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EBITDA margin pressure continues…

About the stock: Amber is a leading solution provider for air conditioner OEM/ODM industry in India.

* The company has a product portfolio including RACs, RAC components and other non AC components

* Derives ~50% of its revenues from RACs and the rest from components and mobility applications

Q1FY23 Results: Strong topline growth; higher input cost drags margin.

* Favourable base and strong demand for cooling products resulted in consolidated revenue growth of 2.6x YoY to ~| 1826 crore. This was led by ~3x growth in component & mobility business to | 773 crore. RAC segment revenue also up 2.4x YoY to | 1053 crore

* EBITDA margin fell 52 bps YoY to 5.4% due to higher raw material costs

* PAT up ~4x YoY to ~| 43 crore, tracking strong sales growth in Q1

What should investors do? Amber’s share price has grown by ~2.4x over the past four years (from ~| 918 in August 2018 to ~| 2185 levels in August 2022)

* We maintain our HOLD rating on the stock

Target Price and Valuation: We value Amber at | 2415 i.e. 30x P/E on FY24E EPS

Key triggers for future price performance:

* The AC industry is likely to grow 30% YoY in FY23E supported by revival in real estate industry and changing lifestyle. Amber having the largest market share of ~26% (in terms of bills of materials), will be a major beneficiary of increased RAC demand

* With the component business contributing ~50% to its topline, Amber is a major beneficiary of the PLI scheme provided by GoI

* New export opportunities (of components) in US and Middle East

* New export opportunities (of components) in US and Middle East

Alternate Stock Idea: We like Dixon in our coverage universe. Dixon Technologies is India’s leading electronic manufacturing (EMS) provider and one of the largest beneficiaries of the government’s PLI scheme. It has a strong RoE, RoCE at ~20%, ~24%, respectively (three year’s average)

* BUY with a target price of | 4200

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