Similar to one of the Electronics Manufacturing Services(EMS) provider which I already covered ‘Dixon Technologies India Ltd‘, I would be covering another one ‘Amber Enterprises India Ltd‘(AEIL). You can read more in the blog ‘Amber Enterprises India Ltd- Analysis’
Amber Enterprises came out with its IPO in January 2018 and received overwhelming response being oversubscribed by 165 times and got listed at a premium of 37% at ₹1175/-. But since then it has been trading at below the listing price. The company manufactures Room Air Conditioners(RAC) for almost all top brands in India.
Room Air Conditioning(RAC)- Industry
Air Conditioner has been considered a luxury good for any household in India for a long time. Low income plus the high cost of AC and the electricity bill had been the reason for the low penetration of ACs in India in the past which still stands at just 4-5% whereas that of China is at 100%, Japan 90% and global average at around 30%. Not only this, ACs are the lowest penetrated consumer durable product in India.
With a number of factors coming up in the past few years, the growth in the demand for ACs has been quite impressive at the rate of 9.4% for the last 5 years and is expected to grow at 15-18% for the next couple of years.
There are two types of room ACs- Inverter and Non-inverter. Inverter AC which is a better product to Non-Inverter one has seen the price difference come down to ₹3000-4000/ between the two. Inverter AC has a market share of 40% is likely to increase to 70-80% in the next few years.(moved to 60% by Q2FY20).
Since RAC is technology-driven industry, which is continuously changing, more so now, that original equipment manufacturers (brands such as Panasonic, Diakin, LG< Hitachi, Bluestar, Godrej, etc) need to be on its toes to anticipate changes in tech & to successfully develop and introduce new products, differentiate themselves as well as market and create a distribution network for its products. To focus on their core business, outsourcing the manufacturing to EMS(Electronics Manufacturing Services) becomes much more meaningful. RAC manufacturing would be a subpart of EMS.
OEM/ODM offer consumer durable brands flexibility in product design updates, faster time to market(lower lead time), cost-effectiveness; avoid manufacturing challenges besides offering value-added services like design and aftermarket services.
OEM model: Usually fixed conversion cost model. Co. charges a conversion cost to convert the raw material to the end product. Conversion charge is fixed irrespective of raw material price volatility.
ODM model: EMS co. invests in R&D to come up with new designs & products for its clients and once that is approved, they get involved in all aspects to manufacturing to servicing the warranty. This model has higher margins but require higher working capital.
Because of the scale achieved by the EMS companies, it becomes much more meaningful for the brands to outsource the manufacturing.
It is a high volume low margin business.
Global RAC brands are increasingly preferring India as the new manufacturing location for addressing the domestic demand and also for limited exports. Manufacturing in China is getting expensive plus the trade tariffs create a hindrance for brands outsourcing their manufacturing from China.
Indian Government policies now favor local manufacturers. Customs duties levied on import of components are either reduced or removed whereas for that of finished product imports is increased. Link . This is helping significantly.
Of the total RACs manufactured in India, 19% is made by Amber Enterprises whereas of the total outsourced manufacturing(35% of total AC manufactured) the company has a market share of 55%.(moved to 38% by Q2FY20 & company’s market share stands at 58%).
RAC business is very seasonal in nature. The growth picks up in Fourth quarter and the first quarter and drops significantly in the rainy and winter season of Second and third quarter.
Q2&Q3 results depend on the inventory left in the market after the summer quarters of Q4&Q1 is over.
Factors driving the sales of ACs in India
Amber Enterprises India Ltd- Analysis
Amber Enterprises India Ltd- About
Amber Enterprises was incorporated in 1990 in Jalandhar, Punjab. Currently, they have now 15 plants(present in North India only) including the plants of acquired companies + R&D facilities. The company started its journey as a diversified manufacturer of sheet metal components and eventually ventured into RAC and its components. That explains their presence in sheet metal components space.
