India Equity Research Automobiles November 12, 2014 Fiem Industries BUY Target (INR) 812 Ride along the growth path continues Fiem’s strong sales growth trajectory continues on the back of strong sales volumes for its key customers HMSI and TVS motors which have both gained market share in scooters and motorcycle segments so far in FY15. With customer preference continuing to benefit key customers, we estimate the strong growth in sales to continue. Additionally, signing of the JVs over the coming quarters could provide additional fillip to the stock as visibility on additional revenues improves. In‐line with reported numbers, we raise our EBITDA margin forecast and consequently PAT forecast for FY15f‐FY16f by 7%. We raise our TP to INR812/share and maintain BUY. Company Report Last Price (INR) 705 Bloomberg code FIEM IN Reuters code FIIN.BO Avg. Vol. (3m) 55,397 36.3 Avg. Val.(3m)(INRmn) 735 / 191 52‐wk H/L (INR) 27,910 Sensex MCAP (INRbn/USDmn) 8.44 / 137 Shareholding (%) 06/14 09/14 70.0 70.0 MFs, FIs, Banks 4.2 4.7 FIIs 0.1 1.3 10.0 15.8 9.9 14.2 Promoters Public Others Growth trajectory remains robust Fiem’s 2QFY15 sales growth at 17.5% y‐o‐y continues to remain strong on the back of strong sales volumes for its key customers HMSI and TVS motors which have both gained market share in scooters and motorcycle segments so far in FY15. In 1HFY15, Fiem has reported a sales growth of 17.6% while two‐wheeler industry grew at 16.4% as key customers continued to gain market share. With customer preference remaining towards scooters, we estimate HMSI and TVS motors to continue reporting strong sales growth and gain market share. As a result, we estimate Fiem to continue to remain on a good footing even if overall domestic two‐wheeler sales slows down a little as witnessed in Oct14. Stock Chart (Relative to Sensex) 900 700 500 Signing of JVs, growth in LED, IPIS next big triggers 300 While core business growth will likely continue to remain strong, further near term trigger could be the signing of the two JVs for which MoUs have already been signed as it could potentially lead to large additional future revenues as well as enable Fiem to diversify into four wheelers and potentially boost exports. Additionally, any growth in LED luminaire and Integrated Passenger Information Systems (IPIS) businesses could further improve earnings as these are high margin businesses currently in nascent stage with huge growth potential. 100 Nov13 Mar14 Jul14 Fiem Inds Nov14 Sensex Rebased Stock Perfm. (%) 1m 3m 1yr Absolute 10.3 13.1 251.0 4.2 3.7 214.8 Financials (INRmn)* 03/14 03/15f 03/16f Sales 7,184 8,477 10,173 19 18 20 EBITDA (%) 12.3 12.2 12.4 A.PAT 375 431 611 12 12 12 31.3 36.1 51.0 Rel. to Sensex YoY (%) Sh o/s (diluted) A.EPS (INR) YoY (%) 36 15 42 D/E (x) 0.7 0.5 0.4 P/E (x) 22.5 19.6 13.8 EV/E (x) 11.2 9.3 7.6 14 21 15 20 18 24 RoCE (%) RoE (%) Quarterly Trends* 12/13 03/14 06/14 We cut our FY15f sales growth forecast to 18.0% from 20.0% previously and raise our FY15f EBITDA margin forecast