Fiem Industries Limited (FIEMIND) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the 3Q FY '20 Earnings Conference Call of Fiem Industries Limited, hosted by Monarch Networth Capital. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Anubhav Rawat from Monarch Networth Capital. Thank you, and over to you, sir.

Yes. Thank you. Good evening, everyone. On behalf of Monarch Networth Capital, I welcome you all to Quarter 3 FY '20 Earnings Conference Call of Fiem Industries. We are pleased to host the senior management team of the company. Today, we have with us Mr. J. K. Jain, Chairman and Managing Director of the company; Mr. Rahul Jain, Wholetime Director; Ms. Aanchal Jain, Wholetime Director, Mr. O. P. Gupta, Chief Financial Officer; and Mr. Arvind Kumar Chauhan, Company Secretary, along with other team members of the finance department. We will start the call with the initial comments about the results and the future outlook of the company. And then we will open the floor for question and answers. Now I would request Mr. J. K. Jain, Chairman and Managing Director of the company, to give his opening comments. Over to you, sir.

Thank you very much. Good afternoon to all. I welcome you all to Q3 financial year 2020 earnings call of your company. I believe you must have gone through the results, which were released yesterday. Your company has been able to put up a good performance given the current environment. Before I give an overview of the performance of your company, I would like to talk about the current scenario in auto industries, and more specifically, in 2- and 3-wheeler segments. For the first 9 months, 2- and 3-wheeler segments have declined by 12.5% with the sharpest decline seen in the last 5 years. I believe this decline is mainly because of the increasing cost of the vehicle due to the new safety norms, high insurance cost and lack of financing. Overall economies is still not showing any sign of improvement. Consumer affordability still remains a key issue for revival in demand. We are hoping that some of the initiatives taken by the government to revise rural demand will help the recovery in the second half of the next financial year. More specifically, for us, the BS-VI transition would be the key event to watch out for as we get into the next financial year. The transition is already underway and a clear view will emerge only post stable transition after April 2020. The impact of BS-VI is likely to result in increase of the cost of the vehicles to the extent of 8% to 15%. This may impact the demand for the first 2 quarters of the next financial year. Thereafter, I expect a normalized growth to return. Now I would like to talk on the performance of your company. Your company has been able to beat the slowdown in one of the toughest market environments. We have been able to achieve net sales of INR 323 crores during the current quarter. This represents a marginal decline of 2% over the same quarter last year. PAT of the quarter has been exceptionally strong at INR 26.06 crores. Detail of the financial will be shared by our CFO. I credit this performance to our strong product mix, which has helped withstand a slowdown in the sales of our key customers. We continue to work with our customers to further enhance this product mix. I would also like to update on the development of the new products during this quarter. We have started supply of bank angle sensors to HMSI. We have also started supply of canister to Yamaha India. Until now, we were supplying only to TVS. Our JV company, AFI, has also started supply of fuel pump module to Bajaj Auto from the month of January 2020 onwards. I just want to sum up by saying that your company has been able to withstand this difficult environment by focusing on internal efficiencies and product mix. While we still see uncertain times in the next 2, 3 quarters, we are confident of long-term potential of the industries and our economy. As the environment improves, we'd like to be the best positioned to take advantage of the same. Now I hand over the line to our -- Mr. O. P. Gupta, our CFO, to talk about the financials. Thank you.

Thank you, sir. Good afternoon to everyone. It gives me immense pleasure to share that the company has been able to achieve a net sales of INR 323 crores during the quarter 3 of current financial year as compared to INR 331 crores in Q3 of FY 2019. Further, the net sale of company for the 9-month are INR 1,048 crores as against the sale of INR 1,082 crores during the corresponding 9-month of last financial year. This represent a marginal decline of 2% on quarter-on-quarter basis and 3.24% on 9-month basis. During the current quarter, the EBITDA margin of the company has increased to 11.65%, which is 50 basis point increase over the same quarter of last financial year. PBT of the company stood at INR 21.15 crores during the current finance -- during the current quarter as compared to a PBT of INR 18.93 crores during the corresponding quarter of the last year. PBT during the current quarter has increased by 83 basis points as compared to same quarter of last year. Further, PAT of the company has significantly increased to INR 26.06 crores during the current quarter as compared to a PAT of INR 1,217 crores in the corresponding quarter of the previous year. This is mainly due to the fact that company has increased the option permitted under Section 115BAA of the Income Tax Act. Under the new regime, the effective tax rate of the company will be 25.17% instead of 34.94% charged earlier. This has resulted a proportionate reversal of deferred tax liability to the tune of INR 7.26 crores. Company is expecting to save an amount in the range of INR 5 crores to INR 6 crores on account of reduced income tax rates during the current financial year. Updating on CapEx, I would like to inform that the company has made an investment of INR 13.40 crores in fixed assets during the current quarter and the total investment in 9-month period has been made to the tune of INR 52 crores. With this, I end the financial brief, and now floor is open for question and answers. Thank you.

