Amber Enterprises India Limited (AMBER) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Amber Enterprises Limited -- India Limited Q2 and H1 FY '21 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Jasbir Singh, Chairman and CEO of Amber Enterprises India Limited. Thank you, and over to you, sir.

Hello, and good morning, everyone. First and foremost, I hope you all are keeping safe and healthy. On the call, I'm joined by Mr. Daljit Singh, Managing Director; Mr. Sudhir Goyal, Chief Financial Officer; and Strategic Growth Advisors, our Investor Relation Advisors. We have uploaded our results presentation on the exchanges, and I hope everybody had an opportunity to go through the same. I would like to open my remarks by giving a brief overview of the business environment and industry updates followed by government's initiatives and our strategy for the same, following the operational and financial performance for quarter 2 and H1 FY '21. Post easing of the lockdown restrictions, Q2 went well for the overall room AC industry and surprisingly have witnessed an uptick in the retail demand for Room ACs in quarter 2 FY '21 itself. We saw uptick in sales due to pent-up demand. Overall, consumer durable and electronics industry have witnessed a positive momentum in quarter 2 FY '21. The channel inventory levels are back to normalized level, and we anticipate growth for H2 FY '21, of course, subject to no further lockdowns happen due to second wave of COVID. This was on the business environment. Let me spend some couple of minutes on our AC industry updates. In the recent notification issued by DGFT, import of refrigerant fill air conditioners have been prohibited. The Indian government has taken initiative towards self-reliance and Atmanirbhar Bharat and ban on import of refrigerant fill RACs is one of the steps towards this initiative. This has opened up opportunities for domestic manufacturing. As per industry estimates, 30% of fully build RACs were being imported in India, valued at approximately INR 4,000 crore plus. These were primarily CBUs which were refrigerant filled, also an equivalent worth of components are being imported in India, and we envisage that the move from government will help local sourcing of RACs. It will not be easy for OEMs to import non-refrigerant fill ACs and unpack and then fill the gas and get the unit tested and supply to different locations across the country. This will primarily incur extra cost from gas filling perspective as well as it will create a logistical hassles for the OEMs. It also negates the economic benefits of importing to a large extent. As per the above-mentioned challenges, we believe that the local manufacturing and sourcing of RACs in India will increase. A number is well placed to capitalize this opportunity as one-stop solution provider to its customer and HVAC industry. Having said above, the opportunities, I would also like to highlight on our capabilities and readiness to cater on the same. We have kept ourselves ready and have successfully completed a QIP of INR 400 crores in quarter 2 FY '21, which got oversubscribed by more than 5.5x. The money raised from QIP has been temporarily being used for paying off the debt, CapEx, working capital and acquisition of balance 20% stake of Sidwal. With this opportunity in hindsight, coupled with growth capital recently raised, we are all geared up for the growth in domestic manufacturing of RACs and its components and would endeavor to grab most of the market share. We believe this opportunity will further strengthen our presence in the domestic market and create a solid foothold for exports market. The China Plus One strategy is also unfolding opportunities for emerging markets. We have already started getting inquiries, RFQs from big global players for RACs as well as components. We have started component export to nearby countries and to U.S. as well. However, the export opportunity will play out in the mid- to long-term because of various reliabilities and product developments for the suitable markets. In addition to our wide range of Room Air Conditioners with multiple SKUs across all star rating and tonnage, including inverter ACs, we have successfully launched a wide range of offering in commercial air conditioner segment also. We have also strengthened our product portfolio for railways, metros and bus air conditioning in Sidwal, with surge in demand for air-conditioned coaches and multiple upcoming metro projects across the country. Going forward, we are optimistic of growing this segment as well. We are continuously investing in R&D for new product developments and better energy-efficient products. With this, we will be future-ready with the product portfolio to cater to the increasing demand across segments. I'll