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

Ladies and gentlemen, good day, and welcome to the Amber Enterprises India Limited Q3 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 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 Mr. Jasbir Singh, Chairman and CEO, 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 am joined by Mr. Daljit Singh, Managing Director; Mr. Sudhir Goyal, CFO and Strategic Growth Advisors, our Investor Relations advisers. We have uploaded our results presentation on the exchanges, and I hope everybody had an opportunity to go through the same. I will open my remarks by giving a brief overview on the industry environment, followed by business update and operational and financial performance highlights for Q3 and 9 months FY '21. The consumer-driven industry has witnessed a positive momentum as consumers have identified the need to make their living spaces a better one as they understand they will spend more time at home than outside, even when the situation normalizes. People are opting for value-added products that help them multitask and make their lives easier. The RF industry, which had witnessed demand uptick in the September quarter, led by steady improvement in consumer sentiments, continued its improvement trajectory in December quarter as well. The quarter 3 demand was also aided by strong festive season sales. Retailers have adopted omni-channel strategy to cater to consumer cross channels. Retailers are also offering affordable finance schemes, extended warranties, same-day installation services, which has helped to attract first time consumers. The channel inventory at the end of December 2020 stood at normalized levels. Now let me talk about the government interventions, which will provide the much-needed impetus to the industry. And at Amber, we are confident to seize this opportunity. The first one being import ban on refrigerant-filled air conditioners. As mentioned in the last earnings call, we ban on imports with refrigerant-filled ACs has got new opportunities for the domestic manufacturers. Post this notification, we have signed 6 new customers. Over longer term, OEMs will prefer to set up either their own facility in India or have complete air conditioner manufactured in India through OEMs. Since the notification has been recently announced, setting up a new facility or placing orders for complete manufacturing of air conditioners will require some time. So OEMs at the moment are preparing -- preferring a [stop gap] arrangement to gas charge in the first phase, and in Phase 2, they might start with complete manufacturing of air conditioners, where we will offer our solutions both in finished goods as well as in components in room air conditioner space. The second one being the PLI scheme. As communicated earlier, the government is under utilization of PLI scheme. As communicated earlier, the government has, under formulization of PLI scheme for air conditioners, wherein INR 5,000 crores worth of incentives are expected to be provided to the AC and its component manufacturing industry. However, concrete details on this scheme are soon to be notified by the government. We mentioned policy changes will help create a component ecosystem within the country and make India a global manufacturing hub. This would allow us to participate in AC production for both domestic and exports markets as well as component supplier to enlarged manufacturing space. With this opportunity in hindsight, we are all geared for the growth in domestic manufacturing of room air conditioners and its components and would endeavor to grab majority 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, too. We had recently announced 2 greenfield facilities, one in [Supa] region near Pune and other one in South India. We have completed acquisition of land for our new super facility in Pune, and we'll be starting with the construction work soon. We expect to operationalize the super plant by quarter 4 of FY 2022. We are continuously investing in R&D for new product developments and better, energy-efficient products. We will be future-ready with the product portfolio to cater to the increasing demand across segments. I will now take you through consolidated financial highlights. On the revenue side, our consolidated revenue for Q3 FY '21 stood at INR 765 crores as against INR 788 crores in Q3 FY '20, almost flattish as compared to last year same quarter. In Q3 FY '21, Room Air Conditioner segment contributed 54% of total revenues, while components and mobility application contributed 46% of the revenues. On the operating EBITDA side, for Q3 FY '21, we witnessed an operating EBITDA of INR 62 crores as against INR 52 crores in Q3 FY '20. Operating EBITDA margins for Q3 FY '21 stood at 8.2% as compared to 6.7% in Q3 FY '20. PAT for the quarter stood at INR 28 crores as compared to INR 25 crores in Q3 FY '20. PAT margins for Q3 FY '21 stood at 3.6% as compared to 3.1% in Q3 FY '20. Now coming to stand-alone financial highlights of Amber. On the revenue side, our stand-alone revenue for Q3 FY '21 stood at INR 576 crores as against INR 568 crores in Q3 FY '20, almost flat as compared to last year same quarter. Operating EBITDA for Q3 FY '21, we witnessed an operating EBITDA of INR 42 crores as against INR 25 crores in Q3 FY '20. Operating EBITDA margins for Q3 FY '21 stood at 7.3% as compared to 4.4% in Q3 FY '20. PAT for the quarter stood at INR 18 crores as compared to INR 12 crores in Q3 FY '20. PAT margins for Q3 FY '21 stood at 3.16% as compared to 2.03% in Q3 FY '20. Now coming to subsidiaries financials, Sidwal, our mobility application subsidiary. Q3 FY '21 revenues for Sidwal stood at INR 44 crores, operating EBITDA stood at INR 9 crores and margin stood at 21.4%. 9 months financial revenues for Sidwal stood at INR 120 crores with operating EBITDA of INR 27 crores with operating EBITDA margin at 22.5%. 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 scenarios. Motor subsidiary, PICL. Revenues for PICL stood at INR 35 crore for Q3 FY '21, operating EBITDA stood at INR 3 crore and operating EBITDA margin stood at 7.7%. We expect some margin expansion over the next 2 to 3 years' time. This is on the back of increase in product offerings and enhanced shipment in our capabilities. We believe we will be able to cater a domestic and export market in a more meaningful way in the near future. Our electronics subsidiary, IL JIN and Ever. For Q3 FY '20 1 revenue for IL JIN stood at INR 91 crores and in Ever stood at INR 33 crores. Q3 FY '21 operating EBITDA margin for IL JIN stood at 6.3%, and Ever stood at 6.6%. 9-month FY '21, revenue for IL JIN stood at INR 189 crores and Ever revenue at INR 95 crores. 9 months FY '21 operating EBITDA margin for IL JIN at 5.3% and for Ever at 3.8%. As the market is moving rapidly towards inverter ACs, we are confident of growing our revenue share from IL JIN and Ever going forward. With the help of our in-house developed inverter PCB both for RAC industry, we have added 4 new customers in IL JIN, and a few more customers are in the proposal of approval. 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 [ Sankosh ] from HDFC Life.

