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Electrifying growth ahead

We retain our BUY rating and revise our TP upwards to Rs1,230. Fiem’s 1QFY21 YoY sales growth again was better than 2-wheeler industry production growth mainly because of stronger YoY growth in TVS and HMSI and a higher share of the revenue from Yamaha. Fiem has bagged Ola Electric as a client and will be supplying head lamps, tail lamps, indicators, rear fender assembly, and mirrors.

As the debt repayment continued in 1QFY22 as well, we maintain our existing view that the management has been prudent in repaying debt in times where growth was uncertain. Lower debt, greater control on its cash flow, higher dividend yield, and substantial client addition makes Fiem a resilient and reliable auto-ancillary player.

* Interest cost reduction continues: The top line increased by 308% YoY to Rs2.7bn as the automotive business grew by 325% YoY to Rs2.69bn and the LED luminaires reported revenue of Rs26mn, up 8% YoY. The RM/employee/other cost displayed a change of +248%/+109%/+143% YoY, respectively. The EBITDA came in at Rs312mn with an EBITDA margin of 11.3%. The repaying of debt also led to a lower interest cost of Rs22mn, down 24% YoY. The consolidated PAT rose to Rs109mn vs a loss in 1QFY21.

* EVs to aid new order book: Fiem has confirmed that it will be supplying head lamps, tail lamps, indicators, rear fender assembly and mirrors to Ola Electric. Fiem has also confirmed that it is a major supplier for most of the models of Okinawa and Electrotherm. Regulation addition of clients especially on the EV front is promising.

* Outlook: As Fiem is already supplying to key electric vehicle players like Okinawa, Ampere, Hero Electric, Revolt, and Electrotherm, we feel that it has a strong firstmover advantage with key players in the 2-wheeler EV industry. While, due to the second lockdown, 1QFY22 was a sequential dampener for the entire auto industry, we feel 2-wheelers demand remains a long-term positive story. With a healthy monsoon and revenge buying themes at play, we think that personal mobility should pick up.

* Valuation and risks: We think that with the onboarding of Ola, Fiem has made its presence felt across the industry. We would like to re-iterate that going forward, this can only lead to more order and client wins as it decisively establishes Fiem’s capabilities to handle large and new-age orders. Thus, we think that Fiem deserves a 15x P/E multiple (earlier 12x). We have slightly tweaked our estimates due to a major client addition and roll over to September 2023E EPS. We continue to value the AFI JV at 8x and thus through SOTP valuation, arrive at our fair value TP of Rs1,230. Our DCF valuation methodology pegs Fiem’s fair value TP of Rs1,400. Risks include slower than expected recovery in 2Ws due to extended lockdowns.

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