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Covid disrupts another summer season

* Amber reported a weak quarter with a revenue/EBITDA miss of 13%/15%. However, gross margins surprised positively with 91bps/64bps qoq/yoy expansion, driven by the healthy performance of subsidiaries. EBITDA was impacted by ESOP charge of Rs33mn.

* RAC Volumes were up 139% yoy but down 59% qoq. The realizations improved 19% yoy, aided by a favorable product mix. The Components and Mobility application business saw a qoq revenue decline of 60%. Sidwal’s order book stands at Rs4.3bn.

* RAC channel inventory is not high, while management expects FY22 industry volumes to remain lower than FY20. Exports are seeing an uptick, but meaningful benefits will accrue post FY23. Amber is targeting revenue of Rs450-500mn from Commercial ACs in FY22.

* We raise FY22E EBITDA by 5% on higher gross margin, while our FY23 and FY24 estimates are unchanged. We factor in strong growth over FY22-24E as our estimates incorporate exports and PLI benefits. Retain Hold with TP of Rs2,790 (30x Sept’23E EPS).

An overall weak quarter

Consolidated revenue of Rs7bn was up 172.9% yoy (13% below our estimate) on robust yoy growth of 201% yoy in the standalone operations and also on 95% yoy growth in subsidiaries’ revenues. However, this yoy growth was on account of a low base, and the qoq sales growth was disappointing. RAC revenue growth of 184% yoy was in line with our expectations, while the Components and Mobility application segment’s revenue was weaker than expected.

Though gross margin expanded 91bps qoq, EBITDA margin saw a contraction of 288bps due to higher employee expenses and subdued top-line growth. PAT stood at Rs124mn, down 83.5% qoq, impacted by lower other income and higher depreciation.

Outlook:

After a minor blip in Q4FY21, Amber regained market share in Q1FY22 to 24%. RAC channel inventory is expected to be cleared by Q3, and Q4 is anticipated to be a strong quarter. Amber has additional benefits of customer wins and capacity expansion, which should support growth. The company will participate in the PLI scheme with two applications for six components.

We are factoring in a volume market share of 27% for Amber by FY24E, with the South India plant adding incremental volumes. Exports should contribute meaningfully only after FY23 as approvals from US customers are expected in the next year. We have already factored in most of the positives in our estimates, implying revenue/EBITDA/PAT CAGRs of 20%/21%/24% over FY20-24E.

We believe that valuations at 39x/26x FY23/24E EPS almost fully discount the positives ahead of actual execution of the plans. Maintain Hold. Key risks: slower-than-expected recovery; in-house manufacturing by brands leading to a loss of business for Amber; market share loss; higher WC requirements; adverse commodity trends; and delay in tapping export opportunities.

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