Amber Enterprises Ltd - Markets Mojo€¦ · Globally the Room AC Market (RAC) size is expected to...

Amber Enterprises Ltd

12 Mar 2019

Initiating Coverage

2

Conditioned for a ‘Cool, Secular’ growth

Sector: Consumer Durables

Price performance

Target Price:

CMPPotential Upside

MARKET DATA

No. of Shares

Market Cap

Free Float

Avg. daily vol (6mth)

52-w High / Low

Bloomberg

Promoter holding

FII / DII

12 Mar 2019 Company Report

BuyRs. 954

: Rs. 772: 24%

: 3.14 Cr.

: Rs. 2,189 Cr.

: 56%

: 25,113

: 1,200/621

: AMBER IN

: 44.02%

: 10.73%/ 4.88%

Shareholding patternFinancial Summary (Consolidated)

Source: Company, Axis Securities CMP as on Mar 11, 2019

Y/EMarch

Net Sales(Rs Cr)

EBITDA(Rs Cr)

PAT (Rs Cr)

EPS (Rs)

Change (%)

P/E(x)

RoE (%)

RoCE(%)

EV/EBITDA (x)

DPS(Rs)

FY17 1,736 139 22 9.3 (16.3) - 7.0 19.1 - 2.5

FY18 2,172 192 62 19.8 113.0 - 10.0 17.9 - 0.0

FY19E 2,379 210 94 29.9 50.7 25.8 10.0 14.5 10.5 2.5

FY20E 2,820 258 126 40.1 34.2 19.3 12.1 16.7 8.1 2.5

FY21E 3,306 314 164 52.3 30.5 14.8 14.0 19.1 6.2 2.5

Dec-18 Q-o-Q Chg

Promoters 44.02% 0.00

FPIs 10.73% 0.03

MFs / UTI 4.73% 0.33

Banks / FIs 0.15% 0.01

Others 40.37% (0.37)

Hiren Trivedi - CM research| [email protected] | (+91 22 4267 1759)

Suvarna Joshi – SM Research| [email protected] | (+91 22 4267 1740)

0

60

120

180

Mar-18 Jun-18 Sep-18 Dec-18 Mar-19

BSE Sensex Amber Enterp.

Amber Enterprises

3

Investment Rationale

Amber Enterprises Ltd.(AEL) is a leading solution provider for Air conditioner OEM/ODM* Industry in India. The companymanufactures Room Air Conditioners (RACs), Indoor Units (IDUs), Outdoor Units (ODUs), Split and Window Air Conditioners. Amberalso manufactures RAC and non RAC components in its endeavour to be a total solutions provider for the RAC industry in India. Withits 12 manufacturing plants strategically located close to OEMs, the company caters to 8 out of top 10 AC brands in India whichtogether have 75%+ market share in India.

We expect revenues to increase at 15% CAGR over FY18-21E; earnings to grow at 38% CAGR to be driven by

Company Report


Amber Enterprises

12 Mar 2019

Market penetration in the RAC segment is a mere 4% in India as against global levels of 30%

RAC penetration (4% in India) lags vis-à-vis other consumer durables like TV (60%), Washing Machine (10%), Refrigerator (20%)

and Air Coolers (17%)

Higher replacement demand from developed countries and new demand presents huge opportunity

India is the only market in the world which has witnessed consecutive positive growth in demand for RAC’s between 2013-17

Domestic demand for RAC is expected to grow at CAGR of 12.4% between FY17-22E

Underpenetrated RAC market with higher growth trajectory

* OEM / OEM – Original Equipment Mfr / Original Design Mfr

Increasing penetration levels of RAC’s aided by higher

disposable income

Reducing replacement cycle of RAC’s due to energy

efficient products

Demand emanating from climatic changes, higher

demand for cooling products including RAC’s

Higher contribution from AC components & non AC

components from recent acquisitions EVER Electronics

& ILJIN Electronics

We initiate coverage with “BUY” rating with a target price of Rs. 954 i.e. ~24% upside (implies 18 x FY21E)

4

Investment Rationale

Company Report


Amber Enterprises

12 Mar 2019

The increasing trend of warmer summers has necessitated higher cooling requirement in peak summer from March to Mayonwards

Global average surface temperatures has risen by 1.4 ºF (~0.8 ºC) over the last century as per NOAA* The combined effect of climate change and an evolving El Niño could make 2019 the hottest year ever as per IMD Given the strong correlation of RAC demand to increases in temperature, the RAC sales are bound to increase as we approach

summer

Changing Climatic Conditions

Local manufacturing to get a boost from Government steps to promote India as hub for innovation, design and manufacturing Setting up port-based electronic manufacturing clusters to support local manufacturing and exports Increased Customs Duty on imported AC’s from 10% to 20%, Compressors for Refrigerators & ACs from 7.5% to 10% to

encourage domestic production AEL a leading one stop solutions provider for the RAC brands is in a sweet spot, as it will cater to the growing demand from RAC

brands

Make in India ; Recent government initiatives

The OEM market is expected to grow as companies shift towards localized manufacturing (65% for RACs) given India’s superior

design capabilities and competent workforce at lower wage rate than China

In FY2012 OEM outsourcing was ~16% which has increased to 34% in FY2017 and is expected to grow to 44% by FY2022E

Total RAC volumes are expected to grow by 12.4% CAGR between FY17-FY22E, while outsourcing is expected to grow by

