IPO Snapshot:

Amber Enterprises is entering the primary market on Wednesday 17^th Jan 2018, to raise a total of Rs. 600 crore, split Rs. 475 crore via fresh issue and Rs. 125 crore through an offer for sale (OFS) by promoters, both in the price band of Rs.855 to Rs. 859 per share. At the upper end, company will issue 55 lakh new shares, while promoters will offload 15 lakh shares of FV Rs. 10 each. Representing 22.21% of the post issue paid-up share capital, issue closes on Friday 19^th Jan while listing is expected on 30^th Jan.

Company Overview:

Amber Enterprises is a North India based contract manufacturer, having 11 manufacturing facilities over 7 locations, essentially making room air conditioners (RACs), with 83% of its approximately Rs. 2,000 annual revenues coming from this single product vertical, and balance from components for washing machines, microwaves, refrigerators and auto industry. Commanding 55% volume market share in the domestic RAC market in FY17, which is expected to have volume growth of 13% till FY22, industry prospects are very bright as penetration levels in India are extremely low at 4% (vs 50%+ for TV, double digit for washing machines). While the company caters to the likes of Daikin, Voltas, LG, Panasonic, Hitachi, Whirlpool, its client concentration risk is high, as top 5 customers account for 75% of revenue, while top 10 make up for a whopping 93%, which is not expected to come down immediately!

Financials:

Company has been posting healthy growth historically, except for fiscal FY16, when restructuring was undertaken to exit low margin verticals like lighting and small consumer appliances. During FY14-17, consolidated revenue and EBITDA both grew at CAGR of 19% but PAT growth was slower at 9% due to rising depreciation and interest costs. On FY17, revenue of Rs.1,644 crore, up 51% YoY, EBITDA stood at Rs. 136 crore, translating into 8.3% EBITDA margin. PAT for FY17 was up 16% YoY to Rs. 28 crore, translating into an EPS of Rs. 12.80. 

H1FY18 performance was especially healthy, thanks to Rs. 100 crore fund infusion by PE firm Ascend, coupled with last year’s long summer season. Company’s H1FY18 PAT of Rs. 27.3 crore was nearly as much as that clocked in full year FY17 of Rs.27.9 crore, supported by net margin expansion from 1.7% in FY17 to 2.9% in H1FY18. On H1FY18 revenue of Rs. 938 crore, EBITDA margin also strengthened to 9.3%, from FY17’s 8.3%. Diluted EPS for H1FY18 came in at Rs. 11.08. Since Q1 and Q4 of the fiscal are seasonally strong quarters, FY18 is expected to close on a very healthy note too. Moreover, current capacity utilization stands at about 45%,, indicating minimal capex required to fuel future growth. Company falls under MAT, and will continue so for the next 3-4 years, with effective tax rate of ~27%.

Debtors and inventory levels have also been under check, with outstanding at less than 3 months and 2 months respectively. Its current ratio of 1.6:1 is a little on the higher side, but nevertheless acceptable. As of 30-9-17, company’s net worth stood at Rs. 363 crore, while total debt is at Rs. 459 crore, and cash and equivalents of Rs. 29 crore. Fresh issue proceeds of Rs.475 crore will be used to repay debt worth Rs. 400 crore and balance for general corporate purposes. Thus, debt equity ratio which is very high at 1.2:1 currently, will contract to 0.04:1 which can fund future expansion.

Shareholding Pattern:

Post conversion of CCPS and CCDs held by PE investor Ascend in Dec 2017, current equity stands at Rs. 25.92 crore, of which, promoter holding is 59.02%, which will contract to 48.65% post IPO. Ascent’s stake of 25.38% will drop to 20.92% post issue. In a pre-IPO deal, Ascend has sold 12.5% stake (pre-issue) in the company to a clutch of investors (Edelweiss, GMO, Enam group) at about Rs. 800 per share, which is subject to 1 year lock in, booking bumper gains in a year’s time, based on its cost price of Rs.237 per share. For regulatory reasons, to facilitate the above secondary sale, promoters bought stake at lower price from Ascend and are now offloading them at a higher price, pocketing a cool 7% in less than 2 months! As of date, Edelweiss holds 4.34% stake while Enam Group’s Akash Bhansali, GMO Fund, DF Partners and Aadi Financial hold 1.93% each in the company.

Valuation:

At Rs. 859 per share, company’s market cap will be Rs. 2,700 crore with enterprise value of Rs. 2,732 crore, which translates into historic EBITDA and PE multiples of 20x and 67x respectively, which appear steep, However, considering H1FY18’s superlative numbers, on expected FY18 earnings, the resultant multiples are 14x and 34x respectively which are more reasonable. While the company states no listed peers in its RHP, it can be compared with the following three contract manufacturers: 

1. Dixon Technologies listed on the bourses since Sept 2017, is a contract manufacturer for LED TVs, small home appliances, lighting products, mobile phones. With topline of Rs. 3,000 crore, its RoE of 25% is much superior to Amber’s 12% (FY17), but EBITDA margin at 3.7% is less than half of Amber’s 9.3% (H1FY18) due to presence in higher volume-lower margin verticals. While growth rates for both the contract manufactures are very high, Dixon’s current valuation is quite stretched with FY18E EV/EBITDA and PE multiples of 35x and 60x respectively. Based on EV/sales multiple, both are priced at similar levels of 1.3x.
2. LEEL Electricals, having recently sold its branded AC business ‘Lloyd’ to Havells, is under the process of de-leveraging balance sheet and channelizing management bandwidth towards the pure contract manufacturing operations of ACs and heat exchangers. LEEL with Rs. 1,300 crore topline and is quoting at sales multiple of 1x and EBITDA multiple of about 24x.
3. Small peers PG Electroplast, another North India based contract manufacturer for kitchen appliances, ACs, water purifiers, CFLs, mobile phones, washing machine etc. with topline of Rs. 500 crore, RoE of 7% and EBITDA margin of 8%, is ruling at EV/EBITDA and PE multiples of 24x and 80x respectively, based on FY18E.

Thus, on peer comparison, IPO valuation of Amber is not expensive. 

Conclusion:

Amber’s fundamentals are strong and it looks capable to grab the growing industry size. On peer comparison, valuations are reasonable, and hence one can subscribe to the issue.

Disclosure: No interest.