now take you through the consolidated financials. On revenue side, our consolidated revenue of quarter 2 FY '21 stood at INR 408 crores as against INR 623 crores in quarter 2 FY '20, a de-growth of 35%. This was majorly due to full season loss in quarter 1 FY '21, which had led to pile up of inventory in the system, which we believe are near normalized levels now. For the quarter, RAC contributed 36% of total revenues while components and mobile application contributed 64% of the revenues. We have been witnessing good traction for our component business across verticals; however, the skew towards component in this quarter was also attributed to lower RAC sales. On operating EBITDA, for quarter 2 FY '21, we witnessed an operating EBITDA of INR 22 crores as against INR 39 crores in quarter 2 FY '20. The drop in revenues led to de-operating leverage playing out. Operating EBITDA excludes INR 2.2 crores on account of fixed asset written off and sales loss on sale of fixed asset. We have resorted to various cost rationalization program to curtail our fixed and semi-variable expenses, of which some of the benefits will be retained on a long-term basis. Operating EBITDA margins for quarter 2 FY '21 stood at 5.4% as compared to 6.2% in quarter 2 FY '20. This is primarily also because we are in the seasonally weak quarter. PAT for quarter stood at INR 3 crores as compared to INR 12 crores in quarter 2 FY '20. Now coming to subsidiaries' financials. On Sidwal, our Railway and Metro business segment has been able to withstand all the challenges from COVID-19. We have been able to acquire new orders and strengthen our order book despite weak economic scenario. Quarter 2 FY '21 revenue for Sidwal stood at INR 47 crores and our operating EBITDA stood at INR 13 crores. H1 FY '21 revenues for Sidwal stood at INR 77 crores, with operating EBITDA at INR 18 crores. H1 FY '21 operating EBITDA margin for Sidwal stood at 22%. We have utilized this time to enhance our capabilities in R&D. We have strengthened our commercial and bus and truck refrigeration solutions, along with continuous development for metros and railways as well. We believe that over a long-term period, with increasing footprints of metro in various cities and increased manufacturing of air-conditioned coaches, we're confident of achieving good growth in Sidwal on a long-term basis. On PICL, our motor subsidiary, revenue for PICL stood at INR 17 crore for quarter 2 FY '21. Quarter 2 FY '21, the PICL business saw an operating EBITDA loss of INR 0.6 crores. In PICL, we have been working on new product development for various applications and markets. PICL has successfully widened its product offering from current PFC motors to BLDC motors. PICL is also in discussion with various customers to launch motors for washing machine and higher voltage motors for commercial AC segment. It has also been approached with RFQs from various large global manufacturers based out of U.S. and Middle East. With increase in product offerings and enhance in our capabilities, we believe we will be able to cater domestic and export markets in a more meaningful way in the near future. On IL JIN and Ever. For quarter 2 FY '21, revenue of IL JIN stood at INR 81 crores and on Ever, revenue stood at INR 45 crores. H1 FY '21 revenue for IL JIN stood at INR 98 crores and Ever INR 62 crores. With increasing efficiencies, newer product mix, addition of new customers and cost rationalization efforts, we have been able to increase in EBITDA margins for IL JIN and Ever. Operating EBITDA margin for IL JIN in quarter 2 FY '21 stood at 7.4% as compared to 5.7% on Y-o-Y basis. Operating EBITDA margins for Ever stood at 5.9% as compared to 5.4% on Y-o-Y basis. H1 FY '21 operating EBITDA margin for IL JIN stood at 4.4% and Ever at 2.3%. As the market is moving rapidly towards inverter ACs, we are confident of growing our revenue share from IL JIN and Ever going forward. We have been adding customers in both IL JIN and Ever and now post completion of reliability of our own developed inverter PCB board, we expect to add more business in IL JIN and Ever in coming years. Our net debt on consolidated basis for 30th September 2020 stood at INR 178 crores. The money raised from QIP has been temporarily been used for paying out the debt until the new greenfield facilities are in pipeline. To conclude, I would like to reiterate that our constant endeavor would be to increase penetration and increase our wallet share in the existing customers, continuously add new customers, create a foothold in the exports market and enhance our products with new technologies by focusing on R&D. With this, I open the floor for discussion.

[Operator Instructions] The first question is from the line of Ravi Swaminathan from Spark Capital.

