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Published on 23/01/2018 5:56:46 PM | Source: SPA Securities Ltd

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AEIL is a market leader in the RAC OEM/ODM industry in India with a market share of 55.4% in terms of volume in Fiscal 2017 (Source: F&S Report). AEIL is one-stop solutions provider for the major brands in the RAC industry and currently serve eight out of the 10 top RAC brands in India

Investment Rationale

Market leadership in the RAC OEM/ODM industry in India

AEIL is a market leader in the RAC OEM/ODM industry in India with a market share of 55.4% in terms of volume in Fiscal 2017 (Source: F&S Report). Further, the share of the overall RAC market in India in terms of volumes has grown from 14.7% in Fiscal 2015 to 19.1% in Fiscal 2017 (Source: F&S Report).

One stop solutions provider for the RAC industry with high degree of backward integration

With the experience, product development expertise and capabilities in the manufacturing of RACs and components, AEIL is one-stop solutions provider in India for the RAC industry. In addition to designing and manufacturing complete WAC, IDUs and ODUs, it offers the customers manufacturing solutions ranging from critical components such as heat exchangers, multiflow condensers and motors to non-critical components such as sheet metal and injection molding. In terms of bill of material, depending on the model of RAC, Company manufacture up to 49% of the ODUs, 62% of the IDUs and 54% of WAC, which includes most of the critical components (except compressors, which are largely imported for the RAC industry in India) (Source: F&S Report).

Strong customer relationships with the majority of leading RAC brands in India

Company has strong and established relationships with its customers, which includes eight out of the 10 top RAC brands in India. Key customers include leading RAC brands such as Daikin, Hitachi, LG, Panasonic, Voltas and Whirlpool. These customers command ~75% market share in the Indian RAC market (Source: F&S Report). Company provides customers with a range of additive manufacturing solutions at their doorsteps. Majority of its top 10 customers have been associated for more than five years and the long term relationships have enabled them to understand and cater to diverse requirements of such customers and to develop new products with and for the customers.

R&D and product design capabilities leading to high proportion of ODM business

Company place strong emphasis on research and development to enhance its product range and improve its manufacturing processes, which has been a key pillar of growth. AEIL believes that it has developed strong product design capabilities, which allows providing customized solutions to their customers and service more effectively and in a timely manner. Leveraging on the experience and knowledge derived from manufacturing products, company has set-up a dedicated R&D centre located in Rajpura, which is approved by the Department of Scientific and Industrial Research (DSIR), Ministry of Science and Technology and GoI.

Outlook & Valuation

The Company plans to reduce its debt (~INR 3700 mn) with the IPO proceeds (~INR 4750 mn) which translates into an EPS of INR 27 for FY19E from INR 12 for FY17 assuming similar utilization levels. At the upper price band of INR 859, the issue is priced at 32x FY19E P/ E. We believe additional levers like lower capacity utilization (~45%), expected CAGR growth of 25% over FY17-22E through increasing share of manufacturing being outsourced to OEM/ODM (~34% in FY17 which is anticipated to grow to ~56% in FY22) and decent growth in RAC volumes (~12.8% CAGR from FY17-22), lower RAC market penetration (~4% compared to global average of ~30%) and high entry barrier will help AEIL to grow at a robust pace going ahead. We recommend SUBSCRIBE to the issue.

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