After falling around 9 percent in August so far, brokerage house Axis Securities has picked consumer durable stock Amber Enterprises as its 'pick of the week'.
Amber Enterprises is a midcap firm and a one-stop solution provider for major brands (OEMs) in the RAC industry. It is a leader in the room air conditioners (RAC) outsourced manufacturing space. The company has a diversified portfolio which includes RAC, RAC components, and non
AC components. It has expanded its offerings further through the acquisition of Sidwal (mobility solutions) and has recently forayed into commercial ACs as well. It was incorporated in 1990.
The stock has fallen over 20 percent in the last 1 year and 31 percent in 2022 so far. It rose 11 percent in July but then declined 8 percent in the current month.
The stock has lost nearly 45 percent of its investor wealth since hitting its 52-week high of ₹4,023 in May 2022 to currently trade around 2,250 per share.
The brokerage has a 'buy' call on the stock with a target of ₹2,504 per share on the back of a solid growth outlook and expected margin improvement going forward.
Investment Rationale
Strong overall performance: In the June quarter (Q1FY23), the company’s revenues witnessed strong growth across categories, despite a challenging environment of inflation and Forex fluctuations, noted the brokerage. The RAC volumes stood at 12.8 lakh for Q1FY23 led by the normal summer season and extension of a heat wave in some areas during the quarter, it added. The brokerage further stated that as per management estimates, the industry volumes stood at 6.4 million units which are expected to touch 8 million units in FY23. Amber has the largest market share of 26 percent (bill of materials) and is expected to benefit from the growth in the RAC demand, it pointed out, adding that Amber will continue to outpace the industry growth rate in FY23.
Gradual improvement in margins expected: As per Axis, the company’s gross margins stood at 14.4 percent in the Juen quarter versus 16.8 percent in the year-ago quarter due to an increase in the raw material prices.
"The company has passed on the price hikes to the OEMs with a quarter lag. The EBITDA margins were impacted by higher employee expenses (ESOP of ₹5.39 crore) and MTM Forex loss. The margins are expected to improve over the long term led by improved realisations, increasing contribution from exports of RACs, and improved cost efficiencies," Axis said.
Plans to augment components revenues: The brokerage further highlighted that the management expects the Motors division (PICL) of the firm to grow more than 35 percent for FY23, while it expects the Electronics division growth by over 35 percent for FY23. The management also plans to increase the share of components in the overall revenues by increasing product offerings, catering to newer geographies, adding new clients, and building a strong order book, it added.
Outlook & Valuation
According to Axis, Amber’s revenues witnessed strong overall growth despite challenges posed by prevailing inflation.
"The RAC industry witnessed strong demand during the quarter despite price hikes. Furthermore, the industry is expected to grow 28-30 percent in volume terms and Amber is confident it to outpace the industry growth in FY23," it said.
Increasing product offerings, customer additions foray into the Commercial AC space, and entry into exports will drive the company’s long-term growth, stated the brokerage.