Fiem Industries Limited (FIEMIND) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q1 FY '21 Earnings Conference Call of Fiem Industries Limited hosted by Monarch Networth Capital Limited. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Anubhav Rawat from Monarch Networth Capital Limited. Thank you, and over to you, sir.

Yes. Thank you, Faizan. Good evening, everyone. On behalf of Monarch Networth Capital, I welcome you all to Quarter 1 FY '21 Earnings Conference Call of Fiem Industries. I hope all of you are safe and sound. We are pleased to host the senior management team of the company. Now let us start the call with initial comments about the results and future outlook, and then we can open the floor for questions. I would like to hand over the call to Mr. J. K. Jain, Chairman and Managing Director of the company. Over to you, sir.

Good afternoon, ladies and gentlemen. We welcome you all to the conference call on the financial results of the Fiem Industries for first quarter of this financial year. I would like to wish you all good health in the time of wide-spreading COVID-19. This is indeed a challenging and unprecedented time for all of us. The company has released its result on 1st September. I believe you all got the chance to look upon the same. Along with me on this call, I have Mr. Rahul Jain, Director; Aanchal Jain, Director; [Technical Difficulty] Director; Mr. O. P. Gupta, CFO; Mr. Arvind Chauhan, Company Secretary; and other financial team members. As you are aware, April was a complete washout. Followed by the minimal pickup in May, the plants were gradually opened towards the end of the May...

I'm sorry to interrupt you. The audio is not coming clear, sir, from your line.

Hello? Hello?

Yes. It's audible now, sir, please go ahead.

Shall I start from the beginning or...

Sir -- no, sir, you can go ahead, please.

Okay. As you are aware, April was complete washout. Followed by minimal pickup in May, the plants were gradually opened towards the end of May to resume the production per customer schedule. During the month of June, [Technical Difficulty] company to finally achieve its [Technical Difficulty] of INR 66 crores during this quarter. The sales further picked up from the month of July, and we are glad to inform you that the sales for the month of August increased by 4% as compared to the sales of the August 2019. We are expecting a good recovery in the coming months. We think that the reason for the recovery in 2-wheelers are: good demand for the rural sector, preference of the people to travel solo, continuation of the suspension of railways and metro services and the restrictions on the number of passengers in the public transport. We are ready to cater to the demand of our valued customers for regular supplies. Our R&D and design team are also proactively ready for the new product development. On 25th August, the Finance Minister, Nirmala Sitharaman, has said that 2-wheelers are neither a luxury nor a sin good and hence, merit a rate revision. Such reduction of GST on 2-wheelers will surely boost up further demand. In our opinion, it is the right step at the right time, and it should be brought into the action at the earliest. So overall, we are quite hopeful that the demand outlook in the coming months will be more promising, and we should be able to perform better in the coming months. With this, I hand over the line to our CFO, Mr. O. P. Gupta, to update on financials. Thanks.

Mr. Gupta, please.

Thank you, sir. Good afternoon to everyone. I would like to reiterate that company's operations and financial results for the quarter ended June 2020 have been adversely impacted by the COVID-19 pandemic and the lockdown measures taken by the government. As already mentioned by our CMD, the plants of the company were closed during the entire April and part of May 2020. From the first week of May onwards, the plants started resuming operation gradually, with requisite precautions and the sales started picking up from June. In the backdrop of this unprecedented environment, the company has generated net sales of INR 66 crore in the first quarter of FY '20-'21. During the first quarter, the focus of the company has been on conservation of cash and improving liquidity. The company has made negligible investments in CapEx to the tune of INR 4 crore and have used other fixed overheads. The company has not made any fresh borrowing and total debt of the company stood at INR 133.61 crore [Technical Difficulty] 2020, which comprised of term loan of INR 81.96 crore and working capital loan of INR 51.65 crore. The debt equity ratio of the company as at 30th June 2020 is 0.16. With this, I end the financial brief, and now the floor is open for question and answers. Thank you.

