of the R&D in-house and because of the R&D state and because of the capability of R&D, we are getting the newer models and you can compete the world. Today, as a non-Japanese company, we are competing in this segment is a big thing. It is not a small thing. Basically, this is because of the R&D capability. If there is no R&D in the company, I think that company will die not slowly and it will die very soon. Through the basic strength of R&D, we are surviving since long. In our company, basically the R&D is playing a big role.
On top of that, they bought a company in Italy which handles all design-related tasks and is a technical center for them. They work with the customer and with help of the subsidiary design every product (they canât copy).
I wouldnât take the managementâs word as gospel (as one never should) and see over the next quarters how the advantages they claim have helped them get new customers while retaining old ones.
Other than that, I do think studying Lumax and Rinder more deeply can give some important insights about this space and can help one see this scrip from a competitorâs point of view and see what other technical and non-technical advantages they do have.
Hi @Adhiraj, thanks for the detailed notes. Discovered this company just yesterday and my first port of call, like always, is the VP thread to determine if the opportunity dserves further examining. Fiem looks interesting - I am of the view that a hockey stick growth in EV 2W may come at some point in the next couple of years, but it is difficult to bet on a winner. Fiem seems like a safe picks and shovel play with abilty to stay abreast with competition, at reasonable valuations.
I will be reading the ARs and past few quarters concalls in due course, so please do excuse me if the question is covered in the concalls. Is the margin per product for the higher value LED lights not higher than traditional lamps? Why is it that there wonât be margin expansion as the product mix shifts to higher value LEDs?
If there is a potential for margin expansion as well, that may be additional rerating potential.