25.1% CAGR in the same period

Increasing trend of outsourcing by OEMs augurs well for AEL

*National Oceanic & Atmospheric Administration

5

Investment Rationale…

Company Report12 Mar 2019

Amber Enterprises


AEL has grown from a single unit at Rajpura to 12 manufacturing units across 7 locations in India

The manufacturing facilities have a high degree of backward integration thus making it a one stop shop for RAC brands

Strategically located in proximity to customer’s facility ensuring prompt response to clients manufacturing requirements

Strategic location of manufacturing facilities

Acquisition of IL JIN and Ever Electronics critical component manufactures – Advantage AEL

Aids its endeavour towards being one stop solutions provider for customers

Enhanced product offering thus increasing content per AC leading to growing wallet share with existing customers

Expanded capabilities to cater to shifting customer preference towards inverter RAC’s

Expanded into AC and Non AC components , adding to diverse client profile and other consumer durable goods

Backward Integration – Right step at opportune time

Amber is the market leader leader in the OEM/ODM industry with 55.4% share in volume terms (outsourced market)

AEL’s share stands at 19.1% in the overall RAC market in terms of volume

Key customers include Godrej, Bluestar, Daikin, Hitachi, LG, Panasonic, Voltas, Whirlpool and Carrier Midea which together

account for 75% of the market share.

Market leader in domestic RAC, OEM/ODM industry

6

RAC Market Size set to Increase


Amber Enterprises


Globally the Room AC Market (RAC) size is expected togrow 1.3x between FY18- FY22E

India’s RAC market size is expected to grow 1.6x betweenFY18- FY22E

Sustained demand for AC’s is expected from developedcountries due to:

Replacement demand - reducing replacement cycle

Shifting to energy efficient & cost effective products

Increasing demand being witnessed from emergingeconomies as AC penetration increases

India’s low level of penetration of RACs ( ~4%) presents hugescope for growth in demand.

Changes in climatic conditions leading to higher demandfor cooling products

Increasing affordability due to higher disposable income

Regulatory changes leading to development of energyefficient products –catering to new and replacementdemand

Global RAC Market Size & growth trajectory

India’s RAC demand to grow at higher pace

India’s RAC Market opportunity

3.0 3.0 3.1 3.43.9

4.75.5

6.26.9

7.78.6

0.0

2.0

4.0

6.0

8.0

10.0

FY1

2

FY1

3

FY1

4

FY1

5

FY1

6

FY1

7

FY1

8

FY1

9

FY2

0

FY2

1

FY2

2

Volu

me

(In

Mn)

85 91 91 86 88 95 102 110 118127

136

0

40

80

120

160

FY1

2

FY1

3

FY1

4

FY1

5

FY1

6

FY1

7

FY1

8

FY1

9

FY2

0

FY2

1

FY2

2

Volu

me

(In

Mn)

Source: Company, Axis Securities

7

Make In India – Thrust on Localization

Low Localization Levels (%)



Amber Enterprises


30

70

35

10

35

70

30

65

90

65

0 50 100

Refrigetaor

FPD TV

WashingMachine

Air Coolers

Residential Acs

Localisation levels in Appliances Import

Item Old Revised

Air Conditioner 10 20

Refrigerators 10 20

Washing Machines ( Less than 10 kg ) 10 20

Compressor for Refrigerators & ACs 7.5 10

Speakers 10 15

Customs Duty Increase: Select Consumer Durables (%)

Localisation at 65% for RAC’s is lower as compared to Air Coolers

(90%) & Refrigerators (70%)

Rising cost of imports (Customs Duty raised) to push leading AC

brands to increase their localization content to fulfil growing

demand for completely built units and components in addition to

Make In India thrust

AEL better placed than peers to capitalize on growing localization

needs of customers due to Fully backward integrated facility Higher capabilities in terms of components vis-à-vis peers Diverse product offering

Scope for growth due to increasing localization

On like to like basis there is no comparable peer due tofragmented players and wide range of components provided byAEL

AEL is almost 5x its fragmented players which are spread acrossdifferent locations

Being a one stop shop solutions provider offering wide range ofcomponents to RAC brands with 12 manufacturing units across 7locations gives AEL and edge over its peers.

Varied Components offerings – advantage AEL

8

Changing climatic conditions

CY2019 expected to be hottest year ever as per IMD and WorldMetrological department due to a) El Nino effect and b) risingtemperatures

Increasing trend of warmer summers has necessitated highercooling requirement in the peak summer months starting fromMarch - May

March-May temperature forecasts across 4 major Metros in Indiaindicate

Maximum temperatures over next 3 months could be in the range of26ºC to 41ºC

Minimum temperatures could range between 8ºC to 25 ºC

Q4 and Q1 are seasonally strong quarters for RAC sales. HenceRAC demand is set to increase as we approach summer


Amber Enterprises


Temperature variation across Metros (High / Low)

RACs a necessity than a luxury owing to climate change

Scope for growth of residential air conditioners

Maximum demand of RACs to come from India & China

33.330.5

33.6 34.0

21.7

15.4

22.324.8

0

10

20

30

40

Mumbai Delhi Kolkata Chennai

0C

elsi

us

Max (High) Temp. Min (Low) Temp.

