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Time is not yet ripe for an upgrade

* We are revising our forecasts for Amber again by 1) lowering FY23-25 RAC volume estimates by 6-9%, 2) reducing export revenue assumptions for CBUs from FY24 and beyond and 3) tweaking margins by 15-20bps with a higher cut for FY23.

* We believe that Amber’s outperformance vs. the industry would be limited going forward, unlike in the past. Elongated approval timelines and potential rise in competition from Chinese players could also restrict full potential of CBU export opportunity in near-term.

* However, our robust FY22-25E revenue growth projections for components (~34% CAGR) is underpinned by strong demand from brands with increase in local sourcing as ecosystem will evolve under ongoing PLI scheme and Amber’s strong market positioning.

* We trim FY23-25E EPS by 5-14% and also lower the target multiple to 25x from 30x to arrive at a TP of Rs2,350. Maintain Hold. After the steep fall in the Amber’s stock price recently, downside looks limited. We also note that there are no immediate upside triggers.

Model update: After lowering our estimates after Q4 results, we are reducing our estimates further as we factor in the change in RAC volume estimates. The rise in competitive intensity and changing requirements of brands (higher procurement of components instead of CBUs) might restrict Amber’s RAC volume growth outperformance vs. the industry, unlike in the past. We are trimming CBU export forecasts, which were bullish earlier, taking into account the longer product approval time and potential competition from Chinese counterparts, as the development of the Indian component ecosystem will be a gradual process under PLI led scale-up. Our FY22-25 revenue growth estimates for the components business (CAGR: 34%) remain unchanged, underpinned by Amber’s dominant position in the market amid limited expansion on backward integration by brands, as well as export opportunities (already seen in the motors business). The change in revenue mix has led to the margin tweak.

Outlook: We believe Amber will remain the top player in the RAC outsourcing industry given its capacity and ongoing expansion plans. The changes in volume market share in FY22 were partly due to the shifting of CBUs in-house by brands and higher competition. However, we expect ~100bps volume market share gains for Amber in 2-3 years, and management is also targeting value market improvement from the current ~26.5%. Despite a sharp cut in our estimates, we are factoring revenue/EBITDA/PAT CAGRs (FY22-25E) of 29%/36%/52%. The 40% stock price correction in the last 3 months should limit near-term downsides, while the upside will depend on positive surprises on execution and delivery fronts. We think the ‘irrationally exuberant’ valuations have moderated due to weak performance and can further correct if the earnings cut cycle goes on.

Key risks: better-than-expected recovery; further market share loss for Amber; adverse commodity trends; and delay in export opportunities

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