The Hindu Business Line : FIEM Industries: Avoid

Though there is good potential, the offer, priced at about 16 times the expected per-share earnings (on the expanded equity base) for 2006-07, is, in our view, stiff. Further, a single customer accounting for close to three-fourths of the company's revenues poses concentration risk. We would, however, continue to track the stock closely for possible entry opportunities at lower levels.

Background and objectives

FIEM is primarily a manufacturer of auto components such as lamps (head, tail, and signalling lamps among others) and mirrors. In FY-06, the company derived close to 85 per cent of its revenues from these product lines. The IPO is intended for the following purposes:

Setting up a new facility at Himachal Pradesh,

Expanding the existing facilities at Haryana and Tamil Nadu,

Establishing an export-oriented unit at Hosur in Tamil Nadu, and

Repaying a term loan taken to fund the expansion plans.

Investment rationale

FIEM's clients include TVS Motor, Kinetic, Hyundai, Honda Motorcycle and Scooter India and General Motors India. However, its top three customers account for 85 per cent of revenues and TVS Motor alone contributes 70 per cent to sales. The proposed plant at Himachal Pradesh is to cater to the requirements of TVS, which is setting up a facility there. This, in our view, makes FIEM's prospects highly dependent on the fortunes of just a few industry players. Though TVS Motors' growth rate ranks second among its peers, players such as Bajaj Auto and Hero Honda are significantly ahead in the volumes sweepstakes. The earnings growth will have to be driven by volumes and that would require a relationship across all the leading original equipment manufacturers.

Even as FIEM endeavours to forge relationships with the other industry players, it must be noted that OEMs typically source from a set of vendors and an entry into the circle does not automatically guarantee large volumes.

Scale would come only over a period and only thereafter would there be any meaningful impact on earnings.

Though exports constitute a fraction of sales as of now, FIEM's arrangement with Ichikoh of Japan for mirror assemblies and the JV with Korea Airconditioners are likely to have meaningful impact from the next fiscal onwards; their near-term contribution will likely remain marginal.

It would also be appropriate here to draw a parallel between FIEM and its closest peer, Lumax. Lumax has almost all the leading OEMs as part of its clientele and is slightly over thrice FIEM's size, in revenue terms. FIEM's margins are better, but this metric is improving at Lumax, following a strong showing in the first quarter of the current fiscal.

Lumax's diversified customer base also mitigates client-specific risk. At its current price, Lumax trades at 12-13 times expected per-share earnings for FY-07. Further, Lumax trades at a market-cap-to-sales ratio of 0.4; the FIEM figure would be 1.2 (assuming the offer is at the lower end of the price band), in spite of its comparatively smaller size. In this context, we view the offer as being expensively priced.

Offer details: The FIEM offer is for 41 lakh shares in the price band of Rs 125-145. The minimum bid for retail investors is 45 shares and in multiples of 45 thereafter.

IL&FS Investsmart is the lead manager to the issue that opened on September 21 and closes on September 27.

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