Amber Enterprises India Ltd (AEIL) manufacture window air conditioners (WAC), indoor units (IDU) and outdoor units (ODU) of split air conditioners (SAC) with specifications ranging from 0.75 ton to 2 ton. They also manufacture AC components such as heat exchangers, motors and multi-flow condensers as well as components for other consumer durables and automobiles such as case liners for refrigerator, plastic extrusion sheets and printed circuit boards for consumer durables and automobile industry, etc.
For split ACs, since the compressor(key part of AC) is fitted on the outdoor unit, the indoor unit fetches lower margin compared to outdoor as well as window AC.
Around 80+% of revenue comes from ACs and remaining comes from non-AC vertical.
Since the industry is high volume and low margin, it is very important to have a tight grip over costs. Over the last 6-7 years, the company has acquired a number of companies to strengthen whatever it is lacking. As a result they are now backward integrated. The integration with acquired companies seemed to have gone smoothly.
The company has a R&D lab at Rajpura that largely drives the ODM business. They have a team of 100+ employees.
The assembly lines of AEIL are flexible and can shift from assembling WACs to ODUs of SACs within a short time. This flexibility enables quick response time as well as scalability.
For outdoor units of a split AC, the company meets 49% of requirement inhouse, for indoor units it is 78% and for windows AC it is 60%. The company strives to increase this percentage. Compressor is the key component for any AC and it continues to be imported.
The company in the past year has entered into a Joint Development Agreement with Singapore-based Infineon to develop new inverter controller technologies. Infineon is a world leader in semiconductor technology. Hope it brings some good results soon.
Mr. Jasbir Singh and Mr. Daljit Singh are promoter Directors and are brothers. They seem capable having led the company to venture into RAC space and scaling it to such a level.
Amber Enterprises India Ltd- Key Clients
The company serves 8 of the top 10 RAC brands in India. These 8 brands have a market share of 75% in the Indian RAC market. The company has been associated with the majority of its customers for over 5 years. Co. have added few more clients such as Toshiba, Samsung, Livpure, Sanyo etc. Contracts with customers are typically for 3 to 10 years.
LG(17%), Panasonic(15%) & Voltas(15%) are top 3 customers for the company contributing about 50% to the revenue. Enterprises India Ltd- Analysis
Amber Enterprises India Ltd-Subsidiaries
PICL (India) Private Limited: ‘PICL’, was acquired in FY13, is a manufacturer and supplier of single-phase induction motor for air conditioning unit, commercial air conditioners, and coolers. It is a wholly-owned subsidiary(100% stake) of the company. H1FY20 Rev= 84cr
IL JIN Electronics (India) Private Limited:
‘IL JIN’ , manufactures electronic printed circuit board(PCB) for consumer electronics. LG, IFB, and LS Automotive are among Il JIN’s major clients. Amber Enterprises acquired 70% in ‘IL JIN Electronics’ in FY18 for ₹54.42cr. H1FY20 Rev=166cr.
Ever Electronics Private Limited: ‘Ever Electronics’ is also into electronic PCB manufacturers for consumer electronics. LG, LS Automotive, Powercraft Electronics, Godrej and Intangibles Labs are among Ever’s major clients. After acquiring a 19% stake in ‘Ever’ in FY18 for ₹5.71 cr, Amber is scheduled to acquire a balance stake of 51% in Ever by 31 December 2018 in one or more tranches, which has been delayed further. H1FY20 Rev= 154cr
Sidwal Refrigeration Industries Private Limited (‘Sidwal’):
Acquired 80% stake the company in 2018. AEIL is trying to reduce the seasonality by taking several steps and acquisition of Sidwal is one of them. Sidwal is engaged in the business of manufacturing and sale of Heating, Ventilation and Air Conditioning(HVAC) equipment for railways, metros, defence, bus, telecom, commercial refrigeration and related components. Sidwal is into the manufacturing of HVACs for railways, metros, and buses. Getting such a contract gives a lead time of 5-6 years and is quite tough to get into. Also, since both Sidwal and Amber Enterprises uses the same raw material, the acquisition may bring economies of scale in the cost.
Order book= ₹480 cr as on 30th Sept, 2019. To be delivered in 18 months.