from 11.8% to 12.2%, in‐line with the reported 1HFY15 numbers. We raise our FY15f‐FY16f EPS forecast by upto 7% and raise our TP to INR812/share as we roll over to Dec15. We maintain BUY on the stock. We continue to base our TP on the average of our one‐year forward fair values based on an EV/EBITDA multiple of 7.0x and P/E of 13.0x. A slowdown in sales of key customers HMSI and TVS motors and large change in raw material prices which get passed on with a delay are key risk factors. 09/14 Sales (INRmn) 1,881 1,992 1,789 2,105 PAT (INRmn) 103 120 Raise TP to INR812; maintain BUY 81 107 *Standalone Please refer to the disclaimer towards the end of the document. Saurabh Bharat, +91 022 66842856 [email protected] Fiem Industries Exhibit 1: 2QFY15 result snapshot (INRmn) Sep13 Jun14 q‐o‐q (%) Sep14 y‐o‐y (%) Total operating income 1791.2 1789.2 17.6 2,104.7 17.5 Total operating expenses 1579.8 1570.3 17.6 1,846.2 16.9 211.5 218.9 18.1 258.5 22.3 ‐93.2 EBITDA Other Income 7.0 1.9 ‐75.4 0.5 Depreciation 52.7 76.0 0.4 76.3 44.7 165.7 144.9 26.1 182.7 10.2 36.9 31.8 ‐11.5 28.1 ‐23.7 128.8 113.1 36.7 154.5 19.9 EBIT Interest Recurring PBT Net extra ordinary items 0.0 PBT (reported) Total taxes 0.0 128.8 113.1 38.1 32.3 Net income (reported) 90.8 80.8 Shares outstanding (mn) 12.0 12.0 EPS (INR) 7.6 Operating ratios (%) 19.9 47.8 106.7 32.1 17.6 12.0 8.9 32.1 154.5 36.7 6.8 0.0 EBITDA margin 11.8 12.2 EBIT margin 9.3 Net profit margin 5.1 17.5 0.4 12.3 4.0 8.1 7.2 8.7 ‐6.2 4.5 12.3 5.1 0.1 Source: Company, IL&FS Institutional Equities Exhibit 2: Earnings revision summary ‐‐‐‐‐‐‐‐‐‐FY15f‐‐‐‐‐‐‐‐‐‐ (INRmn) Old New Var (%) Old New Var (%) Old New Var (%) 8,621 8,477 ‐1.7 10,345 10,173 ‐1.7 12,414 12,207 ‐1.7 ‐2.9 Net sales EBITDA ‐‐‐‐‐‐‐‐‐‐FY16f‐‐‐‐‐‐‐‐‐‐ ‐‐‐‐‐‐‐‐‐‐FY17f‐‐‐‐‐‐‐‐‐‐ 1,015 1,038 2.2 1,278 1,263 ‐1.2 1,601 1,555 PAT 402 431 7.2 573 611 6.5 797 800 0.3 EPS (INR) 34 36 7.2 48 51 6.5 67 67 0.3 Source: IL&FS Institutional Equities Exhibit 3: One year forward P/E (x) Exhibit 4: One year forward EV/EBITDA (x) 30 12 1‐yr fwd PE Target PE Avg PE 1‐yr Fwd EV/EBITDA Target EV/EBITDA Average EV/EBITDA 20 8 10 4 0 Mar07 Mar08 Mar09 Feb10 Feb11 Feb12 Jan13 Jan14 Dec14 Dec15 Source: Bloomberg, IL&FS Institutional Equities 0 Mar07 Mar08 Mar09 Feb10 Feb11 Feb12 Jan13 Jan14 Dec14 Dec15 Source: Bloomberg, IL&FS Institutional Equities Automobiles 2 Fiem Industries Financials and valuations (standalone) Income statement (INRmn) Balance sheet (INRmn) Fiscal year ending Total operating income EBITDA Other income Depreciation EBIT Interest Net extra ordinary items PBT (reported) Total taxes PAT (reported) (+) Share in assoc. earnings Less: Minority interest Prior period items Net income (reported) Adj. net income Dil. shares (mn) EPS (INR) Fiscal year ending Net worth Minority interest Total debt Deferred tax liability Total liabilities Net block CWIP Goodwill Investments Cash Inventories Debtors Loans and advances less: Current liabilities less: Provisions Net working capital Total assets 03/14 03/15f 