FIEM Industries - Result Update - Negatives priced in, Well poised to gain in the long term - Centrum

We maintain our Buy rating on FIEM Industries with TP of Rs1,260. Recent correction seems to be pricing in most of the negatives and present a good investment opportunity to investors. We expect FIEM's growth to recover aided by strong growth prospects of its two biggest clients namely Honda Motorcycle and Scooter India (HMSI) and TVS Motor. FIEM faced several issues in its LED business, due to an unfavourable business environment, which led to a subdued FY17 performance. Q4FY17 performance was slightly below estimates where the company posted a loss of Rs16.9mn, primarily on account of a one-off item of ~Rs142mn (non-recoverable items being written off). Despite slightly lower visibility in the LED business, we remain convinced of FIEM's medium-to-longterm growth opportunity as the company continues to remain a strong 2W auto ancillary company. Also, the management is working on several fronts to get the LED business on track which will provide additional growth in the long run.

- Auto segment supported well: FIEM's 4QFY17 revenue was down 15.2% YoY as revenue from the LED business was negative on account of sales return of Rs23mn (0.37mn LED bulbs, earlier supplied to EESL). The management has highlighted that the company might have further sales returns of around Rs59mn in the near future. However, the company's auto business managed post demonetization woes very well and posted a growth of 8.6% YoY.

- Profitability was under pressure due to LED related issues: Due to loss in the LED business, the company posted a margin contraction of ~400bps yoy. Subsequently, EBITDA was down by ~40%. However, FIEM maintained encouraging EBIT margin level of ~9% in its auto business which is very positive. FIEM's 4QFY17 PAT turned negative, on account of writing off Rs142mn due to issues in its LED street light maintenance contract.

- Auto business outlook is very strong: If growth of HMSI and TVS Motors in the first two months of FY18 is any indication, FIEM is set to post a strong growth in its auto business. FIEM's LED prospects suffered a lot due to intensifying competition. The prices of LED bulbs in the Energy Efficiency Services Limited (EESL) contracts fell to irrational levels. Some price recovery has already begun but it may take few quarters to gain lost ground in the domestic LED business. However, recently FIEM signed an MoU to set up a JV in Bahrain to manufacture and commercialize LED lights in Bahrain and the whole of the Gulf Cooperation Council. This promises a good future for LED sales in the medium-to-long run.

Valuation and Risk: We remain convinced of FIEM's medium-to-long-term growth opportunity. We value FIEM on our differentiated AOCF/EV methodology and arrive at a TP of Rs1,260 (18.1x FY19E EPS). Key downside risk: slower-than-expected growth in HMSI and TVS Motor.

Shares of FIEM INDUSTRIES LTD. was last trading in BSE at Rs.866 as compared to the previous close of Rs. 869.65. The total number of shares traded during the day was 531 in over 35 trades.

The stock hit an intraday high of Rs. 878.85 and intraday low of 865. The net turnover during the day was Rs. 460886.

Source : Equity Bulls

Keywords