Ashish Chugh's views on FIEM and Alok Industries

Ashish Chugh, author of Hidden Gems shares is views on FIEM Industries and Alok Industries

Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee Q: You have chosen FIEM Industries Limited for us? A: FIEM Industries is one of the few auto ancillaries which have grown their topline by 30 percent compound annual growth rate (CAGR) and bottomline by 70 percent CAGR in the past three years. This company manufactures automotive lighting products like headlamps, tail lamps, fog lamps and side indicators. FIEM mainly to the two-wheeler segment even though it supplies products for cars as well as for commercial vehicles but major portion of the turnover comes from the two-wheeler segment. Also read: Sandee Bhatia feels Indian equities set for decent year-end rally FIEM has got eight manufacturing plants located in Karnataka, Tamil Nadu, Haryana and Rajasthan and all of these plants are fairly large sized plant. The company last year started its Alwar plant, which is built on 10 acre and this plant caters exclusively to Hondo Motorcycle. If one looks at the financials of the company, the FY12 sales were about Rs 530 crore, which were up by 27 percent over FY11. The profit after tax (PAT) increased by almost 80 percent to Rs 21 crore and cash profit was about Rs 38 crore. In the first half sales have increased by 15 percent to about Rs 286 crore and PAT is up by about 10 percent to about Rs 11.5 crore and cash profit is about Rs 20 crore. This company is expanding aggressively in the LED business and that is where the future growth is going to come from. This company is manufacturing LED display panels, which are used for various commercial applications and also LED lights for residential and commercial purposes. They are also focusing on manufacturing of LED solar lights. So the LED business is the one which is going to be the growth driver for the future. The key risk in this investment is that this company is focused primarily on the two-wheeler segment and more so on Honda Motorcycle. There is overdependence on one customer but I am not sure if this is a risk or a positive because few years back Honda Motorcycle entered the Indian market and they have got aggressive growth plans. So only if there is a slowdown there, then the company can get impacted. The promoters’ holding in the company is high at about 70 percent and they have increased their holding by 5 percent in the last three years. If you look at the valuation of the company; the cash profit is about Rs 38 - Rs 40 crore. The marketcap of the company is about Rs 200 crore at the current price of Rs 170, which means cash PE of about six. However, if you compare this company with the peer group which is Lumax Industries, you find a huge valuation gap between the two companies. Even though the operating margins of Lumax are lower than that of FIEM, it commands a marketcap which is much higher and PE multiple of close to between 30 and 35, whereas FIEM trades at a PE multiple of about 9 to 10. So given the growth, which has been coming for the past three years and growth that is expected in the future, I think there could be a PE expansion and also increase in profits of the company in the future. Q: You have picked a pretty well tracked stock - Alok Industries, what is the story there that you like? A: The price of Alok Industries has come to its eight years low, so I would say that this is a stock which is for the contrarian investors with very high risk appetite. There are of course concerns with regard to the high debt in the company but those concerns are pretty much fully priced in. I don’t need to tell too much about the company. It is a fully integrated company and quite well-known. Few years back they made the mistake of venturing into the real estate business and also the excessive capacity expansion in last five-six years, where they spent close to Rs 7500 crore. There was a huge debt which was taken for that expansion because of which the debt-equity ratio is not very comfortable. However, if you look at the financial numbers of the company in the second quarter of the current financial year; sales are up by about 50 percent to Rs 3300 crore. Profit after tax (PAT) is Rs 290 crore, which is up by 200 percent. This PAT includes some extraordinary items with regard to foreign exchange gains. If you reduce that, if you factor in that then the profit for this quarter is about Rs 200 crore. Now market cap of the company is about Rs 900-950 crore whereas profit for the current quarter alone is about Rs 200 crore. This is primarily because the cotton prices where comfortable and also most textile companies did very good profits for the current quarter. Change in fortunes for this company is a function of two factors; one is reduction in debt of the company and second is a changed revival in the business or change in the business environment for textile companies. As far as reduction of debt is concerned company has in the last few months sold the commercial properties, which it had in the Lower Parel area in Mumbai. Besides that company is trying to sell about 450 acres of land which it has in Silvassa. The company also has got various residential properties in Mumbai which it might want to sell. Besides this company also has a retail business in UK and in India. There may be rationalization in that business, which includes closing down the unviable stores and also bringing in a strategic investor for that business. With regards to change in the business environment is concerned, as of now cotton prices are low and that is why textile companies are doing well. In the last 18 months, the depreciation in rupee has been much more compared to depreciation in say currency of Bangladesh or Vietnam, which are the competitor countries. So India would have a competitive advantage with respect to other competitors. A wildcard in the next few months can be a revaluation of Yuan, which looks very much possible. In case that happens that would lead to the revival in the entire export sector and Alok Industries being export led company, would benefit from that. When that would happen and how the business environment will change is something which is very difficult to guess. Alok currently trades at about Rs 11-11.50 and it is trading at its eight years low. The possibility of downside from these levels looks to a maximum of 10-15 percent. In case the company is able to sell its real estate and pare down its debt, and the business environment for the company improves or remains the way it is as of now, I think the stock could be on a revival path. Disclosure: No personal holding in any of the stocks discussed.