03/16f 03/17f 7,184 8,477 10,173 12,207 885 1,038 1,263 1,555 7 8 10 12 218 306 308 337 674 740 964 1,230 144 124 92 87 0 0 0 0 530 616 872 1,143 155 185 261 343 375 431 611 800 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ (1) (1) (1) (1) 374 431 610 799 374 431 610 799 12.0 12.0 12.0 12.0 31.3 36.1 51.0 66.9 Cash flow statement (INRmn) Key Ratios Fiscal year ending Net profit + Depreciation Deferred tax Working capital changes Less: Other income Cash flow from operations Capital expenditure Others Cash flow from investing Equity raised Change in borrowings Dividends paid (incl. tax) Others Cash flow from financing Net change in cash Fiscal year ending P/E P/BV EV/Sales EV/EBITDA ROCE ROE EBITDA margin Net profit margin Operating income y‐o‐y EPS y‐o‐y Gross asset turnover Working capital cycle (days) Net debt to equity Net debt to EBITDA 03/14 03/15f 03/16f 03/17f 592 737 918 1,136 33 37 52 69 32 6 31 34 7 8 10 12 651 772 992 1,227 ‐404 ‐400 ‐800 ‐400 6 8 9 11 ‐398 ‐392 ‐791 ‐389 ‐ ‐ ‐ ‐ ‐149 ‐309 ‐55 ‐647 ‐84 ‐101 ‐143 ‐187 ‐16 38 ‐1 ‐1 ‐250 ‐371 ‐198 ‐835 3 8 3 3 03/14 03/15f 03/16f 03/17f 1,971 2,300 2,766 3,378 ‐ ‐ ‐ ‐ 1,197 888 834 187 275 322 374 443 3,443 3,510 3,974 4,007 3,130 2,821 2,913 3,376 27 400 800 400 0 0 0 0 1 1 1 1 19 27 30 33 423 445 467 490 764 840 924 1,016 184 199 216 234 995 1,095 1,204 1,324 109 128 173 220 286 288 260 229 3,443 3,510 3,974 4,007 03/14 22.5 4.3 1.4 11.2 14.2 20.5 12.3 5.2 19.3 36.2 1.7 14.2 0.7 1.4 03/15f 19.6 3.7 1.1 9.3 14.9 20.2 12.2 5.1 18.0 15.1 2.0 11.2 0.5 0.9 03/16f 13.8 3.1 0.9 7.6 18.0 24.1 12.4 6.0 20.0 41.5 2.2 8.7 0.4 0.7 03/17f 10.5 2.5 0.7 5.8 21.6 26.0 12.7 6.5 20.0 31.0 2.2 6.3 0.2 0.1 Automobiles 3 Fiem Industries Analyst Certification The following analyst(s) is(are) primarily responsible for this report and, certifies(y) that the opinion(s) on the subject company(ies) and its security(ies) and any other views or forecasts expressed herein accurately reflect their personal view(s): Saurabh Bharat Disclosures Meaning of IL&FS Broking Services Private Limited’s equity research ratings The rating represents the expected change in the price of the stock over a horizon of 12 months. 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To this end, we have policies in place to identify, consider and manage potential conflicts of interest and protect the integrity of our relationships with investing and corporate clients. Employee compliance with these policies is mandatory. Any comment or statement made herein are solely those of the analyst and do not necessarily reflect those of IBSPL. OFFICE ADDRESS IL&FS Broking Services Private Limited The IL&FS Financial Centre, 3rd Floor, Plot C ‐ 22, G ‐ Block, Bandra Kurla Complex, Bandra (East), Mumbai ‐ 400051, Maharashtra, India. T: +91 22 2653 3333 F: +91 22 2653 3548 IL&FS Broking Services Private Limited ‐ Corporate Identity Number: U67120MH2009PTC191131; SEBI Registration Numbers: BSE CM ‐ INZ010005833 | NSE CM ‐ INZ230005738 | NSE F&O ‐ INZ230005738 Automobiles 4