Amber Enterprises: Playing it cool - BUY

As a play on the increasing aspiration levels and consumption in the country, investors can buy the stock of Amber Enterprises, a contract manufacturer of room air-conditioners. With the penetration of room air-conditioners (RACs) in India at just 4 per cent, versus a global average of 30 per cent, the segment has considerable untapped opportunities.

According to a Frost & Sullivan report, the proportion of outsourcing in the Indian RAC market has increased to 34 per cent from 16 per cent over the past five years, as more players see the benefit of reduced capital requirement and faster product development.

Amber Enterprises claims to have a market share of 55 per cent in the RAC contract-manufacturing space, with clients such as Panasonic, Daikin, Hitachi, LG, Whirlpool, Voltas and Blue Star.

The Centre’s recent move of doubling import duty on air-conditioners to 20 per cent is set to further benefit the company with the likelihood of more brands outsourcing their production or buying components from Amber.

At the current market price of ₹900 a share, the stock trades at 46 times its earnings of 2017-18. The other contract manufacturer in the white goods space, Dixon Technologies, trades at 47 times its trailing earnings. Thus, Amber is relatively inexpensive. Any correction in price, in line with the broader market decline, can be used to accumulate the stock.

Business prospects

Amber recorded an annualised growth of 22 per cent in revenue between 2014-15 and 2017-18, which is higher than the industry average. In 2017-18, the company recorded a revenue growth of 29 per cent (to ₹2,128 crore) and a PAT (profit after tax) growth of 181 per cent (to ₹62 crore). The operating leverage from higher volumes and increased capacity utilisation, and reduction in interest outgo due to repayment of debt (from the IPO proceeds) helped profit growth.

Revenue growth was helped by strong growth across segments, thanks to new customer additions, fresh products and an increase in the wallet share of existing customers. While the growth in the AC business was 22 per cent, the revenue from the other two segments — AC components and non-AC components — expanded 55 per cent and 47 per cent relative to the previous year.

The revenue split is: 71.7 per cent from ACs, 13.8 per cent from AC components and 13.6 per cent from non-AC components.

Going ahead, too, the company is poised to do well, thanks to the firm’s expanding product portfolio and Amber’s strength in R&D, which is bringing it more ODM (original design manufacturing — where the company designs the product and develops it in-house) business.

Amber acquired two companies in the past year — ILJIN Electronics (December 2017) and Ever Electronics (March 2018). Both of them manufacture electronic PCBs (printed circuit boards) for inverter air-conditioners and other white goods.

Given the increasing demand for inverter technology across the consumer goods space — as they consume less energy than conventional products — these acquisitions are set to pay off well.

Also, with domestic consumer companies focussing on Make in India, and the import duty hike on air-conditioners, prospects look good for Amber.

Many more companies may now get their indoor units (for split ACs) done from Amber and other contract manufacturers.

In the first quarter of 2018-19, revenue declined for the company because of unseasonal rains across the country that impacted AC sales.

The standalone revenue was down 3.5 per cent. However, the AC as well as non-AC components segments did well, with revenue growth of 8 per cent and 31 per cent, respectively.

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 proximity to customers’ facilities.

Profit margins expand

In the recent June quarter, the company (standalone) reported an operating profit margin of 10.07 per cent versus 9.04 per cent in the same quarter last year, helped by the change in product mix and the increase in revenue from the components business.

For the full year 2017-18, operating margins for the consolidated business was 8.6 per cent, up 70 basis points over the previous year.

Profit margins may improve for the company given its focus on growing its components business through new acquisitions and by deriving higher business from ODM.

Also, the operating leverage from higher volumes should help.

While the rupee depreciation will impact the company, it passes on the cost increase to clients (happens with a lag).

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