You had mentioned in the opening remarks that given the fact that inventory levels in the retail system have normalized, so just wanted to check with you, so in the second half, so you had mentioned that we will be seeing growth. Is it like we'll be seeing strong double-digit growth because companies also would be looking more materially given the fact that retail demand has picked up? So if you can touch upon that more.

Yes, Ravi, so basically, my belief is that inventory levels which were held up when the lockdowns were announced, of about 2.2 million to 2.4 million air conditioners, have now been consumed and it is back to normalized level of pre-COVID levels. There are some brands who are witnessing some positive uptake, and there are some brands who are still at negative numbers. But on a consolidated numbers, on the industry side, I think what we expect is that quarter 4 should be a very positive quarter for the industry. Giving a number on whether it will be high double-digit or single-digit growth is really difficult at this time. But yes, industry is expecting a good kind of a summer in coming quarter 4.

Got it, sir. And my second question is with respect to this ban on refrigerator -- sorry, air conditioners with refrigerant. That benefit -- I mean those volumes, do we expect it to come this year itself? Do we expect incrementally companies starting to outsource to you, say, next year onwards?

So Ravi, when this notification came, before the notification implementation date, anybody who has released letter of credits, so they are allowed to import the shipments. So I believe that the real impact of the notification will start coming into -- from February onwards. So February and March is when we are expecting volume increase from this ban on the refrigerant air conditioner import. I think largely, the impact will be in the next financial year.

Got it, sir. Got it. And my last question is with respect to volumes for this quarter, how much was it? And what is the current capacity you've generated across branch?

So volume on the quarter 2, what we have done is 1.9 lakh units. And capacity utilizations are at a lower level right now. We would be almost less than about 50% to -- or maybe 45% to 50% range.

The next question is from the line of Aditya Bhartia from Investec.

Sir, my first question is on the export side. Just wanted to understand how you're seeing this opportunity shaping up? What kind of time lines would be required to meet all the reliability tests? Which are the customers for which some of these tests may have already gotten concluded? And how would you essentially look at revenues ramping up for this opportunity?

So exports have actually 2 verticals to look at. One is from component side and another one is from room air conditioner side. On components, we have already crossed the leg of reliability with some customers, and that's how exports have started. With some other customers who have just recently started participating in the RFQ side, so we believe that by FY '21, the developmental cycle will be over with them and by FY '22 we expect some good orders coming in hand from those customers as far as components are concerned. On room AC side, because the markets -- this is one product which needs reliability testing and the structure of the products which we use here in India are not the similar structure products what are used in U.S. markets. So we have started developing these products. Our first sample will be ready to be shipped out by January. And next year, complete calendar year will be reliability testing and approval cycles. So FY '22 is when we are expecting Room AC exports calendar year to start.

Sure. And sir, when we speak about components, is motors going to be the biggest opportunity? Or are you seeing opportunity on other verticals as well?

So we've started exporting motors and heat exchangers, and we are also now talking to some customers for PCBs also. But PCBs have not yet started exporting. It is just on the initial stages of discussions.

Understood, sir. And sir, if I remember correctly, when we acquired PICL, roughly 50% of revenues used to be from exports and then those revenues -- export revenues have come off. What would be that proportion currently? And how would you see that changing over the next 3 years?

Yes, you're right, PICL used to export largely to Saudi Arabia, and then when the oil crisis hit, PICL was hit, and we've changed the strategy towards domestic. Today, the percentage in PICL is about close to over 20% is exports and 80% is domestic. We expect this change in numbers to go up at least by about 60:40 ratio in coming 2 to 3 years' time.

Sure. Understood. And secondly, sir, on the commercial air conditioning side, would be very eager to understand how exactly are you seeing that particular opportunity? How large the market is? Which are the product verticals we're in really operating? And how have your initial discussions with customers been?