Yes. Just a couple of bookkeeping questions first. One, if you could tell us the AC volumes which was sold during the quarter, Q3 '21 and last year and, if possible, the split into IDU deals and windows.

So the total volumes was almost flattish. It was 5 lakh 43,000 units as compared to 5 lakh 72,000 last year.

Okay. And any split you can say, sir? Or is that something -- I know you've not been doing that, but...

Yes. We actually avoid telling the splits.

Okay. And secondly, sir, again, on the stand-alone side, the split between aircon and components, if possible, given that for consolidate .

So Components has contributed total INR 163 crores, and room ACs have contributed INR 412 crores.

Okay. Okay. That's good to know. Sir, secondly, also on the gross and net debt numbers and, if possible, the debtor number as well on the balance sheet.

Consol number, consol next.

This is Sudhir. So consol net debt number is INR 263 crores as on 31 December 2020. And last year, it was INR 343 crores on a net debt level. And if I talk about the gross debt level, so gross debt is around INR 471 crores this year, and last year, it was around [ INR 497 crores ].

Okay. And if possible, the debtor number.

So debtors are at around INR 650-odd crores. As against last year, it was around INR 550-odd crores.

Okay. Perfect. And just one question to Jasbir, sir. So now that from your commentary, it seems like the inventory is largely kind of consumed when you look at some of the listed players, their numbers also have been fairly strong, at least on the primaries. So fair to assume that as we get into Q4, of course, you also have a lower base from last year, we should start seeing strong growth come back on the room ACs side?

The sentiment overall is very positive. Customers are bullish now, given the Q3 results of primary sales, as you rightly pointed out. So we are expecting a decent growth in Q4.

[Operator Instructions] The next question is from the line of Praveen Sahay from Edelweiss Financial Services.

Yes. So sir, as you had referred in the last call that the inventory level in the channel, we're at a pre-COVID level of 5 to 6 flat. What's the situation right now? Because now we are past January. So how is the situation in the channel inventory level?

Well, there are 2 point of view here. One is that many companies' brands have been able to push a lot of inventory into the primary sales due to the expected cost increases of the product due to commodity and commodity impacts. So their inventory level is very less because they have been pushed quite a bit. And some of the brands who did not push, they have inventory levels, but they are at a pre-COVID level, the standard inventory levels, which used to be earlier in this kind of scenario of December or January.

Okay. And secondly, as you had mentioned regarding the commodity prices, so this time, we had seen a good improvement in the gross margin. So what we are -- is it possible to sustain this gross margin? Or commodity price inflation is going to give some pressure on that?

Well, I mean, of course, we have been able to pass on the increases on a quarterly lag basis. And one prime reason because the margin expansion is -- basically 2 factors to that. One is the change in the product mix, which will be -- of course, looks to be a sustainable level. But the other factor is that we had old inventories line up with us, which were at a lesser cost. So moving forward, we have got increases. Whatever increase in the commodity has happened, we have been able to successfully pass on that to our customers. So we expect this price variation clause to be applicable in future also.

