Investors with a long-term perspective and an appetite for high risk can buy the Fiem Industries stock (market capitalisation of about ₹ 800 crore). The company is a supplier of lighting, rear-view mirrors and plastic-moulded parts, predominantly for two-wheelers.
An expected turnaround in new vehicle sales after two years (FY20 and FY21) of fall, improving share of revenues from the LED lighting segment and bettering financial metrics from the company’s deleveraging efforts are positives. After having more than doubled in the market rally since the lows of March 2020, the stock trades at a reasonable PE of about 17.8 times its trailing 12-month earnings. Peers such as Lumax Industries trades at 90 times due to a combination of sharp price rise as well as depressed earnings. Investors must take exposure to Fiem Industries in small quantities though, considering the micro-cap nature of the stock.
Ride on auto cycle
Fiem Industries derives 95 per cent of its revenues from the two-wheelers segment, with Honda, TVS, Yamaha and Suzuki being its key clients. Caught in a cyclical slowdown even as Covid hit, the overall auto industry sales volumes shrunk by 18 per cent in FY20, and two-wheeler sales volumes too mirrored the industry fall. While the pent-up demand from the lockdown and the festival season did bring some spurt in two-wheeler sales in FY21, demand has not come back firmly so far this fiscal. Two-wheeler sales volumes for the first 10 months of FY21 (April –January) is about 20 per cent lower than April-January FY20.
After two successive years of sharp fall, the worst could be over for the industry. Into FY22, the low base of the last two years is expected to act as tailwind. Fiem is well placed to ride on this upturn. The market share of Fiem’s key client Honda moved up from 6.4 per cent 10 years ago to 25.1 per cent now, while that of TVS has moved up from 6.7 per cent to 14.5 per cent in the same period.a
Trends such as rising share of scooter and premium bike sales in the overall two-wheeler mix bodes well for the company Fiem is a supplier to scooters such as Activa, Dio, Grazia (Honda), Fascino (Yamaha) and Jupiter (TVS). It has added Piaggio to its client list recently. In the premium bikes segment, Fiem supplies to the GT-Continental and Himalayan models of Royal Enfield, the Street 500 and Street Road models of Harley-Davidson as well as other premium bikes from Suzuki and Yamaha.
Scope for higher LED penetration
What holds promise for Fiem is the higher adoption of LED lights by two-wheelers, given the focus on energy efficiency, be it through adoption of BS VI norms, the Café Regulations or electric vehicles. Today, the ratio of conventional lamps to LEDs for the company stands at 41:59 and has scope for moving up over the years.
The government proposes that two-wheelers below 150 cc move to electric by 2025 as well as 40 per cent of all personal vehicles (cars and two-wheelers) become electric by 2030. As of 2019-20, only about 1.52 lakh electric two-wheelers were sold in the country which is less than 1 per cent of the total two-wheeler sales. Even assuming only a portion of the government’s target is met, this will still translate into substantial demand for LED lamps.
The company had earlier tried its hand in the LED luminaries segment – home lighting, information display systems in buses and trains, street lighting through supplies to government-run Energy Efficiency Services. However, the demand and profitability did not turn out as expected. These capacities will now be redirected towards automotive LED lighting.
Benefits of deleveraging
While LED lamps may be priced 2-5 times higher than conventional ones, the company does not automatically get higher margins on this as, typically, most suppliers do not have good bargaining power with auto manufacturers. Even as LED share in the sales mix has gone up steadily over the last few years, the company’s operating margin has remained at about 10-11 per cent, given that they operate on a ‘cost plus 5 per cent margin’ terms with their buyers.
However, higher capacity utilisation once demand improves could lead to greater absorption of fixed costs and bring about operating leverage to drive the margins. The current capacity utilisation stands at 70-75 per cent. Also, the company’s relatively newer products such as canisters (used for emission control), bank or lean angle sensors (to switch off engine when vehicle skids) and fuel pump modules will improve content supplied per vehicle and give them more pricing power.
The company has been on a debt reduction run in the last 3-4 years, with the latest debt to equity ratio (as of September 2020) at 0.22 per cent. Interest cost reduction due to this has seen the return-on-equity improve from 9.9 per cent in FY17 to 15 per cent as of FY20. Interest costs fell by 37 per cent in the nine months ended December 2020. Sales for April-December 2020 dropped by 24.4 per cent year-on-year to ₹799 crore, while adjusted profits fell 57 per cent to ₹ 24 crore.
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