FIEM Industries IPO

Promoted by J.K.Jain, FIEM Industries is one of the leading manufacturers of automotive lighting and signaling equipment and rear-view mirrors. Major business comes from the two-wheeler segment of the vehicle industry. The company is capable of catering to the needs of almost all segments of the automobile industry: two-wheelers, three-wheelers, light commercial vehicles (LCVs) and tractors.

FIEM has technical support agreement with Ichikoh Industries, Japan. Ichikoh is supplier of automotive lighting, rear-view mirrors to major Japanese vehicle manufacturers such as Nissan Motors, Tyota Motor Corporation, and Daihatsu Motor. It has also entered into a memorandum of understanding (MOU) with Zadi Divisione Fanaleria CEV Spa, Italy, for producing products as per Zadi's specification for the European as well as the Indian markets. However, this MOU is yet to be converted into any agreement.

Customers of FIEM, both in India and abroad, range from TVS Motor Company, Honda Motorcycles and Scooters India, Suzuki Motorcycle India, LML, Kinetic Engineering., Kinetic Motor Company., Majestic Auto, Scooters India, General Motors, Hyundai Motors India, Skoda Auto India, Swaraj Mazda, Ashok Leyland, HMT Tractors, and Tractors and Farms Equipment to Piaggio Italy, Aspock Systems GmbH, Austria, and Geka, Germany.

The objects of the issue are to put up new manufacturing facilities and expand existing facilities. FIEM is setting up a 100% EOU (Unit-V) at Hosur, Tamil Nadu, and a unit at Nalagarh, Himachal Pradesh, a state that accords various tax benefits. Commercial production at both the units is expected to commence by January 2007.

Strengths

• The Indian auto component industry is expected to experience robust growth over the coming years. Growing demand from domestic original equipment manufacturers (OEMs) coupled with massive export opportunity created due to outsourcing by global OEMs and Tier 1 companies will be good for FIEM's growth. Already an established player with good technical collaboration, the company is expanding aggressively to capitalise on new opportunities as also to win over business from competitors, which are not aggressive. However, if it fails to tie up enough new business for the new and expanded capacities, its financials will suffer.

Weaknesses

• FIEM is dependent on TVS Motors, which accounted for around 70% of the total income in FY 2006. This makes it vulnerable to the fortunes of TVS Motors and also reduces its bargaining power with TVS Motors.
• The details of the MoU/ joint venture agreement by FIEM with Korea Airconditioners Company and Aspock Holding GmbH, Austria, for entering into totally new auto ancillaries such as air-conditioners and wiring harness are not available. These can increase the risk profile of the company.
• The FY 2006 performance is extraordinary, with sales up 24% and net profit 136% due to the sharp rise in operating profit margin (OPM) from around 9% in the past four years to 12.6%. This is despite the sluggish sales and profit of its largest customer, TVS Motors.

Valuation

The post-IPO EPS based on FY 2006 earning works out to Rs 6.6. At the offer price band of Rs 125-145, the PE range is 18.9x to 21.9x. The TTM PE of the Auto Ancillary-Lamps industry is around 13.5.

Sharekhan Eagle Eye (equities) for September 21, 2006

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Sharekhan Investor's Eye dated September 20, 2006

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Gateway Distriparks
Cluster: Cannonball
Recommendation: Buy 
Price target: Rs250
Current market price: Rs159

Financials continue to impress

Key points

• During FY2006 GDL registered a 45% growth in its revenues on the back of a 14% rise in the throughput handled and a 30% increase in the realisation per twenty-foot equivalent units (TEUs). 
• The growth in the volume and the realisation improved GDL's operating profit margin (OPM) by 540 basis points from 55.1% to 60.4%. Consequently the operating profit jumped by 59.1% to Rs83.8 crore. 
• Towards the end of FY2006, GDL had come out with a USD85-million global depository receipt (GDR) issue and garnered around Rs375 crore. As the majority of the funds had not been utilised, the same had been deposited in banks. The cash that GDL had on its books was utilised to pay off its debts worth Rs50 crore. Hence we saw a very significant nine-fold jump in its other income and a 45% decline in its interest charge in FY2006. 
• Although with the repayment of the debts GDL's debt/equity ratio has come down to 0.06, yet the excess un-utilised capital is hurting its return ratios. Its return on capital employed (RoCE) has come down from 27% to 20% and its return on net worth (RoNW) has fallen from 21% to 12.7%. 
• In 2006 GDL commenced its rail container freight (RCF) service. It is now setting up its second rail linked inland container depot (ICD), which will ply on electric route connecting the Jawaharlal Nehru Port Trust (JNPT) to northern India. 
• GDL has expanded the capacity of its container freight station (CFS) at JNPT by 36,000 TEUs to 216,000TEUs. Further with huge cash of Rs352 crore on its books, GDL is now actively looking to acquire an existing CFS at Nava Sheva. 
• JNPT is all set to commission its third container terminal at Nava Sheva, taking its container handling capacity from 2.4 million TEUs currently to 3.6 million TEUs. Hence GDL's move to expand its Nava Sheva facility augurs well for its profitability.
  

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SECTOR UPDATE

Pharma

Data protection cheers MNC pharma!!

Key points

• The Government of India is on the verge of allowing 5-year data protection.
• Data protection implies the safety of the clinical trial and test data provided to the regulatory authorities by innovator drug companies. This means that other companies cannot make use of the innovator's data to obtain marketing authorisations for drugs. 
• The implementation of data protection would enhance the confidence among the MNC associates to launch innovative products in the domestic market. Indian subsidiaries have been traditionally restricted from launching new products from their parent's portfolio due to lack of data protection.
• The regulation is likely to benefit Indian companies, which have shifted their focus from being pure generic players to innovative players, as it would protect their research data from being copied in the future.
• The increasing launch of new products by MNCs would increase the pressure on domestic companies to reduce drug development costs. This would provide a boost to players in the contract research and clinical data management space. 

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VIEWPOINT

Monsanto India

Sowing seeds of growth
We recently attended the annual general meeting of Monsanto India Ltd (MIL). The company is a 72% subsidiary of Monsanto Co., USA and is in the business of manufacturing and selling herbicides (used for controlling weeds) and seeds (corn and sunflower). The company is not to be confused with Mahyco Monsanto, another joint venture of Monsanto that sells the controversial BT cotton seeds. 

As the herbicide and agrochemical market has become increasingly generic and competitive, MIL's focus has shifted towards the higher margin seeds business. The contribution of the seeds business has jumped from 21% of revenues in FY2001 to 53% in FY2006. As part of this portfolio restructuring, MIL has sold one of its herbicide products, Leader, to Sumitomo Chemicals recently. 

Trading Calls

Buy Indiabulls at Rs 445-431. Stop Loss at Rs 415. Target of Rs 454 and Rs 492

Buy HPCL around Rs 290.85 with stop loss of Rs 286

Trade at your own risk

Trading Calls

Buy GEI Hamon around Rs 47.90 with stop loss of Rs 46

Buy HPCL around Rs 290.85 with stop loss of Rs 286

Trade at your own risk

Trading Calls

Buy IPCL with stop loss of Rs 285 for a target of Rs 355

Buy Bharti Airtel with stop loss of Rs 430 for a target of Rs 550

Buy ICSA with a stop loss of Rs 691 for a short-term target of 900

Buy R K Forgings with a stop loss of Rs 110 for a short-term target of Rs 146

Buy TCS with stop loss below Rs 1012 for a target of Rs 1045

Buy Bharti Airtel with stop loss below Rs 453 for a target of Rs 480

Trade at your own risk