Amber Enterprises: Expensive; for risk-takers only

Amber Enterprises, a contract manufacturer of room air conditioners is planning a debut in the capital market. The total issue is for ₹600 crore with a fresh issue of ₹475 crore and an offer-for-sale by existing investors for the balance. Of the isue proceeds, ₹400 crore will be used to settle debt. The total outstanding debt in the company’s balance sheet as of September 2017 was ₹428 crore.

The company makes and supplies room air conditioners (RACs) and components. Amber’s key clients are Panasonic, Daikin, Hitachi, LG, Whirlpool, Voltas and Blue Star.

The Indian RAC market has been growing at a CAGR of 10 per cent in the last five years. Increase in disposable income of the middle-class and easy availability of consumer finance have been driving growth. However, the penetration of RACs in India is still at a low 4 per cent and offers large scope for players in the space.

In the contract manufacturing space in RAC, Amber claims a market share of 55 per cent.

Numbers from Frost & Sullivan show that the preference to outsource manufacturing has increased in the Indian RAC market over the last five years to 34 per cent from 16 per cent, with reducing capex and paring the use of imported components being the key reasons.

However, the asking price by the company is expensive.

In 2016-17, sales stod at ₹1,644 crore and PAT at ₹27.89 crore. But, in the first six months of 2017-18 the company achieved strong growth — with sales at ₹938 crore and PAT at ₹27.3 crore.

The company’s management attributes the sales growth in the first half of the year to strong demand and doubling of profits to operating leverage. But, given that over the last four years, sales has grown at 17 per cent and PAT at 9 per cent, we need to tone down forward expectations. Drop in interest outgo and operating leverage from new capacities added recently will, however, boost profit growth. On estimated earnings for 2017-18, at the offer price of ₹859, the company is asking for a valuation of about 64 times.

The entire consumer durable space represented by B2C companies such as Whirlpool (51 times on estimated earnings of 2017-18), Symphony (71 times) and others and the contract manufacturer — Dixon Technologies (60 times), is overheated now.

Investors with a high-risk appetite can consider investing in the stock, others may wait for an opportune time.

Business

Amber has 11 manufacturing facilities across seven locations in India. Most of these units have a good level of backward integration and are located in the proximity to customers’ facilities. In 2016-17, sale of RACs and related components accounted for 83.6 per cent of revenue.

The company also offers manufacturing solutions in critical components such as heat exchangers, multi-flow condensers and motors. Of the total revenue, about 75 per cent comes from ODM (original design manufacturing — where the company designs the product and develops it in-house). Margins are relatively higher here.

Amber does not have any long-term supply agreement with its customers. It relies on purchase orders and these orders may be amended or cancelled prior to finalisation. There is also risk from client concentration. Sales to the top five and top 10 customers contributed 74.7 per cent and 92.5 per cent, respectively, of revenue from operations in 2016-17.

The company’s operating margin in 2016-17 was 8.3 per cent. This is good for a contract manufacturer. Players such as Whirlpool, Blue Star and others in the OEM space make only about 10-12 per cent margin. In the six months ended September 2017, Amber’s operating margin improved to 9.3 per cent helped by traction from higher sales volume.

Return on capital employed (ROCE) stood at 15.2 per cent in 2016-17. This is little suppressed because of Amber’s large investments in capacity in the last few years.

Growth drivers

Amber intends to grow its existing product portfolio through innovation and achieve greater backward integration. It also intends to build its ODM segment, given the relatively higher margin. The company plans to look at potential for exports and attract more clients in the domestic market too by showcasing its strength in the R&D and product space.

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