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Subdued performance given industry level challenges

Amber 4QFY22 results were missed estimates. Net sales were 13% below estimates (INR 19.4n; +21% YoY), while EBITDA was 30% below estimates (INR 1.2bn; -11% YoY). Management highlighted that miss in volumes and realisations were on account of supply chain disruption, adverse product mix and lag in passing on price hike to customers. Going forward, company intends to further gain market share (26.5% share in RAC and components) given a) ramp up in components business in both RAC and non-RAC through acquisitions, b) in-house capabilities through PLI investments to further reduce dependence on imports and c) cooling solution opportunities in industrial, railways, data centres etc. to open new avenues for growth. Further, pick up in exports to Middle East, USA and normalisation of RAC volumes with ease in supply chain issues will drive growth. We maintain BUY with revised TP of INR3,700 (40xMar’24E EPS)

* Revenue/volumes miss estimates: Net sales recorded growth of 21%/39% YoY in 4QFY22/FY22 and stood at INR19.4bn/42.1bn. Company reported RAC volume growth of 29% in 4QFY22 to 1.5 mn units and growth of 24% in FY22 to 2.6 mn units. This was lower vs expectation of 2.7-2.8 mn units, due to supply chain challenges. On a blended basis, realisation for 4QFY22/FY22 declined by 25%/6% YoY given a) change in product mix, inclined towards split ACs, b) lower volumes of outdoor units as it is supplied in SKD form due to product changes and c) increase in demand for 1 ton ACs having lower realisations, with increasing industry volumes from e-commerce.

* Price hikes insufficient to curb inflation: Price hikes taken during the year were to the extent of 7-8%, however still lags by 3-4% to curb the inflationary pressure. Given lag of 1 quarter in passing off price hike with continued supply chain disruption, gross margins contracted by 450bps/210bps in 4QFY22 vs 3QFY22/4QFY21. Following which, EBITDA declined by 11% YoY and margins contracted by 240 bps to 6.5% (7.6%/8.8% in 3QFY22/4QFY21. PAT declined by 30% YoY to INR 593mn; given significant increase in interest expenditure (+78%) and weak operational performance.

* Strategy and Outlook: Management expects RAC industry to clock volumes of 8-8.5mn units in FY23 and surpass pre-pandemic levels given increased demand from new customers from lower tier cities and rising temperature. Volume growth guidance for Amber is ahead of industry as it expects to gain market share on the back of new customer additions and increased product offerings across segments

Maintain BUY with revised TP of INR3,700: We forecast sales and EBITDA CAGR of 33% and 47% respectively over FY22-24E, as we expect a robust summer season, increased in house manufacturing, and ramp up in export of components will drive improvement in profitability. Looking beyond current challenges, we expect healthy growth in RAC volumes given strong demand and new customer addition. We maintain BUY with revised TP of INR 3,700, valuing the stock at 40x Mar’24E EPS. Key risks: insourcing by brands and worsening NWC cycle.

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