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

Congrats on good set of numbers in this tough environment. Sir, firstly, I would like to understand like most of our customers now have launched their BS-VI model, and we have been talking about the ongoing transition to LEDs in BS-VI, and BS-VI would be beneficial for LED transition. So are we actually seeing any uptick in the penetration of LEDs and -- in this new model?

Basically, so far, not so much. It is similar. But we expect in coming models, the penetration will be much higher.

Okay. And sir, secondly, on this margin expansion, like our gross margins have expanded by like 123 bps in -- on Y-o-Y basis and about 230 bps on a Q-o-Q basis. So what has led to good margin expansion?

I think this is generally because of the product mix. As you know, that the internal efficiency and product mix, you see the raw material consumption. If you compare with the last quarter, it has come down because of the product mix and the new products which has been developed by the company.

Okay. So still, we had been guiding of about 12%, 13% margins on the EBITDA level going ahead. So by what time, can -- do we expect to attain these margins?

I think you have virtually reached to the near. This quarter, the margin is 11.65%. So you're virtually near to 12%. So the company expects -- the little growth in sales will definitely enable the company to reach to 12%. And definitely...

So these margins will sustain going ahead?

Yes. Yes. Definitely. In such a tough environment, if the company is able to achieve, say, from 11.17% to 11.65%, now -- in the better time, definitely will cost 12%.

Okay. Sir, and if you could give any color on the revenue potential of Yamaha Global. Like earlier, we have been supplying to Yamaha Thailand and Indonesia. So is there any new order wins in any other geographies? And what is basically happening over there? If you could give more color?

No. No. Basically, it is the same. And it is the same, and they have introduced 1 or 2 new models also. But the area is similar.

Okay. So nothing significant in this third quarter?

Yes.

Okay. And what would be the revenue potential from this bank angle sensors, fuel pump modules and canisters, individually, if you could share?

Bank angle sensor, we already shared, around INR 50 crores to INR 60 crores when full potential will come.

Okay. And the other 2 products?

Other 2 products. One is the AFI product, that is our JV company. So yes, for that, we already shared around INR 150 crores to INR 200 crores when it goes for posting.

Yes. And canister?

Canister is INR 10 crores to INR 15 crores, we already shared.

Announced earlier.

Yes. It will all depend upon the -- yes.

The next question is from the line of [ Pankit Shah ], who is an individual investor.

Actually, my name is [ Pankti Shah ]. And I had a couple of questions. As per your last 3 to 4 quarterly results, which JV or associate is making losses?

Actually, our main JV company is that AFI, and this company has not gone into production. So this initial period, then in first year, this JV company is definitely showing losses. And in the next year, when the company starts making sales, this will come in profits.

This item is basically for BS-VI norms, which has started from January onwards.

Okay, okay. And my second question is, could you explain why your last few quarters in your segmental assets and liabilities, the unallocated assets and liabilities are increasing?

No. Unallocable assets -- because we have some unallocable surplus money in the cash credit, like in our cash credit in the few months, there was nil cash credit balance. So that extra money which we are getting has gone in the form of FDRs. So that money FDR is adding to the unallocable assets.

The next question is from the line of Keshav Garg from Counter Cyclical Investments.

Sir, first of all, congratulations for great numbers. Sir, I wanted to understand that how come when the 2-wheeler sales are falling, then our turnover has -- I mean we have been able to maintain our turnover, sir. How was that possible?

Yes. We have already explained to you here, in my -- during my speech that due to the product mix, we are able to achieve that.

Just to add on this thing. We are having some more share in the models, which are running -- which are not registering good sales. So this is the reason. You are seeing the overall decline in the OEM volumes, but we are supplying more to the running models, good running models.

Okay, sir. And also, sir, although our P&L is very good, but our working capital has increased quite drastically, sir. Our receivables have increased, whereas our payables have reduced. Sir, so is it a temporary thing and it will revert back? Or you think it's permanent?

