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Note: This article has no recommendation to either buy or avoid this IPO. Instead, we have presented all the relevant information based on which you can make your own decision.
About the company
Amber Enterprises designs and manufactures air conditioners and components for leading consumer durable brands like Daikin, Voltas, LG etc. This segment contributed 84 per cent of its revenues in FY17 while rest of the topline was derived from manufacturing components of washing machine, refrigerators etc. Its revenues has grown by a CAGR of 17 per cent since 2013, while its net profits have grown at 9 per cent in the same time period. Its operating margins have been averaging 9 per cent over the past 5 years while net profit margins averaged around 2 per cent for the same period.
For over 20 years that the company has been in business, it has focussed only on manufacturing air conditioners. As a company specializing in designing and manufacturing of engineering products, a natural progression would have been to expand its product portfolio. Like most of its peers it did not foray into more products from other verticals in its offering like television, refrigerator etc. This focus has strengthened its position in air conditioners market. But the downside of this practice is that it makes the company solely dependent on the sale of air conditioners for its success. Besides, Amber's business is highly dependent on its key clientele, with the top five ones contributing majorly to it topline of FY17 at 75 per cent.
About the issue:
The 600 crore issue comprises of fresh issues worth 475 crore and offer for sale worth 125 crore. Proceeds of the issue will be used for repayment of loans availed by the company. Post the issue promoter holding will come down to 44 per cent from the current 59 per cent.
Additional details
Offer period: January 17 to 19, 2018
Price band: Rs 859 to 855 per share
Revenue (FY17): Rs 1,644 crore
Profit after tax (FY17): Rs 27 crore
Company/Business
- Are the company's earnings before tax more than Rs 50 crore in the last 12 months? No, Amber's earnings before taxes for FY17 was 38 crore.
- Will the company be able to scale up its business?
Yes, with the rise in disposable income of the middle income population, air conditioner purchase will be considered as a necessity rather than luxury. Also, India has started to become an electrical equipments export hub which is going to benefit companies like Amber. - Does the company have recognisable brand/s truly valued by its customers?
No, its customers have the liberty to get products manufactured from other players who have cost and other advantages. - Does the company have high repeat customer usage?
Yes, the company conceptualizes, designs and manufactures air conditioner and related components for its clients. The manufactured part once approved, forms essential part of the final product and the company gets repeat orders over the product life cycle, which generally ranges from 2 to 3 years. - Does the company have a credible moat?
No, the company operates in a very competitive market which has little differentiation. New or larger players with significant cost advantages can take the business away from the company. - Is the company sufficiently robust to major regulatory or geopolitical hurdles?
No, changes in government regulations such as increase in mandatory wages in India or revision in regulation and energy efficiency standards will be detrimental to its business. - Is the business immune to poaching by new players?
No, a new player with innovative products can take business away from the company. Though regular business with established brands requires time and efforts, constant changes in consumer preferences makes established players vulnerable to disruption. - Are the company's products able to withstand substitution or outdation risks?
Yes, outsourcing will always remain in demand. Companies are increasingly outsourcing their non-core activities and manufacturing processes to contract manufacturers for reasons of cost and specialization. - Does the company's customers have significant bargaining power?
No, Amber's clients are not fully dependent on a single supplier. Also, the contracts it has with its customers are short term in nature with price and time acting as major constraints. - Does the company's suppliers have significant bargaining power?
No, there is no reason to believe that its suppliers have great bargaining power. - Is the level of competition the company faces relatively low?
No, the company operates in a very competitive environment with major competition coming from cheap imports.
Management
- Do any of the founders still hold at least a five per cent stake in the company? Or do promoters totally hold more than 25 per cent stake?
Yes, promoters of the company hold 59 per cent of the pre-offer equity shares of the company. - Do the top three managers have more than 15 years of combined leadership at the company?
Yes the top management comprises of the promoters itself who have combined experience of more than 15 years. - Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
Yes, we have no reason to believe otherwise. - Is the company free of litigation in court or with the regulator that casts doubts on the intention of the management?
Yes, there are no major cases against the company which cast doubt on the intention of the management. - Is the company's accounting policy stable?
Yes, we have no reason to believe otherwise. - Is the company free of promoter pledging of its shares?
No, promoters have pledged 2.64 per cent of their pre-offer equity shares to banks for in lieu of loans.
Financial
- Did the company generate current and five-year average return on its equity of more than 15 per cent and return on capital of more than 18 per cent?
No, the company's average five-year ROCE and ROE were 18 and 12 percent respectively. For FY17, ROCE stood at 17 per cent while ROE was 9 per cent. - Was the company's operating cash flow positive during the previous year and at least four out of the last five years?
Yes, for FY17, the operating cash flow was 98 crore and it was positive in all of the last 5 years. - Did the company increase its revenue by 10 per cent CAGR in the last five years?
Yes, revenue of the company grew at 17 per cent CAGR in the last 4 years. - Is the company's net debt-to-equity ratio less than one or is its interest coverage ratio more than two?
Yes, the net debt-to-equity is 1.1x as on September 30, 2017. The interest coverage ratio stands at 1.6x for 2017. - Is the company free from depending on huge working capital for its day to day affairs?
Yes, Amber works on negative working capital, as suggested by its negative cash conversion cycle. It means that it receives cash from its customers before it pays its suppliers. This efficiency in working capital management would keep it free from relying on huge working capital. - Can the company run its business without relying on external funding in the next three years?
No, since the company plans to expand its manufacturing capacities along with introduction of new products, it will require capital to grow its business. Introduction of new products will require it to continually invest in research and development, will warrant need for funds. - Have the company's short-term borrowings remained stable or declined (not increased by greater than 15 per cent)?
No, after declining by 43 per cent in FY17, current borrowings of the company rose to 246 crore as on September 30,2017 from 93 crore as on March 31, 2017.
Stock/Valuation
- Does the stock offer operating earnings yield of more than 8 per cent on its enterprise value?
No, the post-IPO operating earnings yield of the company will stand at about 3.4 per cent at its price band range. - Is the stock's price-to-earnings less than its peers' median level?
No, at a price band of Rs 859 to 855, its PE will be around 77 while average PE of its peers is 51. - Is the stock's price-to-book value less than its peers' average level?
Yes, as per the price range, its price to book will be around 3.3x while its peers trade at average price to book of 7x.
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