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Dismal operational performance
Fiem Industries Ltd (Fiem) reported weak set of numbers in Q2FY19, which was below our estimates. While revenue growth was healthy at 20.8% YoY, the operating profit grew at meagre 5.6% YoY as margins declined 145bps during the quarter. Further, dismal operational performance and lower other income led to net profit growth of 3% YoY. Nonetheless, we remain positive on the two wheelers and four wheelers auto segments and expect double digit growth over the next 2-3 years. However, increase in commodity cost (as witnessed in H1FY19) has led to margins decline for the company. Going forward, we expect margins to stabilize given the correction in crude oil prices and appreciation of rupee. Maintain Buy with a revised target price of Rs. 807.
Q2FY19 Result Update :
* Fiem posted a strong revenue growth of 20.8% YoY in Q2FY19 to Rs. 395 cr as against Rs. 327 cr in the same quarter last year. The growth was led by 19.7% increase in its automotive segment and 1.5x jump in LED luminaries segment.
* Operating profit for the quarter grew at meagre 5.6% yoy to Rs. 39.6 cr as against Rs. 37.5 cr in the same quarter last year. The muted operational performance was due to higher raw material prices, which increased by 322bps in Q2FY19. However, the fall was partially arrested by lower employee cost and other expense. The EBITDA margin declined by 145bps to 10.1%.
* Led by dismal operational performance and lower other income, net profit growth was restricted to 3% YoY to Rs. 14.8 cr as against 14.3 cr in Q2FY18. The PAT margins declined 65bps to 3.7% in Q2FY19.
Outlook & Valuation:
We expect Fiem’s automotive segment to report healthy growth on account of rising disposable income, recovery in GDP growth and improvement in rural economy. Fiem has been launching new and latest products to increase its offerings and providing value addition to its customers. With strong R&D capabilities, Fiem Industries was the first company to supply LED based lamps for two wheeler models. According to the management, LED products are expensive compared to the conventional products and offer better margins. The wider adoption of LEDs unlocks huge potential for the company both in terms of sales growth and margin expansion. It indicated that despite higher prices, the OEMs are willing to shift to these products, as these are more efficient products and improve the styling appearance of vehicles. Even though we remain optimistic on the sales growth of Fiem, margins have remained under pressure due to rise in commodity cost and hence we have lowered our margins outlook for H2FY19 and FY20E. Nonetheless, we maintain a Buy on the stock with revised target price of Rs. 807.
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