[Operator Instructions] The first question is from the line of Varun Baxi from Equirus.

Sir, my first question is regarding our production ramp-up post lockdown, and what kind of utilization are we seeing currently in, say, August?

In the normal circumstances, present capacity utilization remains to the range of 70% to 75%. And similarly, in the month of August, it was around the -- similar to that -- around 75%.

Okay. So we are now like -- from our schedules, from our customers are also in line with the pre-COVID levels and now almost we can say that all the orders should be executed at the pre-COVID levels now?

Yes. The orders are -- the pre-COVID level very, very encouraging. We are not able to meet the demand, to be very frank, because of some constraints from the labor. But still, the demand is very high.

Okay. Okay. And sir, if you can update on any new order wins from our domestic customers like TVS or HMSI? Because in BS-VI, like there was -- there were talks that we will be able to gain more orders from these customers. So any update on that?

Yes. We have -- although BS-VI models are already introduced by HMSI, there are a few models which will be introduced in recent months, might be by next month and few are on -- during the October month. Similarly, for TVS-M also, there are a few products which are under development. Those will be released for the platform -- market platform very soon.

Okay. Sir, also, on our JV with Aisan, so how has been the ramp-up over there? Like, we had earlier started supplying to Bajaj. So any new order wins were there? Or any new updates over there?

Regarding our JV for Fuel Pump Module, basically, earlier, they were looking only for Bajaj, now they are working for other customer also. The development is going there. It is in process. And we expect a sale around INR 100 crores this year.

In FY '21?

Yes.

Yes.

Okay. Okay. And sir, similarly on banking angle sensors and canister, earlier, we had said like we are expecting INR 35 crores and around INR 5 crores from these 2 products. So do you maintain this? Or is there any further update over there?

Yes. We hope to maintain the same.

Okay. Okay. Sir, finally, on our gross margins in this quarter. So in this quarter, our gross margin slid significantly. Is there any one-off of, like, say, inventory adjustment or anything of that sort, which led to the decline in our margin?

Yes. Actually, as you -- hello? As you know, this quarter has been really unprecedented in the history of business and you know that there are hardly much of the sales in this quarter and there are definitely fixed overheads, so there is definitely a direct impact on the profitability margins. So you have the turnover of INR 66 crores, which the company was making in the range of INR 300 crores to INR 350 crores in 1 quarter. So regarding the direct hit on margins, there is no direct hit. If the company is able to achieve its sales, it will definitely come back to its original margins. And during this period, of course, there is a reorganization of business. And the company during COVID-19 has focused more on optimum utilization of its assets. And some of the assets have definitely been transferred from -- to auto sector and they are trying to make effective use of it.

Okay. Okay. And if you can throw any light on any fixed cost reduction measures that they have taken to -- and how much of this is going to remain sustainable once -- even after the volumes reach the earlier levels? Or -- so that would be really helpful.

Yes. Actually, if you talk about the fixed reduction in the cost, right from day 1, company thought of reducing the cost. So they cut the salaries and the other fixed overheads. They were very, very vigilant on seeing the cost reduction and then reduction in the wastage and automation. But as the company is now virtually reaching at the pre-COVID level state and they have made -- company has made good sales in the month of July and August. So -- and from September onwards, they would definitely be at pre-COVID level. So after September, definitely, to retain the talent, the company thought of revising its cost and giving back the salaries to its -- to all levels of employees. Other cost reductions however will continue.

Okay. Okay. And sir, like we have been working for the global models of Yamaha and Suzuki and last year around 3 models had started. So any color on what is the plan for this year? And any new -- any further model addition that we can see in this year?

Yes. There are 4 models which are under pipeline and might be by end of this year -- before end of this year, those all 4 models will be launched from TVS -- from Yamaha platform.

In the global market?

Yes.

[Operator Instructions] The next question is from the line of Ashutosh Tiwari from Equirus Securities.