So by entering into commercial AC space, we have actually enhanced our horizon of addressable market. And that market is substantially good market to be in, and we've just launched 2 products right now, which -- where we have started shipments also. During the lockdown itself, we got approvals and shipments have started, but very low volume right now. And we are now in pipelines to build up the whole portfolio of about 18 to 20 products in next 2 to 3 years' time. So once the whole product offering is ready with us, we expect a good volume number. We can't give right now because it's at a very early stage. But I can say that we are witness -- we will witness a good growth out of commercial AC segment.

And sir, the products when we'll be operating, how large is the market likely to be for that? And what proportion of customers would be the same as the ones whom we are servicing on the room AC side?

Some of the customers are the same and some are new customers. And the market size, different reports have -- I mean there are different research reports available. But as far as the ductable market is concerned, it's close to about INR 4,000 crore market. And if we add on the VRV side also, that's another INR 2,500 crore. So it's about close to about INR 6,500 crore of addressable market which we are trying to get on.

The next question is from the line of Renu Baid from IIFL.

Sir, I have 2 questions. First, can you just share the outlook in terms of Sidwal, what is the current backlog? And we were expecting finalization of couple of large more orders. So how have we moved on that, both in terms of order book visibility as well as numbers delivering now in terms of our volumes and sales for the rest of the year?

So on Sidwal, recently, we have won large tender from -- in fact, 2 tenders from DMRC, Delhi Metro Corporation. So these are about close to about INR 98 crores. And then on the revenue side, we've already informed that the quarter 2 numbers of Sidwal, it's INR 77 crore for H1 and EBITDA of INR 18 crores.

So sir, broadly in terms of the time lines of the execution of the overall backlog, we had mentioned of close to INR 250 crores plus of order book in this business. So are we looking at time lines at the next 12, 15 months? Or it should be broadly doable within the next 2 years? So how are we looking in terms of visibility for this portfolio?

So backlog has actually increased now with the new orders coming in. So we are having an order book in hand close to about INR 350-odd crores, which will be delivered in 18 to 24 months' time.

Sure. And we did mention that in second half we expect the overall volume in the RAC segment to improve for us. Last year, we did approximately 1.5 million units. So this growth that we're expecting is predominantly led by the existing brands or the markets getting back to normalcy and pent-up coming in fourth quarter? Or these volumes would also include new customer volume additions because of the recent imposition of import duty? And have we already started seeing stack up in volumes from customers? As in if you can just share some more inputs in terms of how has your order books moved for the month of October, November and this quarter based on the current market environment?

So, Renu, in October, we've done flattish kind of a sale as compared to last year quarter -- last year, October. And I believe that quarter 3 should be a kind of a flattish quarter and quarter 4 should be a good growth quarter because in February and March, the implication of the ban also will start coming in. So we expect growth in total H1 -- H2 of FY '20, current year. And on the industry side, I think industry is also looking into a good growth for quarter 4 right now. And in Q3, people have started stacking a little bit on the inventory side as far as the finished goods are concerned. So we believe a decent growth coming in quarter 4 because the pipeline, there is not large inventories in the pipeline now.

Got it. Sure. And my last question is when we overall look in terms of the business, both from a working capital as a CapEx side, now -- by now, would we be having more clarity in terms of the CapEx time line from the quantum for the facility being proposed in south India? And do we expect the overall working capital and pricing environment to improve given that commodities are moving headway northwards? So would we be able to take on the cost increases in the second half as volumes were to improve?

Yes. We were already talking to customers because as I explained to you last time that we move -- the whole industry moves with a quarter lag of the impact. So that is already under discussion with all the customers. And some of the customers have also revised it, and some are on the way to revision it. And I think moving forward, on the working capital side, we should be okay. We are -- I think we don't have any debts on the books. And also, we -- I believe that moving forward, the kind of cycles we have been able to negotiate with the customers, it should be okay for us.

Any time line now or in terms of the CapEx for south?

Excuse me, this is the operator. Ms. Renu Baid, may we request you to come back in the queue for a follow-up, please? [Operator Instructions] The next question is from the line of Naval Seth from Emkay Global.

