Amber Enterprises: Cool prospects

Investors looking for a piece of action in the Indian consumer durables space can consider the stock of Amber Enterprises, a contract manufacturer of room air-conditioners (RAC). Amber Enterprises claims to have a market share of 55 per cent in the RAC contract-manufacturing space, servicing clients, including Panasonic, Daikin, Hitachi, LG, Whirlpool, Voltas and Blue Star. Amber is an indirect play on the long-term prospects of top consumer air-conditioner brands in India.

While the general economic slowdown and negative consumer sentiment have been weighing on the consumer durables industry, including makers of RAC, since last year, players such as Amber would benefit as demand revives. The company’s market network and reach will help it grow higher than the industry average. In 2018-19, while the RAC market in India de-grew by 3 per cent, Amber managed a sales growth of 29 per cent.

Amber makes about 70 per cent of its revenue from RAC and the balance from RAC components and other products (non-AC components).

In the recent June quarter, the company recorded 89 per cent volume growth over the same period last year. RAC volumes for the quarter stood at 10.4 lakh units compared with 5.5 lakh in the June quarter last year. Increase in product offerings, including the new energy-efficient models, addition of clients and increase in wallet share from existing clients have helped the company. Besides, the increase in import duty on ACs and components last year saw more OEMs (original equipment manufacturers) preferring to buy from contract manufacturers in India, which worked in favour of Amber.

The long-term outlook for the air-conditioners industry in India is good, given the low penetration.

At the current market price of ₹909, the stock discounts its estimated earnings for 2020-21 by 17 times. The other contract manufacturer in the white goods space, Dixon Technologies, trades at a much higher valuation of 28 times. Reasonable valuation of Amber is a key positive and offers a good opportunity for long-term investors.

Growing business

Over the last five years, Amber has been reporting higher growth than the industry average. In 2018-19, Amber recorded sales growth of 29 per cent and PAT growth of 52 per cent over the previous year.

In the June quarter of 2019-20, sales (consolidated) grew 75 per cent to ₹1,236 crore and net profit by 143 per cent to ₹64 crore. While the strong sales growth can be attributed to new customers and higher wallet share from existing clients, growth in profit was helped by increased operating leverage. Toshiba, Samsung, online players, including Flipkart and AmazonBasics and Sansui, are some of the new clients the company has added recently.

Amber’s acquisitions of ILJIN Electronics in December 2017 and Ever Electronics in March 2018 — that make electronic printed circuit boards for inverter air-conditioners and other white goods — have been doing well with higher profit margins.

The company’s recent acquisition of Sidwal Refrigeration, which has a diversified presence in the heating ventilation air-conditioning solutions (HVACs), should also drive top-line growth. Sidwal gives Amber an entry into manufacturing HVACs for railways, metros and buses.

Improving margins

In the June quarter, Amber reported operating profit margin of 9.4 per cent compared with 8.9 per cent in the same quarter last year. The profit margin has improved, thanks to the operating leverage from higher volumes. Going ahead, as the sales volumes of the newly-acquired companies pick up, capacity utilisation will also improve, helping margins.

A weakening rupee is a risk for the the company’s margins as Amber imports certain inputs but, cost increases, if any, may be passed on to the clients.

The debt-equity ratio stands at a low 0.25. The interest coverage ratio is also comfortable.