Okay. And lastly, sir, on your Pune expansion plan, how big the facility? And any details off of that can you give me?

We have bought 10-acre land in Supa region. This is adjoining plot to Toshiba manufacturing plant and Carrier Midea plant. So in this 10-acre facility, we will be constructing first about 2.5 lakh square feet area. The construction will start soon. [Maps] are getting ready and approvals are getting in place. After that, we will commence the production. Production is expected to start by Q4 or FY '22.

Any number on the unit, how much you are going to produce, sir?

We will be having a facility of 1 million units to start with and some components also directly to be supplied to customers.

Okay. And whether you are going to serve this PCIL BLDC motors there as well or...

Yes. PICL will directly serve to the customers but not through Pune factory.

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

I have a couple of questions. The first one was, any updates from your side on the exports? Like any movement that has happened in terms of the sample that you spend or anything [indiscernible]?

Yes. On exports, as I told in the last call also that there are 2 components part to export market. One is the -- our component facility where PICL has been able to crack orders, and that is moving positively. In fact, the margin expansion in PICL is also being contributed by some export sales. And on the finished goods side, this year, FY '21, we will be basically -- sorry, calendar year FY '21, we will be submitting our samples because the U.S. markets have a different type of construction required for air conditioners. They don't use side through window air conditioners. They do use top through window air conditioners, and they don't have a high wall-mounted splits. They have a very different PTAC units. So that is under construction right now. By, I think, March or April, we will be submitting our samples. And this calendar year, '21 is going to be validation period, and next year is when we are expecting some orders to flow into our room air conditioners.

Okay. Got it. Got it. And the other more near-term question was this commodity cost inflation which has happened, could you give us a sense in terms of how it could impact room air conditioner demand in India for this season? Could there be like a big cycle [indiscernible]?

Well, the commodity has shot off the roof. And I think at least about 5% to 7% range of cost increase on the finished goods side will be impacted. It is still to be seen. Sentiments are very positive. Not a very big inventory line in the system right now. It depends on how good or bad the season would be. In anticipation of a good season, I think that industry should be able to grab. But there has been incidents in the past when any increase is sharp, sudden increases of 5% to 7%, markets have taken about a year time to digest this. So it's like a wait-and-watch scene right now. So let's see how it goes up. But yes, there is some resistance by the retailers, which I heard from brands that they are not happy with the situation, but then nothing can be done about it. It's not only for air conditioner segment. It is completely to all other segments like auto and construction, other things also.

Sorry, in general is when these price increases happen, do consumers tend to play the decision by years of purchase an AC. That's something that had happened, I'm just trying to understand what happened to the

It's difficult to say, actually. If it is a very good summer or, I would say, as crossing heat kind of scenario, then persons can't wait. It is about impact of INR 1,500 to INR 2,000 per air conditioner will not matter. But for someone who is planning to maybe replace their ACs or someone who is planning to shift from cooler on a EMI kind of assume , he may defer it. So it will be a mix and match of both.

The next Question is from the line of [ Aman Santa ] from Newport Asia.

Yes. I'm just wondering about if you can comment on the current market share that you have and market share potential, given that the new plant is coming up. And you also said that you want to try to take the lion's share of the opportunity that these new policies will bring about. So maybe you can talk about what the potential is for market share going forward.

So basically, right now, we are at 24% of the room AC market. And in the ODM space also, we have quite a substantial share of almost 70%. The gas charging facility, as I explained, that we have added 6 new customers. So the opportunity, I think we will be able to grab the majority part of it to begin in the Phase 1. Now in Phase 2, there could be 2 possibilities. One is that larger companies may think of setting up their own facilities, where we are already gearing up to serve component business to them. And second one is where they are seeking for ODM supplies. Then there is where we see long-term contracts coming in for Amber. So in both the scenarios, we will come to know about the strategies largely after the season now, by July or August, where we will be able to move in tandem with them. But we are looking forward to grab the majority share in both the opportunities.

And then the second question is just about the export opportunity because that -- it's early days for that. So does that take like 2 years to ramp or longer? What sort of -- what will make India competitive in supplying globally besides the China Plus One strategy that some OEMs might undertake?

So -- there are -- in components side, it takes about 18 months to 24 months for getting the validation done because the products like heat exchangers, inverter PCB boards or motors are such that they are reliable -- reliability components. The final product's performance is dependent on the functionality of these components. So after crossing the validation period, then it is a slow growth of share of business increase. So that process has started. So with some of the customers in PICL subsidiary, we have already crossed that validation period, and now the initial orders have started coming in. And I believe that in next 2 to 3 years from now on, the share of business will also start improving. On the finished goods side, the PLI scheme will play a very important role because that is where we are going to get incentives to a tune of 5% to 6% for next 5 years. So that will make us more viable. On the other side, as I explained that we were not ready with the right product mix for those markets. Now within this year, calendar year '21, we will be ready with the product mix, and next year onwards, we expect that PLI will also be notified, and it will be a right timing for the company to start getting eligible and more competitive for exports.