I have 2 questions. First, if I take from your remarks and look at the numbers of listed companies, somehow, there seems to be a disconnect where your AC volumes are down plus or 50%, but primary sales for a Voltas or a Blue Star or Hitachi is down less than 20%. So where are -- and if I -- in terms of liquidation of inventory, that is also at normalized level. So why we have underperformed for second consecutive quarter over here?

So Naval, basically, you are actually taking inputs from only listed entities, whereas we have 42 brands working in the market. And we work with the most of the brands, and some of them are unlisted also. So they -- some of the players, they have -- they already had a lot of inventories with them apart from the channel inventory. So that is what is being liquidated right now. And in quarter 3, just in the October, as I've told that we have come to pre-COVID levels, so that's a reflection that orders have started coming in, and things have started moving in a very positive direction.

What was the industry decline in first half, if you can share that?

So industry, as per our estimates, decline is 32% to 33%.

Sure. And second question on import restrictions. Obviously, you would have seen increased kind of customer interaction. So any new customer wins which you would have highlighted, but by February, March, as you highlighted, by that time, your capacity would be 100% utilized because of the preorders. So will those kind of volumes get lost somewhere? Or who will cater to those volumes were there in Feb and March, if at all, those players who will start looking at volumes by then because of import restriction?

We have, in fact, basically, I would say, added 4 new customers and large customers. We can't name them right now because NDAs have been signed. And we are looking forward for a good volume from them. Largely, they were importing 100% of their requirement earlier. And we are in talk with further 4 customers to be added. So these first 4s have already been confirmed and now next 4, we are talking to, and I think in the next 15 to 20 days that will also be confirmed. But all the volume from these new customers will start in February onwards because they do have inventories right now and some of the shipments coming on the way.

The next question is from the line of Madhav Marda from Fidelity Investments.

My question is on the export side. Once the reliability cycle, et cetera, concludes next year, just wanted to understand how we are placed from a cost competitiveness versus the other companies or countries which are exporting to the U.S.? And in terms of product R&D, if there's anything that we need to sort of catch-up on or if you're already there with the new samples that we're planning to launch? If you could just give us some sense, sir.

So basically, on export front, especially on the room air conditioners front, China and Thailand are the 2 large exporters of -- out of -- close to about 65 million air conditioners are exported, 80% are exported out of China and 20% is done by Thailand. So if we compare the costs of the products of 1.5 ton, 2 ton, I mean, we are almost at par, almost at par with Chinese and Thailand players. There are some countries who do have FTAs with Thailand. So there, we are right now noncompetitive. But the countries where there is no FTA, we believe that we will be able to match apple-to-apple cost with for 1.5 ton and 2 ton. On 1 ton, we still have to work towards because 1 ton is a large market which is catered from China and are huge volumes. So that is where I believe we will take at least 2 to 3 years' time as we scale up and the economies of scale will come, and then we'll get competitive in that zone also.

Okay. And of these 65 million units which are exported, how much -- is there any growth split for the 1, 1.5 and 2-ton ACs?

Largely -- no, we don't have a number right now on the split because every country has a different kind of split on this. So some of them use 1 ton and some are using 1.5 and 2 ton. And there are, again, differences in the wall-mounted split versus floor-mounted splits and cassette type air conditioners. So it's a big metric to be looked upon on a country-to-country side.

Okay. And maybe on the PCB side for IL JIN and Ever, how are we doing on the reliability cycle? And by when do we see revenues picking up in a good way from these 2 subsidiaries?

So on IL JIN and Ever, with the 4 to 5 -- 4 customers, we've already crossed reliability cycles of our own developed inverter PCB board, and we have started getting orders. We have already started shipping. Mass volumes will start picking up from next financial year, maybe March onwards. And 3 new customers are right now in pipeline where reliability has started. So I think in next financial year, those -- that reliability cycle also will compete.

Okay. And just last question...

This is the operator. Mr. Marda, may we request you to come back for a follow-up, please. The next question is from the line of Bharat Shah from ASK Investment Managers.

