After a 1500% climb in 52 months, Kotak Securities projects 30% more upside for this auto ancillary stock

Fiem Industries, a leading player in the two-wheeler automotive lighting and rear-view mirror segments, has seen its shares surge significantly in recent years, reaching new milestones and setting high benchmarks.

In April 2020, the company’s shares were trading at just ₹101 apiece. Since then, they have skyrocketed by 1,500 percent and are now trading at around ₹1,650. Notably, the stock has posted positive returns for four consecutive calendar years, with gains of 21 percent in 2023, 54 percent in 2022, 100 percent in 2021, and 20 percent in 2020.

The stock has already jumped by 55 percent in the current calendar year alone, rallying from ₹1,062 to ₹1,620.

Since its listing on the NSE in 2006, Fiem Industries experienced seven calendar years of negative returns, with the remaining 11 years in the green. Among these years, 2014 was a standout year, with the stock recording its biggest annual gain of 140 percent.

Looking ahead, domestic brokerage firm Kotak Securities anticipates that the stock will continue its strong performance, driven by the company's strategic position to capitalise on the two-wheeler industry recovery. The brokerage highlights the company's robust presence with key players in the two-wheeler segment, noting that it has consistently outperformed industry growth.

Kotak Securities also believes that the rising adoption of LED lighting in the automotive sector will further fuel the company's growth. The passenger vehicle segment, in particular, presents significant medium-term growth opportunities.

Additionally, the brokerage points to the company’s strong financial performance, supported by healthy volume growth in the two-wheeler industry and increasing demand for LED automotive lighting.

Therefore, the brokerage has initiated coverage on the stock with a ‘buy’ rating and a target price of ₹2,140 apiece, which signals an upside potential of 30% from the stock's previous closing price of ₹1,650.

To benefit from the recovery in two-wheeler demand

India is one of the top two-wheeler manufacturers globally, with around 2.1 crore units produced in FY24, according to Kotak Securities. The industry reached its peak production of 2.5 crore units in FY19 but faced a significant decline in FY20 and FY21 due to the COVID-19 pandemic. Although there has been healthy volume growth in the past two years, sales remain below the peak levels of FY19.

Given that 97 percent of Fiem Industries' automobile business revenue comes from the two-wheeler segment, demand growth in this area is crucial. The two-wheeler industry's recovery began in FY23 and has continued, with strong volume growth in Q1 FY25.

Kotak Securities expects this trend to persist in FY25, supported by a good monsoon, improved consumer sentiment, and increased government spending. Over the long term, domestic demand is expected to grow due to rising personal transportation needs, increasing economic activities, higher income levels, and urbanisation.

Strong presence with key players in the two-wheeler segment

The company has built strong, long-standing relationships with key players in the two-wheeler segment, which has significantly contributed to its historical growth. In the domestic market, Fiem has leveraged its connections with major OEMs to cross-sell its products.

Hero MotoCorp and TVS Motor are Fiem's top two revenue contributors, and since FY18, the company has gained significant traction with Yamaha Motor India and Suzuki Motorcycle. Yamaha Motor India has become Fiem's third-largest revenue contributor, with revenue from Suzuki Motorcycle also growing substantially over the past six years, the brokerage noted.

In Q1 FY25, its top four customers accounted for around 79 percent of its revenue. In the competitive two-wheeler automotive lighting segment, Fiem faces competition from companies like Unitech Machines, Varroc Engineering, Lumax Industries, and Uno Minda.

Debt-free balance sheet

Kotak Securities highlights Fiem's impressive growth, noting that the company’s revenue has grown at an 11 percent CAGR over the past decade, despite challenges like the two-wheeler industry's decline during FY21 and FY22 due to COVID-19.

Fiem outperformed industry volume growth, and Kotak Securities expects this trend to continue, projecting a 15 percent CAGR in revenue from FY24 to FY27, driven by robust two-wheeler demand and increasing LED adoption.

Fiem's EBITDA margin improved from 11 percent pre-COVID to 13.2 percent in FY24, with stable margins expected in the coming years due to its pass-through contract with OEMs. The brokerage anticipates a healthy 19 percent CAGR in earnings over FY24-FY27, supported by double-digit revenue growth and marginal EBITDA margin increases.

Kotak Securities notes Fiem's strong financial health, a debt-free balance sheet, and consistent cash flow generation. The company plans to invest ₹100 crore in FY25 and ₹250 crore over the next two to three years, funded by internal accruals. Fiem's ROE has improved from 12 percent in FY19 to 20 percent in FY24, and the brokerage expects it to remain strong at 20 percent to 21 percent over FY25-FY27.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.