Amber Enterprises' Q3FY19 results (Outperformer) - Weak performance; all eyes on summer

Q3FY19 standalone result highlights

• Adj. PAT at Rs38mn: vs Rs1mn in 3Q18 led by higher revenues
• Revenues increased 15% yoy to Rs3.9bn: AC revenues increased 19% yoy to Rs3.2bn on 15% volume growth as OEMs placed orders for upcoming summer season as also shift from Chinese vendors to Amber. While non-AC components supported revenue by growing at 18% yoy to Rs513mn, AC components declined 23% yoy to Rs229m.
• Unfavourable product mix, lag in pass thru of higher RM impacts margins: OPM declined 143bps yoy to 5.7% due to unfavourable product mix towards IDUs, forex losses and lag in pass thru of higher RM.
• Subsidiary performance: Iljin (70% sub) saw Rs2.3bn revenues and 3-5% OPM in 9MFY19. THe new client additions will drive revenue growth. Ever (19% sub, 51% to be acquired by Mar-19) saw Rs430mn revenues, 3% OPM & Rs5mn PAT in 3Q19. PICL (100% sub) had muted Rs860mn revenues, 7.5% OPM and Rs10mn PAT in 9MFY19.

Conference call highlights: (1) Management maintained FY19E volume guidance at 2.1mn AC units sales in FY19 (+10% yoy; 1.15mn units in 9MFY19) as it is seeing strong traction in order placements (2) Channel inventory is largely liquidated as demand momentum is picking up, especially in the West and South region; (3) Increase in duty for ACs from 10% to 20% will lead to higher demand for local manufacturing as witnessed from increased inquiries & higher volumes in 3Q19 despite weak season (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 ~Rs750-800mn towards R&D and de-bottlenecking; Mgmt evaluating setting up a plant in South, for which it will incur capex over FY20-21E

Impact on financials: FY19/FY20 EPS cut by 6%/11% to Rs24.8/30.6

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. Accordingly, we believe valuations at 22.6x FY20E earnings are attractive in view of 23% earnings CAGR over FY18-21E. Outperformer