My broad question is on the long-term growth driver. So what I presume is that Amber's growth would, A, reflect the AC industry growth, whether it is consumer easy or commercial easy? B, that outsourcing as a trend would become faster than the industry growth rate itself of the AC? And third, hopefully, Amber shared within the outsourcing industry would expand. Therefore, these cumulative claims will drive the long-term growth of Amber. Is that -- I -- do I believe that, that trend is basically intact?

Yes, you're right. The trend is very much intact. Earlier, when we got listed in 2018 January, almost 34% of the industry was outsourced. Now that number has further gone to about 48% or so. And our share from earlier 55% has gone up to 70% now in the outsourcing one. And outsourcing growth is actually more in CAGR term rather than a normal retail market growth. Market is growing -- industry is growing at about 12%, whereas OEM business has seen a growth of almost about 18% to 17%.

And to that, exports is an opportunity, components is an opportunity [indiscernible] over the period of time?

Yes, sir. Export is a very big opportunity on a long-term basis, where we have just started taking baby steps, and we are seeing some green shoots also now on component side. Room ACs, we still need to crack, but we have started working on that, and the team is working in the right direction. And we believe in next calendar year, we should be able to complete the reliability cycle of room AC for certain countries. And by 2022, we should expect some orders coming for room AC also. But on a long-term basis, we expect that as the economies of scale will ramp up here in domestic market, that will also give us more leverage for exports becoming more competitive also. On the component side, yes, we've already started exporting. And we believe that especially motors will see larger traction in next year and next to next year. But then heat exchangers and other components also will start exporting.

Right. Which means component industry driven growth would probably fructify earlier in about, say, 2, 3 years' time, we would have a good eyesight of where we are headed? And probably the full unit may take a little longer period in terms of [indiscernible].

Yes. Yes.

The next question is from the line of Vikas Khemani from Carnelian Capital.

Sir, can you give some more guidance or idea about how should one think about the growth in the component side of the business? And how large that could be? Air conditioner part, I think, one, kind of get some sense of understanding, but how should one think about -- a little bit of more detail if you can share?

Sure. So on component side, we have 6 verticals in components and we have an addressable market of entire consumer durable markets, not only room air conditioner side. So in room air conditioner, today, only 25% value addition is happening in India and 75% components are being imported, where government is still thinking to bring up another policy intervention of phased manufacturing program on the component side by increasing some duties every year, so that gradually these components starts getting manufactured here. Right now, almost to a tune of close to INR 5,500 crore to INR 6,000 crore worth of components are imported in air conditioner itself. So if air conditioner CAGR remains in the range of 14% to 15% level, we can see that there's going to be an addressable market of almost about $2 billion worth of components, which we can settle -- out of that, we don't address compressors, but we address motors and PCB and heat exchangers and other components on AC side. Plus the refrigerator, washing machine and microwave oven, water purifiers where we are addressing, that is space which is growing very well. In fact, in quarter 2, our complete revenue shift has happened. 64% revenue has been contributed by components. And out of that, 64%, almost 60% has come from non-AC components. So our strategy of addressing components in consumer durable, including our ACs as well as complete finished goods is playing very well for us.

Right. So I think that's what I saw the trend in your -- So is it fair to say that over 3, 4 years, 5 years, component will be a solid part of the strategy? And in fact, since it actually straddles across not only refrigerator but across products, will it be a higher growth part than the ACs?

Well, I mean, that cannot be predicted right now. But yes, in case, we are expecting growth in all the consumer durable sector, like refrigerator, washing machine, microwave and water purifiers, all sectors are growing in double digit. And AC is, of course, one of the product, which is the lowest penetrated level. So it will depend on the product mix. But moving forward, if I take you a little bit back when we got listed, our revenue split was almost 75%, 25% range. 75% was RAC and 25% was component. Last year, we came to 60%, 40% level. And what we expect is in the next 3 to 4 years' time, this split should come to 50%, 50% level.

Okay. And what's sort of -- a follow-up question on this. How do you see margins in this part of the business, on the component side?

The component side, I mean, some of the components, like we have a range of components starting from close to 6%, 5.5% till 12% range. So it will depend on what product mix opportunity we give up. But I think it should be in the range of almost RAC range.