FIEM has delivered its best ever quarterly profits and operating profit margins at 13 per cent, the highest in the past 14 quarters. In Q4, it executed Rs.11.5 crore worth LED bulb order to Andhra Pradesh. As a result, despite muted demand environment in its core business (HMSI and TVS Motors, its key clients had y-o-y volume growth of 8.4 per cent and 7.8 per cent respectively), FIEM’s revenues grew by 17 per cent y-o-y.
Recent initiatives by the government have fast-tracked LED demand, apparent from the recent tenders, offering an opportunity to multiple players to win. Moreover, recent order win by FIEM (for LED street lights to Delhi worth Rs.997) provides confidence that this segment can make meaningful impact on revenues in FY16E and FY17E.
We believe that strong earnings (FY15-FY17E earnings growth of about 40 per cent), healthy return ratios and the ability to generate free cash flow can lead to further re-rating of the stock, with stronger-than-expected traction on the LED side being the icing.
Key risks:
1) Failure to gain traction in LED segment;
2) Delay in tendering of contracts and receipt of payments from the Indian Railways.
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