Amber Enterprises

Market Capitalization: 8,779 Cr	Current Price:  2,606 (17 Jan 2020)
Stock P/E: 132	Debt to equity: 0.27
Sales Growth (3Yrs): 34%	Profit Growth (3Yrs): 96%
ROCE: 12.6%	ROE: 11.5%
Promoter holding: 40.3%	Cash Cycle: 39 days
Asset Turnover: 1.36	Net Profit Margin: 2.3%

Company Overview

Amber Enterprises India Limited (Amber) is a market leader in Room Air Conditioner (RAC) original equipment manufacturer (OEM)/original design manufacturer (ODM) industry in India. The company has diversified portfolio which includes RAC, RAC components and non-AC components. The company has 15 manufacturing units strategically located close to customers enabling faster turnaround. The Company’s manufacturing facilities have a high degree of backward integration. Amber’s clientele includes MNCs and leading domestic brands like LG, Voltas, Panasonic etc. Amber is serving majority of them for over 5 years and derives 75% of its revenues from top 7 customers. The Company designs and manufactures complete RACs including window air conditioners (‘WACs’) and indoor units (‘IDUs’) and outdoor units (‘ODUs’) of split air conditioners (‘SACs’) with specifications ranging from 0.75 ton to 2 ton across energy ratings and types of refrigerant. The Company also designs and manufactures Inverter RACs ranging from 1 ton to 2 ton. Following the acquisition of Sidwal, Amber has entered the business of manufacturing and sale of HVAC equipment, commercial refrigeration, and related components for private and government customers

Business Analysis

Triple Engines of Growth

Amber is a key supplier to the top AC brands and commands almost 24% volume market share of AC’s sold in India in FY20. RAC brands in-house manufacturing/imports still constitutes 65% of the domestic RAC market. Of the remaining 35%, Amber dominates the market of the OEM/ODM with 71% share making it a dominant player.

Over the next several years, there could be three engines of growth that could propel Amber into the big league in the Indian RAC market. Increased outsourcing of RAC manufacturing by top AC brands, import substitution, and addressing the export market for RAC and components.

Currently, only 35% of the RAC manufacturing is sourced domestically. The trend of outsourced manufacturing is set to increase as growing number of RAC brands like Voltas, LG etc focus on brand building and marketing their product to increases sales and market share. Outsourcing is in sync with the asset light model as RAC demand is seasonal around summers and monsoons. Further, the addition of new energy efficient models and increased demand from ecommerce players without manufacturing units will continue to boost the outsourcing trend.

Currently, 30% of the finished RAC’s valued at INR4,000 crore is imported. Government is looking at various ways to reduce import dependency. In late 2018, Government doubled the basic customs duty on import of RAC’s, Refrigerators, and Washing Machine from 10% to 20%. It has also increased compressors duty from 7.5% to 10%. In October 2020, Government banned import of Air conditioners with refrigerants providing a boost for AC manufacturers locally. The prohibition increases the addressable market size for contract manufacturers and shall benefit market leader like Amber due to their leadership position in RAC contract manufacturing. With the government’s thrust on manufacturing, it is reasonable to expect PLI (Production Linked Incentive) scheme in AC manufacturing, in-line with the scheme announced for Large Scale Electronics Manufacturing. Amber is well placed to tap this opportunity as it a leading player catering to almost 70% of the outsourced demand for RAC.

The final lever of growth is the exports opportunity as companies around the world look to de-risk their supply chain and look from alternative sources. Amber has gradually built an ecosystem of RAC along with entire spectrum of components. Through its acquisition of PICL, Amber has gained specialisation in single phase induction motors for RAC’s, commercial AC’s and coolers. Amber’s another subsidiary IL JIN has specialised in manufacture of electronic assembled PCB’s for home appliances and automobiles. Ever Electronics acquired in FY19 is involved in assembling of electronic PCB’s for RAC’s, other consumer durables, home appliances, and automobiles. Amber has recently developed its own PCB board in collaboration with chip manufacturer Infineon from Germany and is witnessing increased enquiries for it. With these initiatives, Amber is exploring to increase its share of RAC/RAC components as part of its exports.

Components and Mobility Business Scaling up Nicely

Amber has recently forayed into Mobility applications with the acquisition of ‘Sidwal’. Sidwal has a facility which manufactures HVAC (Heating Ventilation and Air Conditioning) equipment for mobile applications such as railway coaches, metro coaches, buses, commercial refrigeration, and related components. Mobility applications like metro, railways, bus etc are high growth, high entry barrier ventures and can lead to enhanced cross selling opportunities and margin enhancements going forward. The acquisition will also help provide more comprehensive solutions such as CAC (Central Air Conditioning), AHU (Air Handling Unit) and FCU (Fan Coil Unit) to existing customers. During Covid-19 period, Sidwal acquired new orders worth INR115 crore to be executed over next 1-2 years. As on Q1FY21 end, the total order book of Sidwal stood at INR550 crore.

