Amber Enterprises India Ltd - Cooling India
Company Name – Amber Enterprises India Ltd (Amber)
Current Share Price – INR 2,368 (July 26, 2022)
Market Cap – INR 7,979 cr
1. What is interesting about the stock?
The consumer durables industry, which encompasses durable goods and equipment for household use, has witnessed substantial growth as a result of various factors, including the impending retail surge, housing demand, higher disposable income, and an overall rise in the level of affluence of a sizable portion of the population.
Amber Enterprises India Ltd, a mid-cap company, was established in 1990 and works in the consumer durables sector. It began with a single facility in Rajpura, Punjab, and currently has 23 production facilities, each specializing in a particular product category, spread over six Indian states. The Company is the original equipment manufacturer (OEM) and original design manufacturer (ODM) for multiple well-known brands. It provides a one-stop shop for the design and production of air conditioners. Amber Enterprises is well diversified in the air conditioner sector. Amber Enterprises also serves the commercial, bus, defense, railway, and metro segments.
Product-wise revenue break-up in FY22 was:
Room Air Conditioners (RAC): Amber is a well-known solution supplier for the air conditioner OEM/ODM industry in India and holds a 24% market share in the overall room air conditioner market. The Company’s RAC business produces a full range of RACs, including window air conditioners, and split air conditioners, and accounts for 47% of its revenue.
Components: The Company offers sheet metal components for microwave assembly, washing machine tub assemblies, case liners for refrigerators, plastic extrusion sheets for consumer products and the automotive industry, and the metal ceiling industry. This particular segment contributes 25% of the Company’s revenue.
Mobile Air Conditioners: This category includes railway air conditioners, metro air conditioners, bus air conditioners, and defense & telecommunications. 7% of Amber’s revenue comes from this division.
Motor: Amber produces various motors for HVAC products, fan coil units, AHU, etc. The Company has increased the range of products offered to its clients by introducing new models for home and foreign markets. In addition, it added items for the markets for washing machines, BLDC fans, and refrigeration. The division contributes 6% of revenue.
Electronics: The Company dominates the market for printed circuit board assembly. It expanded the division's clientele and began producing cutting-edge products like intelligent smartwatches and wearables. The electronics segment contributed 15% of revenue in FY 2022.
Amber's clientele includes multi-national companies like Amazon, Carrier Media, Daikin, Hitachi, Panasonic, LG, Whirlpool, and Samsung. However, the revenue from exports is barely 1% of total revenue. Other clients include Flipkart and Godrej, the railroad and metro systems: BEML and CLW, the defense industry: Bharat Electronics Limited, the telecom industry: Department of Telecom, and buses (Original Equipment Manufacturers).
Amber has potential development prospects in the future. The Company is quite eager to diversify its product offering into consumer durable markets outside the RAC. Through various tariff and non-tariff measures, the Government of India is attempting to lower the import of electronics, which might soon result in establishing new economic opportunities.
In terms of exports, the Company submitted export samples to US clients in 2021, and if approved, it will take 8–10 months for certification. Additionally, Amber Enterprises has begun exporting motors to clients worldwide (shipped 1.5 lakh units of motors in the US and the Middle East). In FY23, the export volume is probably going to quadruple. It has already introduced two new products in the commercial refrigeration sector (market size estimated at INR 6,500 crore). Over the next two to three years, it expects to create 18 to 20 product portfolios.
The Company has been rapidly increasing its capacity, and the most recent expansion involved buying land (10 acres) for the Supa Plant, which began operations in Q4FY22. It has a 1 million unit and component manufacturing capability as soon as the land purchase in Chennai is finalized.
In FY22, Amber Enterprises gained a new international client for its Sidwal mobility business. It has begun offering cooling solutions to companies that operate data centers. Several MNC companies have already signed agreements with Amber to provide cooling solutions for data centers. The order book for Sidwal stands at INR 600 crore.
The real estate sector's recovery and changing lifestyles are expected to sustain a 30% YoY increase in the AC industry in FY23. Amber Enterprises, which has the most significant market share of 26% (based on bills of materials), would benefit greatly from the growth in RAC demand.
The Company is a big beneficiary of the Production Linked Incentive (PLI) plan offered by the government of India, with the component business providing almost 50% of its topline.
Amber Enterprises has had a poor return on equity in FY21 and FY22
Over the past three years, promoter holding has decreased: by 3.7%.
Since the business operates with very narrow margins, it will be vital to maintain excellent operational efficiency.
The Chairman and CEO of the Company are Mr. Jasbir Singh, who has 15+ years of experience in the RAC manufacturing field. He is an MBA from the University of Hull, UK. He has established seven industries under his leadership in 10 years.
Mr. Daljit Singh has a master’s degree in IT from the Rochester Institute of Technology and is the Managing Director of Amber. He has almost 10 years of expertise in the RAC manufacturing industry. He has worked in the past with Morgan Stanley.
2. Key Historical Financials
Amber reported a consolidated YoY increase in revenues for Q4FY22 of 21%, to INR 1,937 crore. For FY22, sales increased by 39% to INR 4,206 crore.
Sales of consumer durables increased in Q4FY22 compared to Q3FY22 as factory shutdowns eased.
The consolidated net profit for Q4FY22 was down 24% at INR 57 crore, while it was up 78% sequentially. Profits fell primarily due to a significant rise in raw material and inventory costs.
The EBITDA margin in Q4FY22 fell 236 basis points YoY to 6% owing to rising raw material and staff expenses.
Increases in inventories and receivables were offset by increases in payables, increasing operating cash flows in FY22 (INR 250 crore) over FY21 (INR 221 crore). Cash flow convertibility (CFO/EBITDA) was good in FY22
3. What is my view on company valuation?
Amber Enterprises trades at a P/E (TTM) multiple of ~70x vs. Industry P/E at 40x. Amber Enterprises has a D/E ratio of 0.2x, indicating a low amount of debt in its capital. In addition, the Company has an efficient working capital cycle of 32 days. However, in FY21 and FY22, the Company had a poor ROE of 6-7%. As of March 31, 2022, promoters owned 40.3% of the firm, FIIs owned 28.1%, and DIIs owned 9.2%.
Amber Enterprises is well-positioned to capitalize on increasing demand generated by the industrialization of fully built-up units and component ecosystem development through reduced imports and is a significant beneficiary of proposed PLI schemes for AC and components. Strong cash flows, a better margin profile, and return ratios will all underpin Amber's value.
Overall, we think the business has a long runway for expansion, with various growth factors across all its product verticals. The Company has also expanded its product offering for railroads, metros, and bus air conditioning in Sidwal in response to an increase in demand for air-conditioned coaches and several upcoming metro projects around the nation.
However, the valuation is still on the higher side and long-term investors should evaluate investing at lower prices.
4. What are the risks to the investment analysis?
Raw material and commodity price fluctuations provide an additional danger to the Company's growth since they drive up the price of final products, which in turn affects customer demand. Furthermore, currency devaluation also causes concern.
The globe is now dealing with many trade and border concerns. In addition, the world economy is impacted by increased hostilities or sanctions between countries.
Clients who constantly alter their insourcing and outsourcing methods for goods and components pose risks.
About the Author
I write about the stock market, cryptocurrency, and blockchain. I have a Bachelor of Arts degree with more than 10 years of experience in finance and cryptocurrencies.
I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purposes and not to be construed as investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.