Emerging countries with growing population and incomes will spurdemand for comfort cooling as global temperatures rise

Demand for AC’s is set to increase in tropical and sub-tropicalcountries, like India, China, Brazil, and Indonesia

Source: Company, Axis Securities, Accuweather, IEA

9

Underpenetrated Markets a huge scope for growth

Currently the penetration of RAC’s in India is merely between 4-5%vis-à-vis 30% globally and ~100% in China. This presents a hugeopportunities for growth

ACs have now become a necessity than being a luxury due to

sustained rise in temperatures along with increasing affordabilityand financing options

Governments thrust on Electricity For All is expected to provide animpetus for increasing demand for consumer durables in rural andsemi-urban areas

India, the only secularly & positively growing market for RACsacross the world. In 2017 India’s demand for RAC’s grew by14.2% vs. 13.2% in China – a significant and strong growthopportunity for Amber, the market leader in OEM/ODMoutsourcing

Source: The Japan Refrigeration and Air-conditioning Industry Association, Company, Axis Securities

RAC Penetration India vs. South Asian Countries


Amber Enterprises


RAC Penetration vs. Other Consumer Durables

30%

100%91%

54%

30%

4%

0%

50%

100%

Global China Japan Malaysia Thailand India

4%20%

10%

60%

17%30%

85%70%

89%

25%

0%

20%

40%

60%

80%

100%

Room AC Refrigerator WashingMachine

FPD TV Air Cooler

India Global

India the only positively growing market across the world in RAC

Growth in RAC Demand ( %) 2013 2014 2015 2016 2017

Global 7.4 (0.8) (4.9) 3.0 8.2

India 3.4 6.6 4.7 11.3 14.2

China 9.0 (2.0) (8.0) 3.5 13.2

Japan 6.2 (5.7) (4.7) 3.1 6.9

North America 4.6 4.3 (1.6) (0.9) 1.2

Europe (3.5) (17.8) (4.9) 13.4 8.7

Middle East 26.8 3.8 (3.0) (2.0) (4.0)

Africa 5.8 1.9 (3.0) 5.2 (2.4)

Latin America 8.5 3.5 (11.0) (12.2) 5.3

10

Increased Outsourcing – advantage AEL

Increasing trend of outsourcing by brands to ODM players as

Brands adopt an asset light strategy focusing on branding, marketing

distribution and innovation

Distinct advantages of domestic manufacturing via OEM/ODM

significant cost savings

lower lead time

better working capital management

quicker response to market trends and requirements

Co is well placed to cater to this increased outsourcing demand due to -

Fully backward integrated operations – one stop shop for RAC

brands

Enjoying economies of scale

R&D capabilities with quality manufacturing set up

Faster response time line due to strategic plant locations

Source: Company,, Frost & Sullivan Analysis , Axis Securities

Forecast of Consumer Durables ODM Industry


Amber Enterprises


8.6

4.7

3

4.9

1.6

0.5

0 2 4 6 8 10 12 14

FY22E

FY17

FY12

(Volu

me

In M

n)

Total RAC Volume OEM/ODM

RAC & Outsourcing Volumes forecast

CAGR 12.4% CAGR 25.1%

84%

16%

FY12

RAC OEM/ODM

66%

34%

FY17

RAC OEM/ODM

0

100,000

200,000

300,000

400,000

0

5

10

15

20

FY1

2

FY1

3

FY1

4

FY1

5

FY1

6

FY1

7

FY1

8

FY1

9

FY2

0

FY2

1

FY2

2

(Rs

Mn)

(Mn

Uni

ts)

Value (Rs Mn) Volume (Mn Units)


Asset light Strategy of brands leading to growing ODM share

44%56%

FY22E

RAC OEM/ODM

11

Regional Share of RAC Demand

Cooling degree days is a metric that indicates coolingrequirement due to heat and humidity. India has highercooling requirements as cooling degree days are more

Higher Cooling requirements will ensure RAC demandcontinues to grow.

India’s higher cooling requirement is expected to pushdemand for cooling products including AC’s

AEL with its 12 units is well equipped to cater growingdemand across regions.

AEL is scouting for presence in South India over next 2-3years to capture demand in Southern region

0 1,000 2,000 3,000 4,000 5,000

Los Angeles

Miami

Delhi

Kolkatta

Mumbai

Chennai

Cooling Degree Days

Hot & DryHot & HumidCompositeColdModerate

North India, the Largest Market for RAC’s accounts for 33% demand

South India (a highly growing market)accounts for 30% demand of RAC

Eastern Ind

ia

acco

unts for 1

5%

dem

and

of R

AC

Wes

tern

In

dia

acc

oun

ts for

22

%

dem

and

of RA

C

While AEL is well equipped to cater North , West & East….. Higher cooling requirements , increases scope for demand growth


Amber Enterprises



… Company plans to expand its presence in South India over

next 2-3 years

12

India’s demographic dividend a key demand driver

Rising Affluent Middle Class Population Estimated to form ~69% of total population by 2020 People living in urban clusters to be ~64% by 2020 Changing lifestyle causing early adoption of white goods in

young population, a strong demand generator Rising Indian Per Capita Income (IPCI) leading to

Rise in spends on aspirational goods including consumer durables likeRACs

65% of the consumer durables demand comes from first time buyers as perindustry reports

Reducing replacement Cycle of Window ACs Window AC replacement cycle is ~5-8 years , while Split AC (SAC) is 10-12 years