No. No. It will revert back. And you will notice that in the current quarter, our working capital has not even been used. It is the INR 22 crores only working capital against the sanction limit of INR 100 crores. The company has complete exhaust -- unexhausted working capital with it.

Okay, sir. And also, sir, with our customers, do we have any annual price reduction contract?

No.

No. That is not there.

Sir, so basically, how is our pricing arrangement determined with our customers? Sir, is it basically pass-through, the raw material is passed through? Or how does it exactly work?

No, no. Definitely, as we have been explaining in all our con calls that we did -- there is definitely a pass-through mechanism.

But it is industry-wide.

Yes, it is. Yes. So as and when there is a reduction, then reduction is definitely passed. And when there is an increase in the price, that is also passed on to the customers.

But it takes some time from 3 months to 12 months to figure out.

Okay. And sir, the problem is that our return on equity is barely 11%, 12%. Sir, so it is -- sir, it should be around 20% for a really good company. Sir, so basically, I can see that our LED segment, INR 100 crores capital employed is there, and this division is making some marginal loss. Sir, but it is pulling down the whole return on capital of the whole company. Sir, so when do you see this getting cured?

Actually, that -- we will appreciate that ever since the company has realized that it's not being good in LED segment, it has stopped making any further investment. And what the company is doing, only making sales which are sufficient to make it at breakeven. And that the marginal loss, which is -- you are saying is just because of the depreciation because of the fixed assets. And gradually -- and you are very right that the capital base and the net worth of the company has grown to the extent of INR 500 crores. So we are expecting good returns. As the sale in auto will pick up, we will arrive at -- if not 20%, we'll definitely arrive at 15% to 16%.

Okay, sir. And sir, also, this -- sir, our maximum sales are to 2-wheelers. And the 2-wheelers -- right now, sir, sales of all automotive is falling. But sir, the penetration of 2-wheelers is really -- I mean we are selling like 2 crores 2-wheelers over that. Sir, so I mean -- so there's not much scope for growth. Sir, so then how do we increase our sales in, let's say, double digits consistently?

So it is already explained. This is mainly because of the better mix, the content per vehicle is increased. And the other reason is that we are supplying to the good running models.

No. Moreover, this sales is declined -- auto -- the 2-wheeler sales is declined because in 18 months' time, the cost is going to increase from the -- about 30% to 40%, which is unusual, which never happened in the past. So this is due to that, but the automobile will increase. You see, auto sector is a big sector, which give opportunity for employment. So that -- as per the earlier this thing, we were supposed to cross 30 million by 2025. So there will be growth, but it is a sudden impact which has happened due to the safety norms, additional -- unbelievable safety norms from BS-III to immediately BS-VI almost. So there will be growth. There will be substantial growth. But due to the price increase, 30% to 40%, so this has slowed down. But this will come back.

Okay, sir. And sir, the installed capacity that we have in our company, provided demand is there, what kind of turnover can we generate with the present installed capacity that we have?

So the -- currently, we are using around 60% of our capacity. So you can -- yes.

Yes, sir. Sir, so maximum, we can go to 100%? Or it's like 80% or...

It is 85% to 90% that we can move.

Up to 95%, we can go.

Yes.

Sir, so basically, we can increase our turnover by around 50% from this level without any CapEx?

There will be some CapEx, but it will not be in a big way.

Always, there is change of -- new models come, so some investment goes on. So it will not be the big investment. The INR 20 crores, INR 25 crores is a normal investment.

Sir, so INR 20 crores, INR 25 crores is our maintenance CapEx per year?

Yes, it is a maintenance as well as some new production equipments.

Sir, and lastly, we will continue to be a predominantly lighting company? Or sir, you are looking to diversify into other products also?

No, no. We are going to be a lighting company predominately, but also diversify -- trying to diversify in many other things as per the direction of the customers.

The next question is from the line of Piyush Sharma from Minerva Funds.

Just a couple of questions. Firstly, just trying to reconcile, when I'm looking at your OEM revenues within automotive. Obviously, you had very solid traction across most OEMs until you see the others bracket. Now again, it seems last year, the same quarter, that others made almost 10% of the automotive revenues and it -- and that seems unusually high. If you could remind me what exactly [Audio Gap] in the third fiscal quarter last year that, that other revenues was that high, if I'm seeing these numbers right?

That's revenue you are talking about the other customers' revenue than our top 4, 5 customers?

Correct, correct. Yes. Other customers, last year, third fiscal quarter, seemed like a bit of a spike. If you can remind me what...

