Our primary theme behind initiating coverage on AEIL is that with Room Air Conditioners (RACs) market witnessing intense competition, OEM players have been shifting attention to core function of marketing & outsourcing production function to OEM/ODM players. Amber Enterprise (India) Ltd (AEIL) being a leader in OEM/ODM segment of RAC market with 55% share should be the biggest beneficiary of this trend. Recent increase in customs duty on In-Door Units (IDUs) & Out Door Units (ODUs) to 20% from 10% in the last Union Budget to promote 'Make in India' campaign of GOI should enable AEIL to increase market share.The changes in business models aimed at enhancing productivity and profitability have been driving branded RAC players to embrace the services of OEM/ODM companies like AEIL for design and manufacturing.Over & above this organic growth, acquisitions done in the recent past would be adding 41% of revenue (Standalone) by FY'21 compared to 26% in FY'19. All the 3 acquisitions done over the last 18-24 months are contributing positively to bottom line & after coming under AEIL's fold, management is guiding improvement in profitability. Above acquisitions have been quite a synergistic fit for AEIL andthat too without leveraging BS significantly.
AEIL is a prominent solution provider for Air conditioner Original Equipment Manufacturer (OEM) / Original Design Manufacturer (ODM) Industry in India with 12 manufacturing facilities. AEIL is strongly positioned in terms of quality, cost & delivery with highly backward integrated production facilities for components like heat exchangers, multi-flow condensers, Printed Circuit Boards (PCBs), motors, sheet metals & injection molding. AEIL commands 3/4th share of the Indian RAC markets. Its key customers include leading branded RAC players like Voltas, Hitachi, Daikin, LG, Panasonic, and Whirlpool.
Leader in OEM/ODM segment of RAC market with 55% share
AEIL is the leader in OEM/ODM segment in India with 55% share of RAC business. Being a leader in one of the least penetrated consumer durables category, RAC, growth potential is very high. With branded RAC players focusing on marketing & branding aspect, outsourcing of production of RACs from OEM / ODM players has increased from from 16% (FY'12) to 34% (FY'17) & is further expected to increase to 56% by FY'22. AEIL should be a major beneficiary of this trend.
AEIL to continue to remain Outperformer in RAC Industry
RAC industry in India is set to grow at 12 to 15% in FY'20. In last financial year, Industry had de grown at 3% due to adverse impact of unseasonal rains. However, AEIL's sales volumes grew at 11% during the same period. AEIL is expected to continue outperforming RAC industry led by increasing share of wallet from customers & August 06, 2019 INITIATING COVERAGE addition of new customers. During FY'19, AEIL has added Croma & Flipkart as its customers and in Q1FY'20 will be starting supplies to Amazon, O General and Toshiba.
Aggressive inorganic growth aiding to strong mid teen organic growth
The acquisitions over last 18 to 24 months(IL GIN & Ever Electronics), engaged in to electronic Printed Circuit Boards (PCBs), should enable AEIL to gain share in inverter based RACs where the market is trending. Inverter RACs are forming 65% of industry currently compared to 10% a couple of years back. Over & above organic growth, acquisitions done in the recent past would be adding 41% of revenue (Standalone) by FY'21 compared to 26% in FY'19.
Outlook & Valuation
With rising temperature and humidity levels, China and India are projected to account for more than half of the global expansion of RAC capacities.AEIL is the leader in OEM/ODM segment in India with 55% share of RAC business. Company's continuous efforts to expand customer base, increasing share of wallet of customers as well as inorganic growth should enable AEIL to be an outperformer in the industry. We estimate Revenues & Net Profits to compound annually at 25%&32% respectively during FY'19- '21E. At CMP of INR 765, the stock is trading at 14.7x FY21E EPS& we recommend BUY with a PT of INR 1,040 (20x FY'21E EPS).
* Concentrated Revenue Base with top 5 customers forming 75% of FY'17 Revenue
* Low Double Digit Return Ratios
* Erratic Weather
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