Shift in demand to Energy Efficient ACs Demand shift to SACs due to easy availability and lower replacement cycle Replacement demand coming from existing & new customers for energy

efficient inverter AC’sSource: Company, Axis Securities, IMF


Amber Enterprises


Increasing middle class population Increasing per capita income leading to higher discretionary spends

AC Demand trajectory to remain robust going ahead…

1,4

82

1,4

86

1,6

10

1,6

39

1,7

49

1,9

76

2,0

16

2,1

88

2,3

80

2,5

85

2,8

03

3,0

40

0

750

1,500

2,250

3,000

3,750

FY1

2

FY1

3

FY1

4

FY1

5

FY1

6

FY1

7

FY1

8

FY1

9E

FY2

0E

FY2

1E

FY2

2E

FY2

3E

(In

USD

)

52

69

40

50

60

70

80

2012 2020

(%)

30%

70%

Replacement Demand

New Demand

Key Drivers of Demand

Increasing urbanization

Growth in per capita income

Shortening replacement cycle aided by innovative energy saving RAC’s

(inverter AC)

Easy availability of electricity and growing aspirations

13

Company Brief

Amber Enterprises Limited was Established in 1990, AEL set up its first factory set up at Rajpura, Punjab

Witnessed structural evolution into a complete RAC solution provider from having commenced as sheet metal manufacturer

Is the largest backward integrated ODM manufacturer of RACs - a key lever for growth and profits

Wide product portfolio including RAC and its components (heat exchangers, multi-flow condensers & motors), plastic components

(case liners, extrusion sheets & vacuum forming)

12 state-of-the-art manufacturing units across India which are in proximity to customer factories, a prime advantage over peers

caters to 8 out of the top-10 AC players in the country and has a market share of +55% in volume terms (OEM/ODM) and 19%

share in the overall RAC market

Followed inorganic route to growth in its quest of profitable growth (20% Earnings CAGR over FY13-18)

Post the acquisitions of ILJIN & Ever Electronics (2018) it has become the leading Company with capability to manufacture RAC

PCBs in India

AEL is highly backward integrated player which caters to 49% of client requirement for outdoor units, 78% for Indoor units and

60% for Window AC’s (WAC’s)


Amber Enterprises


Outdoor Units Indoor Units Window AC's

49

35

16

Amber Compressors Outsourced

78

22


6028

12



14

Strategic acquisitions & locations – AEL’s business differentiator

Company Report


Amber Enterprises

12 Mar 2019

Source: Axis Securities

Customer Type: Complete Units,

Components

Kala Amb (HP)

Dehradhun (U.K)

Greater Noida (UP)

Rajpura (Punjab)

Jhajjar (Haryana)

Faridabad (Haryana)

Existing facilities

Pune(Maharashtra)

Customer Type: Complete Units,

Components

Company Acquired

Overview Acquisition PriceAcquisition Rationale / Objective

PCIL, 2013

Est. in 1994 and has a capacity of 3mn

motors p.a. Acquiredin 2013. It has a

topline of Rs. 86 cr as of 9MFY19

Rs. 48.97cr 100% subsidiary with base

at Faridabad

Expand customer base & product

offerings

ILJIN , 2017

Acquired in Dec-17, has a capacity of

1.8mn units p.a Mfg PCBs for Home appliances &

automobile products. It has a top-line of Rs. 231 cr as of 9MFY19

Rs. 54.43 cr, 70% subsidiary with base

at Greater Noida

Expand product offering and

customer base , increasing AC &

Non AC component capabilities

Ever Electronics ,2018

Est. in 2004 Acquired in Mar-17, Mfg PCBs

for AC, other Consumer Goods &

automobile products. It has a top line of Rs.

177 cr as of 9MFY19

Rs. 21 cr for 70% stake, currently AEL holds19% in Pune

based Ever Electronics

Increasing geographic reach

along with expansion in

customer base

15

Product Portfolio


Amber Enterprises


Room Air Conditioners Segment Contribution & growth Key Clients

Window Room Air Conditioners

Split Air Conditioners

Inverter Split Air Conditioners

526699 699

1,2521,525

0

500

1000

1500

2000

FY14 FY15 FY16 FY17 FY18

(Rs

Cr)

Air Conditioners

71.7

RAC AC Component Non AC Component

Capacity Energy Rating

Split AC

1 ton **

1.5 ton ***

2 ton *****

Inverter AC (1, 1.5, 2 ton) *****

Window

1 ton **

1.5 ton ***

2 ton *****


FY18 RACs contribute 71.7% of total revenues RAC Segment Revenues grew by 31% on

CAGR basis between FY14-18

16

FY18 AC Components contribute 13.8% of total revenues

AC Components Revenues grew by 12% on CAGR basis between FY14-18

Product Portfolio


Amber Enterprises


AC Components Segment Contribution & growth Key Clients

Heat Exchanger

Sheet MetalComponents

Copper Tubing

Electric Motor PCB’s for AC

186 212 210 189

293

0

100

200

300

400


(Rs

Cr)

AC Components

13.8



17

Product Portfolio


Amber Enterprises


Non AC Components Segment Contribution & growth Key Clients

262 319

179 211

310

0

200

400


(Rs

Cr)

