Business gaining traction
We maintain our BUY rating on Amber Enterprises (Amber) led by improved business outlook with strong orderbook, increase in the consolidated margin profile with ramp-up of subsidiaries, and improved seasonality due to the recent acquisition of Sidwal Industries. New customer acquisitions will lead to betterthan-industry growth (as evident in FY19/Q1FY20), which is the core investment thesis behind the Amber’s contract manufacturing business. However, its capexintensive business model and likely higher working capital will limit return ratios.
* Strong Q1FY20 performance. Q1FY20 standalone PAT was 68% higher YoY at Rs486mn with RAC volumes up 89% YoY to 1mn units. Consolidated revenues / PAT was Rs12.4bn / Rs640mn with EBITDA margin of 9.4%. Subsidiaries Ever, IL Jin, PICL and Sidwal reported revenues of Rs810mn, Rs910mn, Rs500mn and Rs310mn with EBITDA margins of 3.7%, 5.2%, 7.6% and 25% respectively in Q1FY20. Sidwal numbers represent two months – May/Jun’19.
* High capex and increasing working capital profile will limit return ratios. Annual capex will now remain at ~Rs1.2bn driven by acquisitions. Key allocations are: R&D (~Rs200mn), maintenance expenses for 12 plants (~Rs300mn), capacity expansions (Rs300mn-400mn) and others. We estimate net debt to increase from Rs2.7bn in FY19 to Rs4.2bn in FY21E. Sidwal has high margins (25% EBITDA margin in Q1FY20), but is working capital intensive (180 working capital days before acquisition / 130 days in Q1FY20). High capex nature and increasing working capital profile of the business will limit the return ratios. RoE/RoCE is expected to be in the range of 12/15% in FY21E.
* Increase in capacity utilisation and inorganic growth to drive earnings. The sharp EPS growth for Amber from Rs20 in FY18 to Rs48 in FY21E is driven inter alia by increase in utilisations (45% in FY17 to 80% in FY21E), ramp-up of Ever/IL, Jin and acquisition of Sidwal. In addition, there are enabling fundamentals of strong RAC demand and even higher growth in outsourced manufacturing in India. Beyond that, growth options will depend on new ventures (will need growth capex and transient dip in returns) and new markets (South India and exports). Company is also setting up another plant in Tirupati (capex of Rs400mn). Amber has shown a penchant for inorganic growth (PICL/Ever/IL Jin and now Sidwal). Long-term investor value will depend on how the management balances these options while maintaining focus on growth.
* Maintain BUY with a target price of Rs962 (unchanged) based on 20x FY21E EPS of Rs48 (unchanged). We expect ~26% earnings CAGR over FY19-FY21E. Our earnings changes factor higher depreciation, higher growth in AC business and improvement in margins with operating leverage in FY21E.
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