Amber has demonstrated strong growth over the last 5 years on the back of acquisitions of PICL, EVER, and IL JIN. This has enabled it to achieve higher degree of backward integration making it a one-stop solution for all client needs. The level of backward integration enables control on the processes, reduces dependence on external suppliers along with lowering the finished product’s cost. Apart from manufacturing RAC unit, Amber is entrenched in producing Heat Exchangers, PCBs, Copper Tubing, Motors, Multi-flow condensers, injection moulding components, and sheet metal parts for RAC. In the non-RAC segment, Amber manufactures case liners for refrigerator, plastic extrusion sheets for consumer durables and automobiles, sheet metal parts for microwave and washing machine tub assemblies. The share of ‘components and mobile applications’ currently stands at 39% of its overall revenues as on FY20 with increasing trend over the last few years. This increased impetus on components/mobility business will lead to EBITDA margin expansion as components/mobility have higher margin profile compared to RAC manufacturing.

Expansion to Address Low AC Penetration

The RAC penetration in India is among the lowest among leading Asian countries at 8%. The demand for RAC will gradually improve in India owing to increased temperature conditions, surge in urban population and increasing disposable income. India has a long way to catch-up with global average RAC penetration of 48%. Further, adoption of RAC’s will surge as technological innovations has made RAC’s more energy efficient. This bodes well for Amber as it is one of the few Indian manufacturers with the capability to design and manufacture Inverter RACs which are regarded as most energy efficient and growing rapidly.

Amber has around 15 manufacturing units across 6 states in India. These units are strategically located in close vicinity to tap the needs of its customers. It raised INR400 crore though QIP in Sep 2020 to expand its presence in South India and cater to the upcoming manufacturing unit of Voltas. It plans to utilize INR300 crore over next 2-3 yrs for Greenfield expansion of RAC and components at plant in Pune and Tirupathi. These plants are expected to be operational by Q4FY22 and Q1FY23 respectively. Amber’s new plants will be able to cater to client requirements and also explore export opportunities. Further, Amber acquired its remaining 20% stake in Sidwal and is looking to pare debt using the QIP proceeds.

Amber is currently operating at capacity utilization of around 75% across its manufacturing units and hence has considerable room to increase its revenues using the current capacity. Amber is increasing its investment in R&D for new product developments and better energy efficient products. It is expanding its product portfolio in commercial air conditioning space to leverage and increase its wallet share from existing customers as well as acquire new customers.

Key Risks

• High Dependence on key clients. Almost 75% of Amber’s sales come from top 7 customers in RAC industry. Any loss of key customers or impact on key customers could indirectly hamper its business.
• High capital-intensive nature of the business will require frequent investments in working capital and upgradation of its manufacturing facilities.
• Shortages/Increases in raw materials prices may adversely affect the business
• The RAC industry is continually evolving with changes in regulatory standards and technology upgrades. Amber must continuously innovate to ensure they stay relevant to cope with changing industry trends.

Key Positives

• Indian RAC is largely untapped as RAC penetration is mere 8%. Climatic changes, Rising Per capita income, and increasing urbanisation will stoke demand for RACs in the future.
• Amber has a strong working relationship with leading RAC brands over several years. This is crucial as product approval along with establishing working relationship with RAC brands takes over 5-6 yrs.
• Amber’s high degree of backward integration and proficiency in manufacturing variety of RAC components along with HVAC solutions gives them an edge over competition or in-house manufacturing.

Outlook and Valuation

Amber is well positioned to capitalise on the large untapped opportunity in the RAC market as it is an integrated player with strong balance sheet and established client base. The RAC market is set to witness strong growth trends over the next several years and Amber is well positioned as it is backward integrated and provides complete HVAC solutions to its clients. Amber is currently quoting at PE of around 132 as Covid-19 lockdown impacted the peak business season of summers and impacted the business volumes severely. As business normalises, Amber is confident of strong growth in the RAC segment as outsourcing as a theme picks up combined with natural growth in the RAC growth in India. Thus, Amber is a perfect way to play the increased consumerism and penetration of RAC’s in Indian market and seems a strong medium to long-term bet.

Disclaimer: Have personal investments in Amber Enterprises at the time of writing this note. Information in this blog is for educational purposes only. The articles may contain external links , references and compilation of various publicly available articles. All copyrights and trademarks of images belong to their respective owners and are used for Fair Educational Purposes only.