Non AC Components

Plastic Extrusion

Printed Circuit Boards for Others

Sheet Metal

14.6



FY18 Non AC Components contribute 14.6% of total revenues

Non AC Components Revenues grew by 4% on CAGR basis between FY14-18

18

Key Milestones - Amber Enterprises

2018 2017 2013 2012 2012

1990 1994 2004 2006 2008 2008 2009 2010

Incorporated in Jalandhar Punjab

First Factory established in Rajpura

Manufacturing of Microwaves ovens

2012 2011 2010

Commenced Manufacturing of Heat Exchangers

Kasna, Kala Amb & Pune Unit established

Started Dehradun Unit 4

Started Noida Ecotech Unit

Dehradun Unit 5established

IPO

Investment by Ascent, exit to Reliance through purchase by

Ascent

Investment byReliance Alternative IF

Jhajjhar Unitestablished

Dehradun Unit 6established

Exit to Green India Venture Fund

Acquisition of PICL

Investment by Green India Venture Fund

Acquisition of IL JIN

InvestmentAcquisition


Amber Enterprises



19

Market Leader in RAC OEM/ODM

AEL is Market leader in the domestic OEM/ODM segment with 55.4%

share in terms of volume and 19% in terms of overall RAC volumes

AEL caters to 8 out of top 10 AC brands in India which together have

75%+ market share, who’s outsourcing requirements have only increased

thereby benefitting AEL

Government initiatives like Make In India, hike in customs duty have

made outsourcing of AC’s /AC components attractive for domestic as

well as MNC’s OEMs

The OEM/ODM manufacturing was 16% of the total RAC volumes in

FY12 , which increased to 34% in FY17 and is expected to touch ~56%

by FY22E

Amber is well prepared to capitalize on the growing OEM/ODM pie

with its fully back ward integrated manufacturing facilities



Amber Enterprises


Ambers share in RAC Market Market Share Analysis – RAC

14.7%

55.4%

0.0%

20.0%

40.0%

60.0%

FY15 FY17

16%

15%

12%

11%10%

9%

9%

5%

4%2%

7%

Voltas LG Daikin Hitachi

Llyod Electric Blue Star Panasonic Samsung

Carrier Godrej Others

Outsourced manufacturing expected to increase

0.5 0.6 0.71 1.2 1.6 1.9 2.5 3.2 4 4.9

2.5 2.4 2.42.4 2.7 3.1 3.6 3.7 3.7 3.7 3.7

0

10

20

30

40

50

60

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY12

FY13

FY14

FY15

FY16

FY17

FY18E

FY19E

FY20E

FY21E

FY22E

OEM/ODM (RAC) (LHS) Non OEM/ODM (LHS) % OEM/ODM (RHS)

20

Focus on product offerings – sticky customer relationships

Set-up a dedicated R&D centre at Rajpura, Punjab (DSIR*,Govt. of India) approved centre.

Equipped with latest technologies: 3D modelling, productlifecycle management software.

AEL’s consistent focus on R&D led to strengtheningrelationships as it offers high degree of product customization,value addition with thrust of cost effective solutions to clients

Customers recognition for AELs superior products and servicequality: 2014-15: Panasonic’s Cost Improvement Outstanding

Performance Award’ 2015-16: Blue Star’s Vendor Performance Excellence Award’ in

finished goods category 2016-17: Godrej Industries Best Support: Green Supply Chain

Award 2016-17: LG Electronics' Best Tooling Management Award

2-3 years for critical components with leading brands like LG

AEL works along with customers by ensuring value addition tothe end product and ensuring clients trustworthiness for AEL

Higher switching cost a key factor considered by existingcustomer that keeps competition at bay

Reducing overdependence on Top 3 clients

The company derived ~75% of the revenues from top 3Clients in FY13 which has decreased to ~ 45% in FY18.

The company currently caters to 8 out of top 10 AC brands inIndia with a relationship of more than 5 years with majority ofits clients.

Consistent improvement in product /offerings quality withfocus on R&D and modernising manufacturing set up

Consistently growing wallet share with existing customers bymoving up the value chain (functional components to completeRAC units)

Source: Company, Axis Securities; *DSIR: Department of Scientific & Industrial Research, Ministry of Steel and Technology


Amber Enterprises


Strong R&D capabilities with focus on innovation Lengthy approval cycles an entry barrier:

Client Stickiness with strong relationship

FY18 –45%FY13 –

75%

Client additions 2017: Daikin & Hitachi2018/19 Carrier Midea, Havells

21

Scaling up the Value Chain & Backward Integration



Amber Enterprises


Sheet Metal

Heat Exchangers

Injection MoldingComponents

IDU ,ODU for Split ACs

Induction Motors

2003

2008

2009

2010

2012

Printed Circuit boards (PCB’s)2018

Multi-flow Condensers

Commenced operation as a sheet metal and componentmanufacturer in 2003. Today, Amber has scaled up the valuechain to become a leader in Original Design Manufacturingsegment for Window /Split AC , Indoor / Outdoor Units.