So we had mentioned earlier that Activa has moved to 2 variants with BS-VI, one is LED and one is halogen. So can you share what kind of mix we are seeing in terms of, say, basically, is halogen far higher in the share of Activa than LED?

No. The condition, whatever forecast we have received based on the market inputs, it is 20% is conventional, wherein 80% is of LED.

Okay. I think last time we discussed that probably maybe 1 or 2 quarters back that almost 70% was expected to be halogen. You're saying that almost 80% is LED in the sales.

Yes. This was predicted earlier last year when we started development of this product. HMSI -- because of BS-VI, HMSI, as I'm expecting, it will be -- conventional will be more, but market demand is, of course, reverse, and 20% is only conventional, wherein 80% of LED.

Oh, that's encouraging. And sir, between the LED and halogen lamps, what's the difference is Activa -- what is, let's say, if halogen is INR 1, what would be the cost of the LED headlamp?

It is almost 2.5x.

2.5x?

Yes.

Okay. Okay. That's it. And what is our share in the -- in this Activa LED and halogen volumes in headlamps?

Total is 40%.

Yes. Total is 40%.

In both put together you're saying, basically?

Yes.

So is it like similar in both halogen and LED? Or it is higher in LED or halogen?

Higher in LEDs, of course, because whatever I communicated, 80% is LED and 20% is only conventional.

No, no, no. I'm saying, our share is...

Our share is also like in LED only. Whatever 40% is -- again, there is 80% of LED, 20% is only conventional.

Okay. I got it. And secondly, do we import some parts from China for LEDs or some other countries, if any parts are imported?

You are talking about the electronic components or...

Yes. Electronic components for lights only, yes. Like the chips and all, diodes and all, so are they imported from China or some other countries?

Yes. We are -- as of now, we were importing from China, but all the companies whosoever is supplying to us based on China, have their set up in other part of the country. So we have already arranged the material, and they have already started supplying from other sources, too.

So because that -- will there be any increase in the cost or it's not material?

No. As of now, no.

Okay. And if you look at last 2, 3 months, Honda ramp-up in production in sales has kind of lagged other peers, like Hero and other guys, basically. So are we seeing -- let's say, in the schedules going ahead, are we seeing a good ramp-up for Honda as well?

Yes, of course. Honda plan, whatever is shared now, it is very good and it is encouraging.

The next question is from the line of Pritesh Chheda from Lucky Investment.

Sir, just one clarification on this Activa. So the entire volumes of portfolio of Activa will have 20% conventional and 80% LED?

Yes, of course.

Okay. And what was this mix last year?

Last year was 100% LED. If you see, BS-IV was 100% LED. Only BS-VI, they introduced conventional and LED both.

Okay. Okay. And second question is, what is the net debt and the gross debt in our book, sir?

Yes, it is -- if you talk of the term loan, it is 100 -- it is -- the total loan is INR 134 crores as on 30th June, which comprises of INR 82 crores of the term loan and INR 52 crores is the working capital.

And what is the cash on the book?

Cash is, actually, whatever the cash is -- that is why it has been utilized. It is only INR 4 crores, INR 5 crores. The net debt would be around, say, INR 129 crores.

This figure was different at the end of FY -- quarter 4 FY '20, have we done any CapEx or anything?

Yes. No, no. Actually, as on 31st March 2020, there was -- the working capital was 0. And the money was lying in the bank [Technical Difficulty] and that money has been utilized for paying the creditors. You see the balance sheet, there were creditors, which have been paid in the month of April and May.

Okay. Okay. So if you...

Yes, sorry. There are hardly any CapEx in this quarter. The CapEx is only to the tune of INR 3.90 crore. So the company has not made any CapEx.

So this gross debt number at the end of FY '21, how should it look like? Because we don't have CapEx, right? We have surplus capacity.