H1FY20 Rev= 93cr Amber Enterprises India Ltd- Analysis
Appserve Appliance Private Limited:
Wholly owned subsidiary of the company. This is into services of consumer durable products and its components.
Amber Enterprises India Ltd- Analysis
Amber Enterprises India Ltd- Financial Analysis
Amber Enterprises India Ltd- Financial Analysis
As you can see the growth of the company has been exceptional, growing at a CAGR of 22.3% for the last 5 years. The growth rate is more than twice of the industry.
The raw material is the top cost for the company fluctuating between 80-85%. Since, quite significant part of the ACs are imported and then Amber Enterprises assembles them, leaving very little room to reduce this particular cost. These lead to increase in top line but not contributing anything to the bottom-line. The margins can be improved via economies of scale, efficient manufacturing and lower debt.
Amber even after repaying a large amount of debt from the money raised via IPO, still has significant debt. Debt will increase further as the company has borrowed ₹150cr for Sidwal acquisition + ₹55cr of Sidwal debt.
FY19 was a tough year for RAC industry led by the GST transition and change in energy-efficiency ratings and also unprecedented rains in Quarter 1 (peak season). The industry degrew by 3% in this year(In Q1FY19, industry degrew by 13%). But still they did well probably on account of addition of new customers.
The hike in custom duty has helped the company increase the sales aggressively in the recent few quarters.
Amber Enterprises India Ltd- Seasonality impact on revenue
Given that Amber Enterprises deals only with RACs, the business is highly SEASONAL. The business performs well during First quarter(Q1) and Fourth quarter(Q4) i.e. March and June quarters and the sales are less than half in the remaining 2 quarters.
Amber Enterprises India Ltd- Analysis
Amber Enterprises India Ltd- Comparison
AMBER ENTERPRISES INDIA LTD
Salary of promoters(FY19):₹1.62Cr and ₹1.44 cr
Promoter Stake: 44.02%(45.48% pledged as on September 30th, 2019)
Deal with much lesser changing technology
RAC penetration=4%
ODM contribution to revenue=85%
Target Industry: Room Air Conditioner
Total Debt(FY19)= ₹233cr
Market cap (12.11.19)=₹3140.7cr
Revenue(FY19)=2,752 cr
P/E ratio(12.11.19)=26.49
DIXON TECHNOLOGIES INDIA LTD
Salary of promoters(FY19): ₹3.39cr & ₹2.76cr
Promoter Stake: 38.89%(51.43% pledged as on September 30th, 2019)
Deal with much more changing technology
ODM contribution to revenue=25%
Target industry: TVs, Mobile phones, Washing machine, etc
Total Debt(FY19)= ₹136cr
Market cap(12.11.19)=₹3405cr
Revenue(FY19)=2,984.45cr
P/E ratio(12.11.19)=52.66
With both the companies being similar in size and nature, AEIL profit margin of 3.4% compared to Dixon technologies’ 2.1% is primarily due to the larger share of revenue coming from ODM in Amber and single line of products manufactured.
Amber Enterprises India Ltd- Analysis
The risk remains the same as that of customer concentration. Since about 80% business comes from RAC and RAC components and India being dominated by only a handful of brands, any loss of customer will be a big blow to the company.
Since the business is seasonal, the company is trying to expand in the export market to reduce seasonal business nature. No doubt a single line of business is best for any company but here seasonality dampens the focus.
ACs continue to be in the highest 28% GST slab. If this comes down, the demand is expected to grow further with reduced product prices.
Any brand that gives out it’s manufacturing to some other company is always wary about the quality as the product represents the brands. In case of any quality issue, its the brand that will be impacted the most rather than EMS provider. Therefore any product approval cycle takes 2-3 years. EMS providers have to gain the confidence of the customers by initially supplying certain components and then moving to reliability functional components and eventually to complete products.
EMS business requires scale to be profitable. In order to reach the scale, it requires having significant fixed assets as well as customer relationships. That acts as an entry barrier for companies that already have become large.
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