AEL emerged as a one-stop-solution provider with strong designcapabilities for AC manufacturers by growing both organicallyas well as inorganically

Acquired component manufacturers thus ensuring backwardintegration of its operations

FY13, acquired PICL - manufacturer of induction motors

FY18, acquired Ever Electronics & IL JIN - manufacturers of PCB’sfor AC and Other White Goods

Strong growth in FY2017 driven by launch of new products:

In Door Unit (IDUs) models and

Inverter RACs

New products under development like Brushless DC Motor,Resin-core Motors and Inverter Controllers will aid in gaininghigher wallet share from existing customers

Reported revenue CAGR of 20% over FY13-18 led by :

Increasing product offerings (growing up the value chain)

Better equipped to cater to either full RAC demand (withoutcompressor) or by proving critical components to OEM brands.

Acquisitions of key component manufacturers - adding customersas well as geographical expansion

Investing in R&D and

Product design capabilities


22

SWOT

Strength Market leadership with 55%+

share in RAC OEM/ODM; 19% in Overall RAC market

Caters to 8/10 top AC brand producers in India

Strong & sticky customer relationships

Economies of Scale

Manufacturing plants (12) in proximity to customer ensures quick response time

Weaknesses Absence of manufacturing unit in

South Relatively lower bargaining power

with customers

Opportunities Low penetration @ 4% in India Increasing localization due to Make

in India , inherent cost advantage Increasing foray of new OEM

brands in India Growing wallet share: new

customers existing components; existing customers new value added components

Threats Seasonal Changes affecting

industry growth

Brands resorting to in house production

Increase in competition

Shift in demand to greener products

SWOTStrength

Opportunities

Weaknesses

Threats


Amber Enterprises



23

An able Management Team


Amber Enterprises


Jasbir SinghPromoter, Chairman & CEO

Over 13 years of experience in the RAC manufacturing sector. Hehas successfully established over seven factories in past ten yearsand established relationships with various large brands.

Daljit SinghPromoter & Managing Director

Over 12 years in finance services and 10 years of experience inthe RAC manufacturing sector. significant contribution to theoverall growth of the Company and successful completion of IPO

Sudhir Goyal CFO

Over 13 years experience in the manufacturing Sector;previously worked with Hythro Power Corporation, AltimaSystems, ETA Ascon group, Jamshedpur Mineral WoodManufacturing Co . Member of ICAI

Sanjay AroraDirector Operations

Over 34 years experience in the manufacturing industry;previously worked with Onida, Savak Ltd, Monica Electronics,Kortek Electronics & LG Electronics India Pvt Ltd. In charge ofoperations , innovation , security & legal matters.

Udaiveer SinghPresident RAC

Over 22 years experience in the manufacturing industry; withAmber since December 2003 . He oversees the planning andoperation of RAC manufacturing facilities of the company.

Sachin GuptaVice President RAC

Over 14 years experience in the manufacturing industry; WithAmber since November 2014 . He is in charge of the businessdevelopment. Previously worked with Godrej & Boyce and LGElectronics India .

. Source: Company, Axis Securities

24

Q3FY19 - Quarterly Performance - Standalone

AEL posted standalone revenues of Rs 389 cr ( up 15% Y-o-y)led by higher AC revenues in a seasonally tepid quarter. HoweverEBITDA margins witnessed a downtick due to higher raw materialprices which are passed on to customers with a quarter lag. Thereported PAT stood at Rs 3.8 cr vs. Rs 0.11 cr in Q3FY18

The company has taken a price hike in Q3FY19. It expects topartially recover the margins by passing on the increased cost ofraw material in Q4FY19

On the RAC front the management is confident of its volumesguidance of 2.1mn for FY19 versus 1.9mn in FY18 (10.5% y-o-ygrowth). Further , the company has witnessed robust demand inJanuary and thus expects higher volume growth for the quarter

The company has added new clients like Carrier Midea during thequarter and is confident of growth picking up in the AC and NonAC components segment in the near future

Post the consolidation of ILJIN and Ever Electronics (recentacquisitions) the growth is expected to be strong

To cater to the Southern India’s demand for RAC’s, ACcomponents and other components AEL plans to set up facility inSouth India near potential client clusters

The Capex of around Rs 90 cr will be incurred over next 2-3 yearsfor setting up unit in South India

We expect double digit volume growth in Q4FY19 and Q1FY20,these being seasonally strong quarters for the RAC industry


Quarterly Performance - Standalone

Rs Cr Q3FY19 Q3FY18 % Change

(YoY)Q2FY19

% Change (YoY)

Sales 388.8 338.4 14.9 226.3 71.8

Other Inc 0.3 4.0 (93.0) 2.8 (89.9)

Total Revenue 389.0 342 13.6 229 69.9

Expenditure

Net Raw Material 334.0 285.3 17.1 186.1 79.5

Personnel 9.8 9.8 0.2 10.5 (6.5)

Other Exp 22.8 19.2 18.9 20.8 9.8

Total Expenditure 366.7 314.3 16.6 217.4 68.7

EBIDTA 22.4 28.0 (20.3) 11.6 91.9

Interest 3.5 16.6 (79.2) 3.3 5.6

Depreciation 12.2 11.0 11.2 12.3 (0.9)

PBT 6.7 0.5 - -3.9 -

Tax 2.8 0.3 - -2.2 -

PAT 3.8 0.1 - -1.7 -


Amber Enterprises


25

Financial overview

We expect top line to grow at CAGR of 15% between FY18-21Eaided by increasing RAC volumes and contribution from recentlyacquired subsidiaries EVER Electronics and IL JIN

We expect growth in subsidiaries led by growth in AC & non ACcomponent volumes due to increase in wallet share from existingclients as well as new client additions

FY19 EBITDA margins to remain soft due to integration ofsubsidiaries, we expect margins to remain in the range of 8.8-9.5% improvement in margins due to subsidiaries as well ashigher utilization of RAC segment over next 2 years.