Yes. I think during the year, of course, some maintenance CapEx will always be there, say, INR 4 crore per quarter, say, INR 15 crore to INR 20 crore. But of course, the bad debt will definitely be less because INR 3 crore per month the company is paying towards the installment, the debt of INR 82 crores and INR 27 crores 9-month installment will fall down. So INR 82 crores minus INR 27 crores, the term loan will come down. And as the business grows, the working capital will increase. So that debt definitely be -- if not less, it will not be more. Because this component -- the mix of the debt will be different. Your term loan will definitely come down by, say, INR 27 crores. But your working capital may go up because of the increase in sales.

Okay. And lastly, sir, we gave a color on August, which is 4% plus in revenue. Based on schedules that you would have got, can we expect a double-digit growth in September and October based on the schedules?

No, the order book is full. So we expect a good turnover during September.

So a double-digit growth is what is visible in the schedule? What is 4% in single digit or 4% in August, does it look like a double digit in September and October?

No. Basically...

Yes. It's -- expectation is definitely there to the company because in the past years also the turnover of the company kept on increasing as the month passed from September, October. So expecting a growth on that. Earlier higher turnover will be difficult, but definitely, company will try. And for sure, we'll match the earlier year turnover. And...

Order book is still there. But if everything goes well, labor constraints goes well, then we expect double digit also.

[Operator Instructions] The next question is from the line of Kunal Pawaskar from Indgrowth Capital.

I wanted to ask you about the capital employed -- actually on the asset block, the net fixed assets of around INR 550 crores that was there on the stand-alone balance sheet, how much be -- how much might be the difference between luminaires and the auto side? Because you said some of the luminaires assets also have -- you have started to reallocate some of them to the auto side or using them at least. So what might the demarcation be as of March '20?

Yes. March, actually, if you see that the demarcation, there is a shifting of segment assets to the tune of, say, INR 15 crores, INR 16 crores from auto -- from LED to auto. And company is in the process of further identifying some of the LED assets and transferring to auto in the current period also, so that their effective use can be met.

Sir, so what might the number be, the split of INR 550 crores across these 2 approximately?

Yes. Number, if you see that we have already given that the INR 732 crores for the auto segment and INR 78 crores for the LED segment.

[Operator Instructions] The next question is from the line of Shashank Kanodia from ICICI Securities.

Sir, I just wanted to understand, in the last 5 years, how is the share of LED lighting for 2-wheelers improved in an account? And why there was no subsequent increase in margins?

No, no. Can you repeat your question, please?

Sir, firstly, over the last 5 years, how is the share of LED 2-wheeler lighting improved, right? So last 5 years, hence, how was it? And what's the trajectory going forward? And do we expect -- or should there be any increase in margins also because of increasing LED penetration or the share of revenues?

If you see the LED versus conventional is, 33% for this current quarter is LED and 67% is conventional. So you go back 5 years, the LED percentage was quite low. So it is increasing. And in the next 3 to 5 years, it is expected that we will reach more than 50% of LED.

Right. So sir, wouldn't this be accompanied by better margins or -- since it's a high value-added product?

It is to the same customers. So it is a high-value product, but the margins will remain in the range.

So say, the increasing share of LED, no improvement in margins is posting for us going forward, is it?

Definitely. Margins will improve. If more and more LED, definitely, the margins will improve.

But sir, last 5 years, history doesn't depict the same, right? So in 2016, you were clocking 12.9% margins, now you are doing 11.3%. So that has not really helped us, right?

Yes, yes, definitely. LED -- value of LED is higher. So percentage of margin definitely will not go. But in terms of amount, it will go. If you're making INR 100, you will make INR 110, but if you calculate the percentage on the total LED sales, the margin will definitely be less.

And sir, maybe the other way to look at it is what is the EBITDA margin in LED segment and conventional lighting?

I think it is an overall, say, 11%, 11.5%. It is not specific that LED segment is giving us 10% and it is giving us 12%, it is not that.

Okay. So first, LED is not margin accretive, right?

