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Strong revenue growth but RoCE remains below Cost of Capital

While Amber continues to report strong growth (38.4% revenue growth YoY in Q3FY23), we note the margins and RoCE continue to be weaker i.e. less than cost of capital. With aggressive capex at Sri city as well as Chennai, we model the FCF to remain negative in FY23 too. Hence, while the revenue growth remains strong, the value creation is likely to be lower, in our view. The FCF was negative in all years from FY18-22. The average RoCE over FY18-22 was 11.2%.

We model Amber to report revenue and PAT CAGRs of 31.4% and 38.6%, respectively, over FY22-FY25E. We believe the stock price upside is capped at current valuations and maintain HOLD rating on the stock with a revised DCF-based TP of Rs2,110 (implied P/E of 24x FY25E EPS; earlier TP- Rs2,220).

* Q3FY23 performance:

While Amber reported YoY revenue and EBITDA growth of 38.4% and 6.6% YoY, respectively, PAT declined 55.9% YoY. Gross and EBITDA margins dipped 123bps and 173bps YoY, respectively due to inflationary pressures and change in revenue mix. PAT margin was down 225bps YoY

* Segment-wise performance: 

Segment-wise YoY revenue growth rates were as follows: RAC and components: 85.9%, motors: 10%, electronics: 49.1% and mobility application: 29.4%. The company currently has strong order book of Rs7bn+ in mobility segment. We note the company has secured orders for Vande Bharat express in mobility segment.

* Multiple revenue growth drivers:

Amber has commenced the production at its new plant in South India, which may drive volume growth for the electronic division of the company. We note the company has added pantry business as a new category to gain wallet share in mobility segment. The company is experiencing strong traction in motors exports business as well. We believe rapid customer addition and new product development may result in long-term growth for the company.

* Maintain HOLD: We model Amber to report revenue and PAT CAGRs of 31.4% and 38.6%, respectively, over FY22-FY25E and RoE of 12.6% in FY25E. While the company is well positioned to benefit from strong growth opportunity in RAC segment, we believe at current valuations (23.6x FY25E EPS), the upside is capped. We maintain HOLD with a revised DCF-based target price of Rs2,110 (implied P/E of 24x FY25E EPS; earlier TP- Rs2,220).

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