Amber Enterprises India (Amber) is a leading Room AC (RAC) manufacturer with 19% overall market share and 55% share among OEM/ODM players as of FY17. The company is well placed to benefit from the strong demand in the AC market in India which is expected to clock 13%/16% CAGR by volume/value, while Amber is expected to outperform the same with strong traction in the outsourcing market. Higher ODM share of 85%, rich clientele and focused growth strategy should enable Amber to clock 25% revenue CAGR between FY17-FY20E with a healthy RoCE of ~18-19%.
* Strong fundamentals of AC market in India to drive earnings for Amber. During FY17-FY22E, the air conditioning market in India is expected to witness a CAGR of 13%/16% by volume/value reinforced by the surge in rural consumption, shorter replacement cycles, energy-efficient RACs and availability of multiple brands at various price points. RAC volumes are expected to increase from 4.7mn units in FY17 to reach 8.6mn units by FY22. Amber, one of the dominant contract manufacturers of ACs in India with 19% share of the total market is a prime beneficiary of the same.
* Higher than market growth for contract manufacturing in India is the second driver for Amber. 13% volume Market growth for RACs in India will imply even higher ~25% volume growth for OEM/ODM players between FY17-22E. Hence, RAC OEM/ODM share of 34% in FY17 is anticipated to grow to 56% by FY22. Amber is best placed to benefit from the same as it follows its strategy of product expansion, new customer acquisitions, and increasing customer wallet. As a testimony, Amber has increased production of Indoor Domestic Units (IDU) from 136,000 in FY14 to ~800,000 in FY18E and the production of Outdoor Domestic units (ODU) from 210,000 in FY14 to ~750,000 in FY18E.
* Higher ODM share (85% of Amber’s offering) provides significant stability to earnings. The EBITDA margin of ~7% for Amber is largely due to its higher ODM capability. One of the distinguishing elements of Amber is that it can manufacture almost all elements ex-compressor. The recent acquisition of IL Jin / Ever Electronics will spur the electronics capability of Amber required for inverter ACs.
* Expect company to maintain its strong track record. Amber has grown its revenues at 17% CAGR between FY10-FY17; we expect 25% revenue CAGR between FY17-FY20 driven by the IL Jin / Ever acquisitions. EBITDA margin is expected to sustain at ~7-8%. This factors capacity utilisation increasing from 40% in FY17 to 70% in FY20. We expect the company to maintain working capital at ~30 days with RoE/RoCE at 14%/19% respectively.
* Recommend ADD with a target price of Rs1,180 based on 25x FY20E earnings.
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