Actually, if you see that the customer comparison up to quarter 3 of this year as compared to quarter 3 of last year, then you will see that the Honda sales has been stagnant. It was, say, 125 and 125 this time. And what has driven the growth is of Hyundai India, Yamaha Motors, which was INR 28 crores and gone to INR 32 crores. And then the other customers and then the replacement market, we have also grown a little. And rest of the customer, that is why the sale has been flat. It has been virtually 2%, from 330 to 317.

Yes. No, I'm specifically asking about the others bracket, which was almost 10%. If I remember it, 10% last year; it's about 5% now.

No, no, no. It was 4.11% last time. If you see the sales, it was 4 point -- INR [ 13.17 ] crores was the exact turnover last time in others. Rest, probably you may not have -- you might have added the list I spoke -- I share replacement market. These are the other consumers. You must have added them in others.

Fair enough, fair enough. That's what I was trying to reconcile. And then very quickly, if you could give some sense on the strategy within the replacement market. Where do you see that part of your business going?

Replacement market is also slowed down at the moment, but we expect a good increase in coming time.

Okay. And specifically, I mean is it fair to assume that replacement will continue to be, let's say, a mid-single-digit contributor to automotive for the next 3, 4 quarters? Or one could expect any meaningful change one way or the other?

No, no, it will be similar.

It will be similar. No benefit.

The next question is from the line of [ Kinjal Dani ] from M M Savla Consultancy.

This is Mulesh Savla from M M Savla Consultancy Services. Heartiest congratulations on good set of numbers in a challenging environment. One of my question is, again, on the similar line of -- on LED division. We do see losses every year and the turnover also is very negligible. Do we have any long-term view on this particular division? Should we continue this division? Or at some point in time, we should hive off these and focus our attention on other products of the 2-wheelers or 3-wheelers industry or something like that?

No. The only -- the main issue is that company is sole -- the company is mainly focusing on automotive segment, and keeping and making the reasonable sales so that their fixed cost is very well met. And what you see that the negligible loss in LED luminaire segment of the INR 42 lakhs or INR 48 lakhs as compared to earlier quarter, it is just because of the depreciation, we have the fixed assets. And what we are -- the company is definitely very well trying to somehow enhance the sales. But at the same time, company will only make addition in the fixed asset when there is a sure-shot sales. Otherwise, company is not going to make any further investments. That is the decision company has taken.

Right. Nay, but I was just on -- focusing particular activity. A lot of your attention might divert to something which is not very productive. So can -- by just closing that division, can we focus more on core activities or the core competencies we have?

We are basically an automotive company, and our focus is only on automotive.

Yes, that's true.

This was just a sideline. So -- and that was started. And somehow, some things in the business click, some things doesn't click. But we have used most of the machinery, what was there in for LED division, especially for luminaires, while we have taken into auto. Basically, that total investment on LED division becomes very less. So our -- and we are also trying to sell it off as and when we get -- we are looking for a partner or buyer. As and when somebody comes, we'll definitely try to dispose it off.

Fine, fine. And one small question on the notes to the accounts. We have said that we have reversed deferred tax to the extent of INR 7.25 crores and when I look at the numbers in the result, we are reducing INR 5.10 crores from the -- I mean we are adding INR 5.10 lakhs (sic) [ INR 5.10 crores ], so the difference is what? Current year's -- current quarter's tax liability?

Yes, yes. When you make a provision for tax, it has 2 components. One is the current year tax liability and second is the deferred tax liability. So the deferred tax liability which was there at the rate of 34.94% as of March 31, '19, the company has exercised the option of...

115BAA.

Yes, 115BAA. So the company is charging 25.17%. As a result, there is a reduction in the deferred tax liability. That is to that extent of INR 7.25 crores. And there is a liability of direct tax. Of course, the direct tax liability is also higher. But since there was a provision in earlier because the government came out with the notification on 22nd September only. So first 2 quarters, the company made a provision at the rate of 35%, which was higher. So that provision has been reduced. And still, the company has made a provision of INR 2.5 crores.

Correct, correct. So about INR 2.5 crores, which is the difference between two is the tax liabilities provision?

Yes, yes, yes.

The next question is from the line of Arun Agarwal from Kotak Securities.

Sir, my first question is on your revenue mix -- on the product mix side, basically, where the molded -- plastic molded parts revenue, which is around 9% of your overall revenues last year, has increased to 11.5% in 9 months this year. So have we sort of gained new customers somewhere? Or how -- and what particular reason is there for the rise in that share?

