FIEM INDUSTRIES Chairmans Speech

Though the year 2016-17 was one of the most challenging years in recent times, however the worst appears behind us as we move towards attractive growth period. Actually, this overview reconciles two contrasting emotions-optimism for our automotive business and disruption in our LED luminaire business that impacted us adversely during the year under review.


Despite impact of demonetization, our net sales in the automotive business grew by 11%. However, the performance of LED business was not favorable as along with low turnover during the year, a written-off of Rs. 19 Crore was also booked, being non-recoverable from Energy Efficiency Services Ltd. (EESL). This write-off happened because of discontinuance of maintenance by EESL, which was a part of the contract of supply and commissioning of over 1,18,000 street lights to South Delhi Municipal Corporation (SDMC). Further, some orders of LED bulbs were short-closed by EESL due to a steep price decline and other market reasons.


Our automotive business


The company''''s overall performance was affected by currency demonetization, which transpired during the third quarter of the year under review, affecting the country, economy, automotive sector and the company. This impact was most visibly reflected in the country''''s two-wheeler segment as this segment is largely influenced by cash purchases and negligible external financing, making its purchase pattern completely different from the rest of the automotive sector.


With off take extensively affected from November 2016 to February 2017, a number of intending two-wheeler buyers deferred purchases. The result was that most prominent OEMs in the country selected to temporarily discontinue operations. The cascade impact of this affected all two-wheeler brands in the country, a number of them being our prominent customers. As an extension, Fiem Industries was also affected by this slowdown.


One sigh of relief is that the impact of the demonetization began to recede by February-end and the country reported an attractive rebound in demand for two-wheelers starting March 2017, indicating that the worst indeed was over.


Besides, the introduction of new BS IV norms from April 2017 catalyzed the revival. Faced with the new stipulation that made it mandatory for all sales in the new financial year to be benchmarked with the new upgraded norms, most two-wheeler trade intermediaries put a greater focus in liquidating their erstwhile inventories, which helped catalyze off take. The combination of a revival in pent-up demand that had remained bottled up for months on account of demonetization re-asserted; besides, the dealers who had proactively de-stocked on account of the BS-IV norms began to restock to address emerging demand.


It is indeed a matter of satisfaction that despite disruptions, Fiem Industries performed well in the automotive segment, the result of working with some of the largest and most popular two-wheeler brands in the country. The improvement in consumer sentiment translated into a stronger off take of these brands, which accelerated our rebound.


The LED luminaire business


The reasons mentioned above coupled with demonetization, impacted the LED business. Though I believe that these are short-term obstacles and that in the long term, the LED business provides a large opportunity within India and abroad. In India, LED adoption is still in an initial phase and could take some time for the disruption to settle translating into attractive prospects for the product and the Company.


The AHO regulatory tailwind


My optimism for the automotive segment is derived for reasons that extend beyond a correction in market trends. A seminal moment in the country''''s automotive lighting segment transpired with the introduction of Automatic Headlight On (AHO) stipulation from 1 April 2017 along with the new BS IV norms. This stipulation made it imperative for the headlamps of two-wheelers to remain switched on while in use during the day. The headlight of the new two-wheeler turns on as soon as the engine is started; riders will not have the option of switching the head light off.


The stipulation could not have come a day too soon, as, two-wheelers accounts for being the single category of vehicles to have suffered the highest number of fatal road crashes. This subject is of increasing public importance; India has possibly the worst road safety record in the world. The Automatic Headlamp On is expected to help reduce crashes involving two-wheelers; it would help others recognize one''''s vehicle position in foggy / dusty environment; vehicles in front would able to recognize one''''s vehicle through the reflection of the vehicle headlamp in the rear-view mirror.


We believe that this regulatory transition will make the role of headlights central to the subject of safety in India. More specifically, this new regulation will accelerate the adoption of LED in 2W Head Lamps, as LED is the most compatible technology. Fiem, as a frontrunner in adaptation of LED in 2 wheelers, is well positioned to make this opportunity, which appears quite sustainable across the foreseeable future.


Our competitive advantage


Fiem possesses a longstanding domain expertise in the research, design, development and large-scale manufacture of lighting products.


The company is more than just a manufacturer of automotive LED products; it pioneered the use of some of these products in India. Besides, the company has achieved prudent backward integration, strengthened its value chain and developed its research led product understanding from source to solution.


This enduring competence has been manifested in various confidence enhancing realities encapsulated in the following 3Rs:


Respect: The company is respected as a go-to provider of comprehensive LED solutions


Research: The Company has successfully absorbed technology research to shrink its mind-to-market with the objective to accelerate product launches by customers; besides, its deep research insight has enabled it to make continuous product enhancements and extend from automotive to non-automotive applications (luminaires).


Relationships: The company has been a trusted multi-year lighting solution provider to some of the most prominent two-wheeler automotive brands in India; the robustness of their brands (and related off take) provides Fiem with attractive revenue visibility across the foreseeable future.


This is not a story that will only play out in the future; it has already started happening. The company recently started supply of 2W LED head lamp to Yamaha India, developed through Fiem''''s in-house R&D capabilities, reinforcing the company''''s respect as a first-mover in the two-wheeler LED head lamp segment.


In view of these market-leading realities, the company is attractively placed to ride the LED revolution in India''''s two-wheeler automotive lighting segment.


Culture of competitiveness


At Fiem, we are optimistic of our prospects because of the culture that we bring to this unprecedented LED opportunity. Fiem possesses a long-term commitment to its business, manifested in a future-facing investment in state-of-the-art pan-India manufacturing assets that deliver the high operating efficiencies.


The company has been periodically conferred QCDDM and other awards by its prestigious OEM customers for its 360-degree commitment to operational excellence, strengthening overall sustainability.


Outlook


Much of our optimism related to the long-term sustainability of our business is also derived from the robustness of the India story. India is the fastest growing economy and the country is expected to retain this position between 2016 and 2020. The country''''s consumption story is being driven by the India''''s burgeoning middle-class. We believe that these realities are irreversible, hold out long-term prospects and should continue to reinforce the preference for the twowheeler as one of the first item of purchase following increased prosperity.


Hence, on the automotive front, the outlook appears promising with demonetization impact behind us. New regulations of BS-IV and AHO represent positive prospects for the industry and Company. LED is being adopted rapidly in the area of automotive lighting applications, a positive development as the company is among frontrunner in development of LED head lamps on account of in-house R&D capabilities. Keeping in view attractive prospects, the company raised Rs. 120 crore through a Qualified Institutions Placement (QIP) in September 2016 to be opportunity- ready. I am thankful to investors for their faith in our Company.


During the year under review, we have also signed a Technology License and Assistance Agreement (TAA) with Aisan Industry Co., Ltd., Japan, and Toyota Tsusho Corporation, Japan, for the manufacture of Canister in India, an emission control system product. Following the TAA, the Canister is being manufactured by Fiem Industries Ltd. with the technical support of Aisan Industry Co., Ltd. for Indian two-wheelers and three-wheelers.


Conclusion


The Company''''s business model continues to be robust marked by enduring customer relationships. The Company is likely to emerge as one of the principal beneficiaries of the LED revolution in the 2W automotive lighting segment unfolding in the country''''s two-wheeler space. We expect that these realities will widen our opportunity canvas and translate into attractive growth across the foreseeable future.


JK Jain


Chairman & Managing Director


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