Yes. It's not.

Okay. Second, sir, I wanted to understand logic behind venturing into LED luminaires segment? And any demerger plan or any sell-off plan or probably what's the way ahead for that segment?

Actually, you will appreciate that the market of LED luminaires has drastically plummeted. It has drastically changed over a period of 5 years. The company when started with LED with very high hopes, the company made a turnover of 100% the very first year and had big plans. And when the value of all these LED luminaires drastically nosedived, then company thought of not putting any money whatsoever because their margin was drastically reduced. So in the period of last 2, 3 years, you will notice that company is only trying to make optimum use of its asset and not make any further investment. So as of now, as company is not making any investment in LED luminaires and trying to use most of the assets in LED, and so when the assets will definitely come down, say, INR 50 crores, INR 60 crores, there is no point of demerger also.

Okay. Okay. So -- and you might also not sell off the remaining part, right?

Think of. Think of depending, depending. Depending if you get some good customer, one can think of. But to some extent, LED business is being used, and it is not going to be -- if circumstances warrant, company can sell some part of the business of LED luminaires.

Okay. Okay. Fine. And sir, thirdly, any new client wins for us in 2-wheeler or the passenger vehicle segment?

Yes. We have already added Kawasaki this year. And very soon, we'll launch with their vehicle with our product, all lamps are developed by Fiem. And thereafter, a very -- another customer is Piaggio also.

Okay. Anything in the...

One more customer is under development, which we'll announce maybe next quarter.

Okay. Any breakthrough with Hero MotoCorp, sir?

As of now...

Yes. We are working on that. And maybe next quarter, we will announce something.

Okay. And sir, any new client base in the passenger vehicle segment? I think last con call, you talked about baking something big in the passenger vehicle segment as well to derisk the business profile?

We are -- as of now, we are working for 2-wheeler. And current situation is no customer will accept the new vendor, especially in 4-wheeler because their business is still not reached up to the last year volume. Their existing vendors are still waiting for their volumes.

The next question is from the line of Anubhav Mukherjee from Prescient Capital.

Sir, if I look at the Q1 performance and compare it to some of the other 2-wheeler ancillaries, it seems that our degrowth was kind of sharper. So is there anything to read into that? Or is it like -- just any sense of that?

No, nothing like that.

Degrowth in what sense?

Like compared to last year Q1, the year-on-year degrowth seemed to be sharper for us compared to some of the other 2-wheeler ancillary...

No, no, no. This is not a normal quarter. And half of the quarter is virtually closed. Company has made a turnover of only INR 66 crores against the turnover of more than INR 300 crores. So there is no point of comparing. This is an exception quarter.

Okay. And sir, for HMSI recently launched a premium 2-wheeler Hornet, for that model, I think all the tail lamp and headlamp are LED. So are we the suppliers for that?

No. Hornet originally also we were not supplying -- supplier for that. But for new Hornet, whatever is launched recently, we are -- the blinker and license lamp -- LED blinker and license lamp is with us.

Okay. So that is like new business or earlier also...

That is a new business. HMSI has first time launched LED blinker and license lamp. And those all business is with us.

Okay. And sir, going forward, like with the new launches of HMSI, like how is our share like compared -- like do we see an increase in our share going forward in new models or at similar levels? How is that trend?

Yes. Of course, all the new models, wherein there is a facelift are having similar kind of arrangement from HMSI. And when there is new models, of course, our share will be almost 50%.

The next question is from the line of [ Manas Sarswat ], individual investor.

Hello?

Yes, sir. You're audible.

So I wanted to know what is the revenue potential of joint ventures? And are there any new joint ventures in the pipeline?

For Aisan, this Fuel Pump Module, we already informed, this is -- for current year, around INR 100 crore turnover is expected. Yes, at the moment, no other development to announce. We'll let you know when the things crystallize.

Okay. So -- and what is the plan for capital expenditure in FY '21?

It is around INR 20 crores.