So plastic molded is 11.32%.

Yes. Because of the BS-VI norms, the additional parts are required, and that is how it is.

So the content in plastic molded has increased, you're saying, with BS-VI?

Yes, yes.

Okay. And that's the sole reason for the increase? Or we have added some new customers or something there on that?

No, no, no. That is the only reason for that.

Okay, okay. Sir, my other question is on the debt reduction thing that we talked about where our overall working capital has come down, where the short-term borrowings have come down to INR 23 crores from almost like INR 65 crores, INR 70 crores, INR 80 crores we had last time around for the past 2 quarters. So is it sort of sustainable number? Or this is something specific for this quarter?

No, no. This is sustainable. I've got -- rather, this is INR 22 crores as on 31st December. Rather, in few months, there was nil working capital and we had surplus money and company made FDR to the tune of INR 25 crores. So what Mr. Jain is expecting, that keeping the efficiency and recovery of money, maybe by the year-end, you will have the same number, INR 22 crores, INR 25 crores or maybe a little more or less or virtually nil.

Obviously, on the pent-up loans.

And then when you see the loans, company has not taken any fresh loans as the company has not made new investments. And the loans as on [indiscernible] 31st March 2020 was INR 120 crores, and every now, it [ exceeds ] INR 102 crores only. By the end of this, another INR 10 crores will come down. The company is not going for any future loans.

Okay. So -- and next year, what is your loan -- long-term loan repayment schedule then? How much are we paying next year?

Yes. It is INR 3 crores per month -- INR 36 crores. So out of this INR 90 crores, INR 36 crores will be repaid next year also.

Okay. Okay. So overall, we have this INR 29 crores -- so I mean, loan -- debt this quarter, so maybe we should come down to INR 115 crores, INR 120 crores by this year-end and another INR 30 crores, INR 40 crores will be achieved of next year?

Yes. If there are no mega expansion or no -- there is no robust growth in auto. You never know this is such a line. But keeping the current environment, definitely, there will not be much investment. So of course, there will not be much loans.

Basically, if our customers start their new operations, then only it will be used cost. Otherwise, it's a normal, like INR 30 crores to INR 40 crores for -- towards around -- towards...

Incremental expenses.

Incremental for maintenance as well as for new development.

Okay. And sir, could you help us on what will be the full year CapEx this year? And 9 months, you've already incurred INR 52 crores. So full year would be?

Say another INR 10 crores, that's the max.

And for next year onwards, we should be lower than this? Or...

Next call, we will share it. That full year -- yes.

Okay, okay. And sir, did we add any new product or models, which might have got launched or will be launched? So any update on that?

We already explained. This bank angle sensor, we started supply to HMSI; and canister, we started supply to India Yamaha; canister, till now, we were only supplying to TVSM; and our JV company, AFI, it is -- this has already supplied -- started supply from January onwards, this fuel pump module to Bajaj Auto.

Yes, but anything on the lighting space? Any new model or something which we were not present earlier or we would have gained access into that model?

No. I think this will be -- steadily, this will come.

We have added new customer for the e-vehicles, but that is -- that -- the sales will come after 1 year only.

Yes. The development is going on.

Nothing great.

Yes.

[Operator Instructions] The next question is from the line of [ Imran Khan ] from [ Ratna Shri ] Capital.

Most of the questions have been answered. I just have one question, if you can help me with this. Sir, can you -- if you can tell us from where do you source your PCBs for LED lights?

No, no, no. Basically, it is our internal matter that I can't disclose here.

So this is customer confidentiality. So we cannot share the sourcing for this. Specific components will be...

Okay. I will put it another way. What I'm asking is, is it from India or China or any other country?

No. Some of the things which we have been importing have been Indianized.

Okay. So we don't import PCBs from China?

Yes. For some models, we have been importing from China.

It is a specific model from specific country.

Sir, can you quantify this, if it is possible?

No, sorry. This, we can't disclose as per the disclosure agreement with the customer.

[Operator Instructions] The next question is from the line of Keshav Garg from Counter Cyclical Investments.

Sir, I can see in your presentation that -- sir, we are deriving around 27% or thereabout revenue from automotive lamp. And sir, the remaining major part in lighting from LEDs. Sir, so basically, what's the realization difference between automotive lamp and automotive LED? And sir, do you foresee that 100% going forward will get transformed into auto LED?