Event update: Amber Enterprises (Outperformer) - Sidwal acquisition earnings accretive; opens new market

Event

Amber acquired 80% stake in Sidwal Refrigeration Industries (Sidwal) & Sidwal Technology and expects to complete the deal by 30 Apr 2019. The balance 20% stake will be acquired over next 2 years.

Details

Sidwal - a leader in mobile air conditioning: Sidwal, founded in 1975, has a diversified portfolio of HVAC solutions for Indian Railways & Metros (72% of FY18 revenues; leader with 50%+ market share), buses (9%) defence (9%), telecom (4%) and commercial refrigeration segments. Sidwal has 3 fully-integrated plants in Himachal Pradesh and Haryana, with the capability of undertaking entire HVAC manufacturing process. Sidwal’s strong order book of ~Rs2bn, history of repeat orders and market leadership provides strong growth visibility (1x FY19E revenues)

Strong financials: Sidwal reported 19% revenue CAGR over FY16-18 with 20-21% operating margin and 14-15% PAT margin in FY18. The company expects growth momentum to continue in FY19E with Rs1.95bn revenues, Rs400m EBITDA and ~Rs230m PAT. Sidwal has limited working capital debt of Rs70-80m, as its high gross margins fund its high net working capital of 180days.

Acquisition synergies: The acquisition would give Amber entry into a new fast-growing market with high entry barriers. The approval cycles for being a vendor to Railways and metros are challenging and have elongated timelines. Also, Sidwal’s strong R&D infrastructure & technical expertise may help Amber to provide more comprehensive solutions such as CAC, AHU, FCU,which will likely be a value add for Amber’s current clientele. Also, Amber’s scale will drive operational leverage and efficient inventory management for Sidwal’s operations. The acquisition will also help Amber in moderating the seasonal nature in the business.

Acquisition likely at Rs2.3-2.7bn: While management is yet to disclose details of the acquisition amount, it has pointed to a valuation of 5.75-6.75x FY19E EBITDA. The implied valuation works out to Rs2.3-2.7bn (10-12x FY19E earnings), translating into a payout of Rs1.8-2.2bn for an 80% stake. The same would be funded via a mix of internal accruals and debt. We note Amber had ~Rs500m net debt as at end Q2FY19, which could rise to Rs2.5bn post acquisition. We see the transaction as EPS accretive (5-7%) for Amber; Reiterate Outperformer.

Valuations & view

The Sidwal acquisition will expand Amber’s product categories within air conditioning, particularly in the fast-growing mobile HVAC solutions space, which has high entry barriers. While Amber’s net debt is likely to rise post acquisition, we believe the acquisition would be EPS accretive by ~7% on our FY20E earnings. On the other hand, 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 as against China’s outsourcing of RAC production. Accordingly, we believe at 25x FY20E and 21x FY21E earnings, Amber looks attractive in view of 23% earnings CAGR over FY18-21E. We reiterate our Outperformer rating on the stock.