Amber Enterprises' Q2FY19 results (Outperformer) - Weak season impacts volumes and earnings

Q2FY19 standalone result highlights

• Rs17mn loss: led by negative operating leverage on revenue decline.
• Revenues declined 14.6% yoy to Rs2.3bn: AC revenues fell 23% yoy to Rs1.5bn on 39% volume fall as OEMs did not place fresh orders on channel inventory build-up in 1Q19. However, AC components grew 21% yoy to Rs230m & non-AC components grew 4% yoy to Rs540mn
• Negative operating leverage impacts margins: OPM declined sharply by 360bps yoy to 4.7% due to lower utilizations. We note gross margins +120bps qoq (-50bps yoy). Moreover, Rs18mn forex loss (treated in other income) impacted PAT in the quarter.
• Subsidiary performance: Iljin (70% sub) which manufactures PCBs for ACs, TVs etc. saw Rs1.67bn revenues and 4.5% OPM in 1HFY19. New client additions by Dec-18 will drive revenues. Ever (19% sub, 51% to be acquired by Dec-18) saw Rs1.31bn & 3.2% OPM in 1H19. PICL (100% sub) had muted Rs500mn revenues and 6.5% OPM in 1H19.

Conference call highlights: (1) Management maintained FY19E volume guidance at 2.1mn AC units sales in FY19 (+10% yoy; 0.731mn units in 1HFY19) as it is seeing strong traction in order placements, implying strong momentum in 2H19. (2) Channel inventory is being liquidated as demand momentum is picking up, especially in the West region; (3) Increase in duty for ACs from 10% to 20% will lead to higher demand for local manufacturing as witnessed from increased inquiries (4) Management is focused on product R&D, exploring new geographies and achieving benefits of operational leverage via higher volumes thus improving margins, (5) FY19E capex plan is ~Rs550mn of which YTD capex is Rs300mn, further capex will be based on new customers.

Impact on financials: FY19/FY20 EPS cut by 7%/6% to Rs26/34

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. Consequently, Amber is well placed to benefit from the growing trend towards outsourcing and indigenisation of RAC production. We estimate Amber to post 18% revenue and 32% PAT CAGR over FY18-20E. Moreover, limited capex and improvement in free cash generation is likely to drive improvement in return ratios. We believe valuations at 25x FY20E earnings are attractive