The PAT is expected to grow at CAGR of 38% between FY18-21Eled by healthy top-line growth, cost optimization and improvedmargin performance

Strong growth in EBITDA

EBITDA margins

Healthy top line growth


Amber Enterprises



9801,236 1,092

1,7452,180 2,380

2,8213,307

0

1,000

2,000

3,000

4,000

FY1

4

FY1

5

FY1

6

FY1

7

FY1

8

FY1

9E

FY2

0E

FY2

1E

Sales (Rs cr.)

81109 117

139192 210

258

314

0

100

200

300

400

FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E

EBITDA (Rs Cr)

8.3% 8.8%

10.7%

8.0%8.8% 8.8% 9.1% 9.5%

0%

2%

4%

6%

8%

10%

12%


EBIDTA margins (%)

26

Financial overview

Repayment of debt post IPO and reducing D/E (from 1.03x pre

IPO to ~0.11X in FY21E) will aid bottom line growth.

The cash conversion cycle has reduced from 52 days in FY15 to

31 in FY18, we expect it to stabilize at around these levels.

The company focused on setting up new capacities, expansion

and acquisitions between FY13-FY18, resulting in lower FCF.

Stabilizing capex and improvement in capacity utilization will

augment improvement in return ratios. We expect ROE to increase

from 10% in FY2018 to 14% in FY21E.

We expect the PAT margins to grow from ~2.9% in FY18 to 4.9%

in FY21E.

Efficient Working Capital management (days)

Improving ROE due to superior earnings trajectory

Declining interest cost (Rs cr)


Amber Enterprises


32.3

42.8

53.2

63.5

53.8

21.9 19.7 18.0

0.0

20.0

40.0

60.0

80.0


4852

46

2531 34

31 30

0

20

40

60



12.6 12.8

9.6

7.0

10.0 10.0

12.1

14.0

0.0

4.0

8.0

12.0

16.0


27

Outlook & Valuations

We estimate Amber Enterprises to post topline CAGR of 15% and

bottom-line CAGR of 38% over FY18-FY21E

We expect the company to report stable EBITDA Margins in the

range of ~8-9.5% between FY18-FY21E due to operating

efficiency and cost optimization

ROE is estimated to increase to 14% over FY18-FY21E

We value Amber Enterprises at 18x FY21E EPS as we expect it to

report Revenue/EBITDA/PAT CAGR of 15%/17.7%/38%

respectively over FY18-21E and thus arrive at a price target of

Rs. 954 (24% Upside)

Volatility in raw material prices

Competition from domestic and overseas players

Forex volatility

Customers resorting to higher in-house manufacturing

Risk Factors

Valuation

12mth fwd P/E (x)

P/E band


Amber Enterprises



500

700

900

1100

1300

1500

Jan-

18

Feb-1

8

Mar-1

8

Apr-1

8

May-

18

Jun-

18

Jul-1

8

Aug

-18

Sep

-18

Oct

-18

Nov-

18

Dec

-18

Jan-

19

Feb-1

9

Mar-1

9

Price 20x 25x 30x 35x

13

23

33

43

53

Jan-

18

Feb-1

8

Mar-1

8

Apr-1

8

May-

18

Jun-

18

Jul-1

8

Aug

-18

Sep

-18

Oct

-18

Nov-

18

Dec

-18

Jan-

19

Feb-1

9

Mar-1

9

PE Mean Mean+1Stdev Mean-1Stdev

28

Financials (Consolidated)

Profit & Loss (Rs Cr) Balance Sheet (Rs Cr)


Amber Enterprises



Y/E March FY17 FY18 FY19E FY20E FY21E

Net sales 1,736 2,172 2,379 2,820 3,306

Other operating income 8.8 8.7 0.5 1.1 1.3

Total income 1,745 2,180 2,380 2,821 3,307

Cost of goods sold 1,605 1,988 2,170 2,563 2,994

Contribution (%) 7.5% 8.5% 8.8% 9.1% 9.5%

Operating Profit 139 192 210 258 314

PBIDT 139 192 210 258 314

Depreciation 40 49 56 61 64

Interest & Fin Chg. 64 54 22 20 18

Pre-tax profit 36 89 132 177 232

Tax provision 14 27 38 51 67

PAT before Comprehensive Income

22 62 94 126 164

Adjusted PAT 22 63 94 126 164


Total assets 750 1,063 1,219 1,314 1,459

Net Block 557 710 666 655 641

CWIP 15.2 11.6 50.0 50.0 50.0

Investments 22.7 36.4 36.4 36.4 36.4

Wkg. cap. (excl cash) 120 171 161 170 195

Cash / Bank balance 35.2 133.8 305.9 402.4 537.0

Capital employed 750 1,063 1,219 1,314 1,459

Equity capital 23.8 31.4 31.4 31.4 31.4

Reserves 339 861 947 1,065 1,221

Borrowings 380 135 205 181 168

Def tax Liabilities 6.7 35.2 35.6 37.5 39.4

29

Financials (Consolidated)

Cash Flow (Rs Cr) Ratio Analysis (%)



