A well 'conditioned' bet on the booming AC space
Amber Enterprises India Ltd. (Amber) is the market leader in the room air conditioners (RAC) outsourced manufacturing space in India. It is a one-stop solutions provider for the major brands in the RAC industry and currently serves eight out of the ten top RAC brands in India. Its growing manufacturing capabilities and scale put it in a sweet spot to capture the underpenetrated RAC market in India.
Market leadership driven by integration and R&D: Amber commands ~19% market share in RAC manufacturing through its 12 manufacturing facilities located across India. In a short span of nine years, it has evolved from being original equipment manufacturing (OEM) to high-margin Original Design Manufacturing (ODM, forms 85% of revenue) in RAC mainly led by aggressive backward integration and R&D capabilities.
Favorable industry trends: RAC industry is growing at 10%+CAGR where ODM's share is expected to grow to reach 56% of the RAC market by 2022 (from current 34%). These factors favor Amber owing to its focus on ODM. Further, the product approval cycle goes beyond 2-3 years creating a moat for Amber to keep the competition under check. After the recent acquisitions in the Printed Circuit Board space, it can manufacture up to 90% of an RAC barring compressor.
Strong boost in profits and debt reduction: The company improved its margins to 8.6% in FY2018 led by higher capacity utilization amid robust RACs' demand. Due to its recent acquisitions (~20-22% of FY2019 revenue) which have lower margins, overall margins may not expand in near term, but operating profits would see good absolute jump. Repayment of its LT debt from IPO proceeds has substantially reduce its interest cost and will boost earnings amid limited capex requirements.
Outlook & Valuation: We expect Amber to report consolidated revenue/PAT CAGR of 28%/51% respectively over FY2018-20E. It is currently trading at 21x FY 2020 earnings which is at 25-30% discount than its closest peer - Dixon Technologies. The recent correction has provided a very good entry point for the investors to take a bet on the booming AC space. Hence, we initiate coverage on the stock with a BUY recommendation and Target Price of Rs. 1272 (28x FY2020E EPS), an upside of 32% from the current levels.