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Continues to expand product portfolio inorganically
* Amber has entered into an agreement to acquire an 80% stake in Sidwal Refrigeration Industries Pvt Ltd. The deal, valued at ~5.5x-6.5x FY19 EBITDA as per management, is expected to be completed before 30 Apr’19. We assume Rs2.3bn as the deal value.
* Sidwal manufactures and sells Heating, Ventilation, Air Conditioning, and Refrigeration equipment for mobile transport applications. About 70% of its revenues come from Railways and Metros, 9% each from Defense and Bus ACs.
* In our view, this acquisition saves lead time for Amber in the HVAC segment and should help it become a preferred supplier for government projects. The higher working capital and the dependence on government projects make it valuation-dilutive, in our view.
* Sidwal will add 18% to EBITDA and EPS accretion of 13%/8% in FY20/21E for Amber. We have cut our target multiple by one notch, with increased dependence on the government business. Maintain Buy with a revised TP of 1,072 (10x FY21E EV/EBITDA)
Key contours of the deal and potential synergies
* Amber will acquire an 80% interest in Sidwal Refrigeration Industries, which will include Sidwal Technologies, on or before 30 Apr’19. We have assumed a deal value of Rs2.3bn in our estimates.
* Sidwal is a market leader in Railways and Metro segments with ~50% market share, while it commands ~80% share in the Defense segment. Sidwal has no long-term debt and has minimal short-term working capital debt of ~Rs100mn.
* It gives Amber Product Categories and Segments an extension into the HVAC industry. The deal paves the way for expansion into long-approval cycle businesses with high entry barriers such as Railways, Defense, Buses, and Commercial Air-Conditioners. Sidwal’s strong technical background can help Amber in providing more comprehensive solutions such as CAC (Central air conditioning), AHU (Air handling unit), and FCU (Fan coil unit) to the existing set of customers.
Outlook and valuations
This is third acquisition by Amber over the last couple of years to increase its product portfolio and create more customer stickiness. However, Sidwal will help Amber enter the HVAC segment and achieve a healthy market share in government projects. We continue to believe that Amber is a beneficiary of the localization drive that various brands are undertaking currently, which in turn has resulted in new customer additions. However, we have cut our target multiple given the higher dependence on government projects with higher working capital requirements. We maintain our Buy rating on the stock, which looks attractive from a valuation perspective. We have incorporated financials of Sidwal in our FY20 and FY21E estimates.
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