Equity Research: FIEM Industries

Summary

Fiem is trading at a valuation of 14x 1-year forward P/E multiple after the recent steep rally. It has a good upside potential of 17% from its CMP.

Fiem Industries Ltd is engaged in lighting fixtures, signaling system and parts; rear view mirror and elements; plastic molded elements, and LED luminaries commercial enterprise. The Company's segments comprises Automotive and LED Luminaries. Its Automotive section consists of automotive lighting fixtures and signaling system, rear view mirror, prismatic mirror, plastic molded elements, and sheet metallic additives for motorized vehicles and others parts for automotive. Its LED Luminaries Segment includes LED luminaries, along with indoor and out of doors lights, display panel and LED integrated passenger statistics device. It presents integrated passenger records systems for buses, railways, metros, airports and malls. Its luminaries encompass LED Bulbs and LED Tubes, LED Down Lights, LED Street Lights, Solar LED Street lighting fixtures and Solar LED Lantern. The Company has over 3 R&D centres, consisting of in India, Italy and Japan. It has over 10 production centers in India.

Fiem Industries may achieve electrifying growth due to the rapid ramp up in sales of lightings for electric vehicles (EV) 2 Wheelers (2W), strongly complemented by new models from existing combustion engine customers. Further, increased penetration of LED auto lightings will only zoom revenue growth. FIEM is net cash since FY21 and margin expectations remain stable at an industry leading 12%. With 80 new projects in pipeline and new CAPEX plan to boost capacities, we expect FIEM to outperform in rather slow revival state of 2W industry. 

State of art facility make it future ready: We were impressed by the future and EV ready status of the Tapukara facility which is well organised and has automation to reduce manufacturing time and cost. Excess space for EV led capacity expansion along with fungible assembly lines makes FIEM ready for rapid growth. FIEM’s design team’s success is clearly demonstrated through its existing lightings for Yamaha and Royal Enfield which have created highest recall value. FIEM’s facilities are also smartly located in close proximity to leading 2W OEM plants.  All the equipment, raw material sourcing line, production lines, assembly lines and packaging lines at the Tapukara facility are completely fungible so as to quickly tackle changes in production schedules of existing and new models from old and new customers. This shows quite a lot of future planning to incorporate expansion and technological development at the same location. The most comforting factor observed at the plant was the deep rooted relations FIEM enjoys with its old customers assuring future business security. The next leg of robust and swift growth for FIEM is expected to be driven by ramp up in sales of its comprehensive EV portfolio catering to all well-known brands like Hero Electric, Okinawa, Ola, Revolt, Ampere, etc. We also learned at the plant visit that FIEM is witnessing heavy surge in demand from EV manufacturers gearing up especially for the festive quarter. Additionally, two existing customers TVS and Yamaha have rolled out ambitious plans to ramp up EV portfolio which will surely land up in FIEM’s kitty. 

Electrifying growth and robust balance sheet: FIEM has ~80 new projects under its belt including 3 new models of Hero MotoCorp and expectations of few more models from existing combustion engine customers. Further, increased penetration of LED auto lightings will only zoom revenue growth. Due to all these factors, It is expected that FIEM will achieve more than 15%/ 20% CAGR growth for revenue/ PAT for next two years. FIEM turned net cash in FY21 after several year of efficient cash allocation and margin expectations remain stable at an industry leading 12%. With new CAPEX plan of Rs600mn to cater to rising demand, we expect FIEM to outperform in rather slow revival state of 2W industry. 

Highly Automated Setup: The state of art LED lighting plant also had a highly automated setup. From inputs raw materials of the Printed Circuit Board (PCB), designing of PCB to manufacturing and testing; all of these process were highly automated and had fungible lines to adapt to new designs and undergo large quantity manufacturing. Rest of the plant also had automation at several processes from RM collection, injection moulding lines and assembly lines.

Best-in-class designing support team: FIEM’s design teams in Italy, Japan and India have proven their ability and have delivered best in class lighting designs which has been the demand driver and a recognition tools for several 2Wheelers over the last decade.

Increase in demand among its customers:

FIEM derived 82% revenue from its top-5 2W clients in 4QFY22 (84% in 4QFY21) and the revenue from its top-2 anchor clients, HMSI/TVS stood at 29%/22% respectively. The 2W industry production declined by 19% YoY in 4QFY22 but has been registering quarter on quarter growth of 9.1%. FIEM’s key client’s production also witnessed similar quarter on quarter growth trajectory in May’22 but the volumes still stay lower than pre-pandemic levels. 

Rapid increase in Demand of EV’s:

Demand for Electric vehicles has seen a bounce back in India post third wave of the pandemic. With ~0.2mn electric 2W sold in YTD CY2022, the expectation is that this number will become ~5-6x in CY2023. Currently the penetration of EV in India is mere 4.5% of the total 2Wheeler sales which is expected to ramp up to 30% by 2030 according to estimates by TVS motors and target of Indian government. 

Increase in demand of EV lightings:

With the guidance of ~60% LED revenue share in the future, as it starts supplying LED lighting to new models of existing clients along with bagging new clients in the EV space, we remain confident that FIEM’s LED revenue share should scale up quickly in the next ~2 years. LED lightings realisation is 2-3x times as that of halogen lightings. This will further led to faster revenue growth than its peers. TVS Motors and Yamaha Motors India have now announced new rounds of fund raising and extensive plans for ramping up Electric vehicle and battery infrastructure to ramp up its EV production. While TVS is expected to raise Rs4000-5000crores for the same purpose, Yamaha’s new EV prototype is ready and is expected to enter into production soon. With the current state of robust loyalty showed by these customers, it is very likely that FIEM will be manufacturing lightings for these two OEM’s. FIEM is working on ~ 80 new projects which will be spread over the next 2-3 year. This is more than the long term average of ~40-50 new projects which shows the rise in new launches for the 2Wheeler industry. 

The management’s plan of repaying the long-term debt has been ongoing even after turning net cash in FY21 and 4QFY22 again witnessed a debt reduction of Rs61mn. FIEM is expected to repay all its debt by Sept’22 and this will give the company immense strength to pursue capital expenditure through internal accruals going forward and also increase return to shareholders through dividends. 

It is expected that Fiem’s capability to maintain margin in an inflationary environment, continuously repay debt for over a year, and add a new client in pandemic uncertainty is commendable. Fiem’s high quality standards, robust SMT lines and the habit of insourcing maximum components are now paying off during a global supply chain disruption. With big names in EVs, Piaggio, Yamaha, and Harley Davidson export order ramp up, we feel that the growth runway for Fiem remains long. 

Historical Financials:

Estimated Financials:

Valuation:

Fiem is trading at a valuation of 14x 1-year forward P/E multiple after the recent steep rally. FIEM is at P/E multiple of 17x (equal to its 5-year average) to arrive at a TP of Rs. 1760. We believe that 17x PER is justified due to high earnings growth, improved return ratios due to increased sweating of assets, no huge capex plans and net cash balance sheet.