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Fiem’s performance in Q2FY24 was largely in line with our estimate on Revenue/EBIDTA and margin front. In Q2FY24, Fiem delivered a decent set of performance despite muted 2W industry growth and was also able to manage margin above 13% level. Revenue during the quarter came at Rs.5.1bn (-3% YoY / +7.3% QoQ). Operating profit for the quarter came at Rs.681mn (-5.7% / +12% QoQ) vs est. of Rs.695mn and margin for the quarter improved on a sequential basis by 54bps to 13.4% vs est. of 13.3%. On YoY basis, margin contracted by 38bps due to higher staff cost. PAT for the quarter stood at Rs.435mn (+6.7% YoY / +22.5% QoQ)

Lighting segment's revenue dropped by 1% YoY to Rs. 3.68bn, and Plastic Moulded parts revenue de-grew by 7.6% YoY to Rs. 567mn. The RVM segment witnessed a single digit growth of 1% YoY to Rs. 615mn. Going forward, the management expects to register a healthy growth in H2FY24 driven by overall auto industry growth, new projects (models), and an increasing share of LED content

* Gogoro partnership to bring higher content value: The MoU entails FIEM to manufacture and assemble key components for EVs, including Hub Motor Assembly, Electric Control Unit (ECU), and Motor Control Unit (MCU). This collaboration, coupled with FIEM's supply of lighting and mirror solutions for Gogoro's domestic and export markets, positions the company as a primary beneficiary of the EV revolution.

* Initially, this production is for the domestic market and will begin with CKD (Completely Knocked Down) units. The company expects to localize this product within the next year. The content value is expected to be in the range of Rs.13-14k per unit, with margins improving over time, albeit being lower initially. During the quarter, the company started supplying MCU and HUB motors to Gogoro and going forward expect to supply EV related components to other OEMs as well. We expect that FIL will be the primary beneficiary of this EV opportunity over the next few years.

* Leading market share in EV lighting: Fiem’s current EV revenue share is around ~6% and the company boasts certain marquee clients such as Ola, Okinawa, Bounce, and Hero Electric and is also in discussion with incumbent OEMs. The company will also supply lighting solutions to the newly launched OLA scooter and MC in EV space.

* The penetration of EVs in India is currently in the low single digits, but this is expected to change dramatically over the next 3 to 5 years, and by the year 2030, it could hit a penetration level of between 30-40% as it is evident in the EV retail sales which has recovered well despite reduction in FAME-II subsidy.

* Outlook & Valuation: We maintain our positive view on the stock driven by continued dominance in the E-2W lighting segment, healthy free cash flow generation, and the addition of new clients, diversification into PV segment and partnership with Gogoro. We understand FIEM is poised for healthy growth in the coming year. We maintain OUTPERFORM rating on the stock with a TP of Rs. 2,098 (16X of FY25E EPS).

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