Amber Enterprises



Sources 198 452 177 172 217

Cash profit 126 165 172 206 247

(-) Dividends 6 0 8 8 8

Retained earnings 119 165 163 198 238

Issue of equity 2.1 7.6 0.0 0.0 0.0

Change in Oth. Reserves

79.9 459.8 0.0 0.0 0.0

Borrowings 62 (179) 35 (8) (5)

Others (65) (2) (22) (18) (16)

Applications 198 452 177 172 217

Capital expenditure 88.8 199.7 50.0 50.0 50.0

Investments (6.9) 13.7 0.0 0.0 0.0

Net current assets 99.8 139.5 (45.4) 25.7 32.6

Change in cash 16.3 98.6 172.1 96.5 134.6


Sales growth 59.4 25.1 9.6 18.5 17.2

OPM 8.0 8.8 8.8 9.1 9.5

Oper. profit growth 19.3 38.0 9.2 22.8 21.7

COGS / Net sales 92.5 91.5 91.2 90.9 90.6

Depreciation / G. block 5.5 5.3 5.9 6.1 6.2

Effective interest rate 15.8 22.4 15.6 12.0 12.4

Net wkg.cap / Net sales 0.07 0.06 0.07 0.06 0.05

Net sales / Gr block (x) 2.4 2.3 2.5 2.8 3.2

RoCE 19.1 17.9 14.5 16.7 19.1

Debt / equity (x) 1.03 0.12 0.18 0.14 0.11

Effective tax rate (%) 38.0 30.3 29.0 29.0 29.0

RoE 7.0 10.0 10.0 12.1 14.0

Payout ratio (Div/NP) 29.3 0.7 8.8 6.6 5.0

EPS (Rs.) 9.3 19.8 29.9 40.1 52.3

EPS Growth (16.3) 113.0 50.7 34.2 30.5

CEPS (Rs.) 26.1 35.5 47.6 59.3 72.7

DPS (Rs.) 2.5 0.0 2.5 2.5 2.5

30

Disclaimer

Disclosures:

The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the Regulations).

1. Axis Securities Ltd. (ASL) is a SEBI Registered Research Analyst having registration no. INH000000297. ASL, the Research Entity (RE) as defined in the Regulations, is engaged in the business ofproviding Stock broking services, Depository participant services & distribution of various financial products. ASL is a subsidiary company of Axis Bank Ltd. Axis Bank Ltd. is a listed publiccompany and one of India’s largest private sector bank and has its various subsidiaries engaged in businesses of Asset management, NBFC, Merchant Banking, Trusteeship, Venture Capital,Stock Broking, the details in respect of which are available on www.axisbank.com.

2. ASL is registered with the Securities & Exchange Board of India (SEBI) for its stock broking & Depository participant business activities and with the Association of Mutual Funds of India (AMFI) fordistribution of financial products and also registered with IRDA as a corporate agent for insurance business activity.

3. ASL has no material adverse disciplinary history as on the date of publication of this report.

4. I/We, Hiren Trivedi– CM, Research, MBA (Finance) & Suvarna Joshi – SM, Research, MBA (Finance), author/s and the name/s subscribed to this report, hereby certify that all of the viewsexpressed in this research report accurately reflect my/our views about the subject issuer(s) or securities. I/We (Research Analyst) also certify that no part of my/our compensation was, is, or willbe directly or indirectly related to the specific recommendation(s) or view(s) in this report. I/we or my/our relative or ASL does not have any financial interest in the subject company. Also I/we ormy/our relative or ASL or its Associates may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of theResearch Report. Since associates of ASL are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies including the subjectcompany/companies mentioned in this report. I/we or my/our relative or ASL or its associate does not have any material conflict of interest. I/we have not served as director / officer, etc. in thesubject company in the last 12-month period.

Any holding in stock – No

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6. In the last 12-month period ending on the last day of the month immediately preceding the date of publication of this research report, ASL or any of its associates may have:

i. Received compensation for investment banking, merchant banking or stock broking services or for any other services from the subject company of this research report and / or;ii. Managed or co-managed public offering of the securities from the subject company of this research report and / or;iii. Received compensation for products or services other than investment banking, merchant banking or stock broking services from the subject company of this research report;

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Amber Enterprises


Instead of a company visit, we have done a conference call with the company’s management.

31

Disclaimer

Disclaimer:

Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to the recipient’s specific circumstances.The securities and strategies discussed and opinions expressed, if any, in this report may not be suitable for all investors, who must make their own investment decisions, based on their owninvestment objectives, financial positions and needs of specific recipient.

This report may not be taken in substitution for the exercise of independent judgment by any recipient. Each recipient of this report should make such investigations as it deems necessary to arrive atan independent evaluation of an investment in the securities of companies referred to in this report (including the merits and risks involved), and should consult its own advisors to determine the meritsand risks of such an investment. Certain transactions, including those involving futures, options and other derivatives as well as non-investment grade securities involve substantial risk and are notsuitable for all investors. ASL, its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or anyaction taken on basis of this report, including but not restricted to, fluctuation in the prices of shares and bonds, changes in the currency rates, diminution in the NAVs, reduction in the dividend orincome, etc. Past performance is not necessarily a guide to future performance. Investors are advice necessarily a guide to future performance. Investors are advised to see Risk Disclosure Documentto understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions andmay be subject to change without notice.

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