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FY19 ends on a strong note; encouraging growth prospects to drive FY20E — reiterate LONG
AEL posted a robust 40% yoy growth in its standalone 4Q sales at Rs 9.71bn (+8% vs. EE) led by strong demand from existing clients and new client acquisitions. EBITDA grew 51% yoy to Rs 1.0bn, beating EE by 10% on above-expected sales and gross margins. EBITDA margins improved 73bps yoy to 10.5%, 25bps above EE of 10.3%. With backlog inventories liquidated for most RAC brands and encouraging demand conditions in view of a favorable summer, AEL saw strong volume growth of 43% in 4Q. Along with robust growth in the core business, AEL’s acquisition of Sidwal Refrigeration Industries is expected to boost its operational performance ahead. Maintain LONG with a Mar’20 TP of Rs 1,087 (Rs 1,005 earlier) set at 26x standalone TTM EPS of Rs 38 and 15x subsidiary TTM EPS of Rs 6.5.
Volume momentum strong, traction to continue in 1QFY20:
AC volumes jumped 43%/ 11% in 4QFY19/FY19 to 0.96mn/2.12mn (4Q/FY18: 0.67mn/1.91mn) driven by robust demand from the AC industry. Further, AEL topped AC industry growth rates with (a) the addition of four new customers (Havells, Carrier-Midea, Flipkart, Amazon) and (b) new IDU models launched in late-3QFY19, leading to higher volumes from existing clients. With a robust growth outlook for 1QFY20E and new client acquisitions, we expect AEL to register above-RAC industry growth rates in FY20E. Post FY20E, we expect ~15% growth for the standalone business, in line with RAC industry growth rates.
Sidwal acquisition to boost growth:
AEL acquired Sidwal Refrigeration Industries in May’19 for a consideration of Rs 2.02bn, which is roughly valued at FY19 EV/EBITDA of 5.3x. Sidwal’s FY19 sales/EBITDA stood at Rs 1.8bn/Rs 380mn with an EBITDAM of ~21%. The acquisition helps AEL tap high entry-barrier customers like Indian Railways and Metros, while foraying into commercial refrigeration. Accordingly, the company can realize synergies by cross-selling Sidwal’s products to existing customers. With an OB of ~Rs 2bn and given higher govt. focus, especially on Indian Railways and Metros, we expect a robust operational performance from Sidwal in the near-to-mid-term.
AC, non-AC components set for healthy growth:
Components revenue grew from Rs 1.24bn/Rs 3.83bn in 4QFY18/FY18 to Rs 1.61bn/Rs 4.48bn in 4QFY19/FY19, up 30%/17%. Components contributed 37% of FY19 consolidated revenues vs. 28% in FY18; management aims to take this proportion to 50% in the medium term. Driven by the capabilities of its subsidiaries, we remain confident that this business is poised for healthy growth and offers scope for profitability improvement.
With strong growth prospects for the core business, we expect a ~16% sales CAGR over FY19-22E. We have included Sidwal’s operational performance into our estimates, leading us to raise our consolidated sales/PAT estimates for both FY20E and FY21E by 15%/18%. Maintain LONG with a Mar’20 TP of Rs 1,087.
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