Amber Enterprises' Q1FY20 results (Outperformer) - Strong quarter; client scale up to sustain

Q1FY20 consolidated result highlights

• Cons. adj. PAT at Rs643mn: +143% yoy led by strong revenues.
• Revenues jump 75% yoy to Rs12.4bn: led by 79% yoy increase in AC revenues to Rs8.5bn on 89% volume growth led by strong summer season particularly in North, shift from imports to indigenous sourcing as also addition of new clients such as Toshiba, Carrier, Amazon, Flipkart, etc. Non-AC revenues too grew by 66% yoy to Rs3.84bn in 1QFY20. Moreover, revenues increased due to consolidation of new subsidiaries - Ever (Rs890mn) and Sidwal (Rs305mn).
• Positive operating leverage aid margin expansion: by 135bps yoy to 9.4%. However, margin expansion was restricted by adverse product mix towards higher share of low margin IDUs. Moreover, consolidation of subsidiaries (Ever & Iljin) which have lower margins (3-5%) than Amber restricted margin expansion. Sidwal saw margins of 26% in the quarter. Hence, EBITDA grew 104% yoy to Rs1.16bn. 

Conference call highlights: (1) Amber delivered +89% yoy volume growth to 1.04mn units in 1QFY20, ahead of industry growth of 25%; (2) Management’s focus on R&D, higher operating leverage & cost efficiencies to enhance margins of IDUs and subsidiaries (3) Ever margins expected to expand from 3% to 5% led by increased focus on R&D and new product development, apart from reducing dependence on a single large customer; (4) Amber added capacity at Jhajjhar plant and overall capacity utilisation was at 80% during 1QFY20 (5) FY20E capex plan is ~Rs1-1.2bn towards plant in Tirupati to cater to south mkt, R&D and de-bottlenecking; Rs250mn already spent (6) Working capital improved led by strong summer and also new customers with shorter receivable cycle (60 days vs 90 days for old clients) (7) Sidwal likely to see strong traction on metros, coaches, etc with Rs1.8bn order backlog.

Impact on financials: No change in FY20/FY21 EPS – Rs37.6/45.4

Valuations & view

Amber has emerged as one of the leading design-focussed outsourced manufacturing companies with 55%+ market share, led by its cost-effective manufacturing, scale, backward integration, strong design capabilities and wide product portfolio. Accordingly, Amber with its strong value proposition is seeing benefits from recent import duty hikes as brands are localising vs China outsourcing of RAC production. We expect the margin and working capital issues to resolve in FY20 driven by higher demand. Accordingly, we believe valuations at 17.6x FY21E earnings are attractive in view of 23% earnings CAGR over FY18-21E. Outperformer.