Analysis: Fiem Industries Limited

Modified on July 1, 2018

This article provides in-depth fundamental analysis of Fiem Industries Ltd, a leading player in automotive lighting industry.

 

Fiem Industries Ltd

Q: Vijay, I liked your stock portfolio. It is very well researched. Since we both come from the financial world, it would make sense for us to analyze and invest in the right companies.

FIEM Industries Ltd: I was analyzing Fiem Industries Ltd, which is an auto-ancillary (mid-size).

  • It has given good returns, sales growth and profit growth over the past 5 years.
  • Low D/E=0.44 compared to the auto-ancillary sector
  • Reserves= INR 215 cr> debt= INR 81 cr.
  • low equity = Equity cap is INR 12 crores.

I think it should be a part of yours and my stock portfolio. Price-wise, it has touched a high of INR 945 and is available at INR 582 today with yearly low of INR 452.

  • Last 5 years: sales growth> 25%, profit growth> 40%
  • OPM>12%
  • ROE > 14%
  • ROCE >20%
  • Interest coverage ratio > 4
  • EPS > INR 30
  • Consistent dividend payment with 60% last year and 70% this year.
  • No shares pledged.
  • Volume is low. Average volume is 10,000 on BSE and 30,000 on NSE
  • Regular tax and dividend paying company.

I think, Fiem Industries Ltd is a good stock to own. Is there something, which we need to be aware of or something missing why the stock has plummeted from 900s to 580s. Some management issue or any other issue, which you think can be a challenge.

What is your take?

Regards,

Author’s Response

Thanks for your feedback & appreciation! I am happy that you found the articles useful!

 

Financial Analysis of Fiem Industries Ltd:

Fiem Industries Ltd equity analysis research report Indian automotive lighting industry

Fiem Industries Ltd has been growing its sales at a decent pace of 20-25% year on year since last 10 years (FY2005-14). However, profitability margins (both OPM & NPM) have been fluctuating wildly. Operating profit margins (OPM) have been varying from 9-13% and net profit margins (NPM) have been fluctuating from 2-8% over the years.

Margins are representing a cyclical pattern, which is characteristic of automobiles and ancillary industries. Low fluctuating margins are characteristic of companies, which have consistent pricing pressure from their customers (OEMs). In automobile industries, OEMs keep a constant watch on vendor margins. Improvement in vendor profitability margins is commonly followed by requests for discounts by OEMs. In such businesses, companies find it difficult to have high profitability margins.

Over the years, the tax payout ratio of Fiem Industries Ltd has been fluctuating from 36% to 22%. However, recently tax payout is stable at about 30%, which is a good sign.

 

Operating Efficiency Analysis of Fiem Industries Ltd:

Fiem Industries Ltd has fixed asset turnover in the range of 2.1 to 2.4 over the years. Such FATR, though common for auto-ancillary businesses, is low when compared to good performing companies elsewhere.

Low profitability margin with low fixed asset turnover is not a healthy combination. Low net profitability margins result in very low amount of funds from sales being available to the company for investment in its operations. Low fixed asset turnover demands that large amount of capex needs to be incurred to grow the sales of the company. An investor can verify the continuous capex done by Fiem Industries Ltd by analyzing the increasing net fixed assets (NFA) over the years.

The combined impact of low profitability and low fixed asset turnover ensure that Fiem Industries Ltd is not able to grow by using only the funds generated from its profits. It has generated net profit of INR 146 cr. whereas the cash requirement for investing have been INR 349 cr. The gap has been met from two sources: releasing funds stuck in inventory and raising additional debt.

Analysis of inventory utilization of Fiem Industries Ltd reflects that it has been able to improve its efficiency levels over the years. Inventory turnover ratio of Fiem Industries Ltd has improved from 12 to 15.8 from FY2011 to FY2014. Better utilization of inventory has led to freeing of capital stuck in inventory. It is the major reason of Fiem Industries Ltd showing higher cash from operations than net profits over last 10 years (FY2005-14). PAT for last 10 years (FY2005-14) is INR 146 cr. whereas the CFO over the similar period is INR 307 cr.

As discussed above, the combination of low net profit margin and low fixed asset turnover is forcing Fiem Industries Ltd to invest heavily in its fixed assets for generating future growth. Increase in net fixed assets has been funded from raising debt. Total debt of Fiem Industries Ltd has increased from INR 23 cr. in FY2005 to INR 139 cr. in FY2012.

Fiem Industries Ltd has been able to reduce debt levels in last 2 years (FY2013 & FY2014) because of improved inventory utilization as reflected by improving inventory turnover ratio during this period. Improved operating efficiency has led to excess cash generation as reflected by CFO of INR 148 cr. in last 2 years as compared to PAT of INR 65 cr.

It seems one possibility that Fiem Industries Ltd is able to reduce its debt recently by improving its operating efficiency. It is a very good sign. However, an investor needs to be aware that the business model of Fiem Industries Ltd is a capital-intensive one. Combination of low net profit margin and low fixed asset turnover will always require large capex for Fiem Industries Ltd to grow its business in future. The investor needs to ascertain, to what extent Fiem Industries Ltd can improve its operating efficiency from current levels, to release funds from working capital and counterbalance the increasing debt.

It seems possible that debt levels of Fiem Industries Ltd would rise further as it nears the optimal operating efficiency levels. Comparison of operating efficiency of Fiem Industries Ltd with its industry peers would give the investor a fair idea about the scope of further improvement in its efficiency levels.

Investors should remain cautious of investing in companies where growth is associated with continuously increasing debt levels.

 

Margin of Safety in the market price of Fiem Industries Ltd:

Fiem Industries Ltd is currently available at a P/E ratio of about 16.35, which offers no margin of safety as described by Benjamin Graham in his book The Intelligent Investor.

Read: 3 Simple Ways to assess the Margin of Safety in a Stock

 

Conclusion:

Overall, Fiem Industries Ltd seems to be a company growing at a moderate pace but low fluctuating profitability margins. It operates in a capital-intensive industry where large capex is necessary for achieving future growth. Fiem Industries Ltd has relied on debt to fund its capex. However, it has simultaneously improved its operating efficiency and released funds stuck in inventory, thereby reducing its debt to some extent.

An investor should keep a close watch on its operating efficiency levels. Stable or deteriorating operating efficiency levels would lead to the removal of counterbalancing force on the increasing debt levels and Fiem Industries Ltd might see high debt levels thereafter.

These are my views about Fiem Industries Ltd. However, you should do your own analysis before taking any investment related decision about Fiem Industries Ltd.

You may use the following steps to analyse the company: “How to do Detailed Analysis of a Company

Hope it helps!

Regards,

P.S.

 

DISCLAIMER

  • The above discussion is only for educational purpose to help the readers improve their stock analysis skills. It is not a buy/sell/hold recommendation for the discussed stocks.
  • I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013.
  • Currently, I do not own stocks of the companies mentioned above in my portfolio.

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