The next question is from the line of Dhruv Jain from AMBIT Capital. As there is no response from the line, we'll move to the next question.

Yes. Hello. Hello. Can you hear me?

Yes, sir, we can.

Sir, I had a question with respect to the gas charging opportunity that you spoke about. Sir, what could be the volumes, et cetera, for volumes and margins for this gas charging business? And by when do you expect manufacturing or from the OEMs to actually lose to India? So if you could just walk us through the time line for that.

So in Phase 1, the gas charging, any import which was earlier happening for almost about 2 million units, that will -- that has already shifted -- started shifting because companies have started gearing up earlier. They were not expecting that Indian government will come up with such kind of a ban or barrier -- non-tariff barrier, but it has happened. So quickly, because it was announced just at the cusp of the season, there was no -- I would say, nothing was remaining apart from getting it gas charged. So that has already started. Now looking into the longevity of this notification, companies have started exploring different views. I think by August or September, things will be very clear which customer is looking for long-term manufacturing contracts with ODMs and which one would like to go for their own units. But yes, I mean as far as Amber is concerned, we would like to take advantage of both the situations.

Okay. And sir, the second question was with respect to PLIC. We know that the government has announced it. But sir, brands have also been putting up CapEx. They've been talking about putting up CapEx. So in terms of competition, how do you see the brand manufacturing affecting Amber?

So well, there are total 16 manufacturers in the country at present and 16 manufacturers catering to about a 7 million market. So on one side, markets are poised to grow at about 15% to 16% CAGR. And on other side, brands who have the manufacturing facilities already existing, they would certainly like to take advantage of PLI and continue to manufacture in-house with -- and take advantage of PLI at the same time. But what will happen is that most of the brands, which we are seeing who are manufacturers themselves and specifically multinational companies, they are actually thinking to shift the geographies for the exports market to be catered from Indian operations. So there are some companies, multinational companies who have operations in India for which Amber is already supplying components to. They are talking of big numbers to shift exports to here in similar lines to what has happened in mobile phones, where many of companies, larger companies, have shifted their geographies out of different parts of world to India for catering and taking advantage of PLI scheme. So that is one shift which we are seeing, which will happen, and they will continue to manufacture for exports and for domestic manufacturing, where Amber will benefit by supplying components to them. And on the other side, directly, on the competition side, yes, we are seeing some news that companies -- brands themselves are planning to come into OEM or ODM outsourcing model. But then it will create a conflict for them being a brand and supplying to Indian market. Let's see how it's poised out to be. But yes, for -- as far as Amber is concerned, with our geographical spread, having already 15 plants plus 2 new coming -- facilities coming up, we will be at a very strong foothold to cater to all geographies as well as in the old product mix. category.

The next question is from the line of Hiren Trivedi from Axis Securities.

Yes. One small question is on the Sidwal order book and the new orders during the quarter. And what has been the performance of Sidwal during the quarter? If you can just help me with that, please.

So Sidwal has actually grabbed 2 or 3 new orders worth about INR 120-odd crores within this quarter. And there was a sluggishness in Sidwal on sales side because of slow uptake from railway side. I think post-COVID level, all the railway factories had a very slow uptake on the production side, and hence, the air conditioner requirement was also slow. But no, there's no change in the share of business, and there is no cancellations of any orders. And we are growing in the order book. In fact, the metro division of Sidwal is doing pretty well where we grabbed 2 new orders from DMRC and 1 more Metro division for our air conditioners supplies.

And what would be the current order book be? If you can help me with that.

So current order book, as we speak, is close to about INR 400 crores, which will be supplied in 2 financial years.

The next question is from the line of Hitesh Taunk ICICIdirect.

First of all, congratulations on a very good set of recovery, sir. Sir, I have 2 questions. First of all, sir, you talked about your new client additions, around 6 clients you have added [indiscernible], which is very good. Sir, I just wanted to know whether these clients are going to add revenue from the Q4 onwards or this -- if the plant addition would start contributing revenue from the next financial year on.

So these 6 new clients which have been added is in the gas charging one portion where it is primarily not exactly sales of manufactured air conditioners. It is just the gas charging part, where it will be a sort of a job of kind of a thing. So the production has already started. We are glad to announce that since December, we started it. And now January and February, we are picking up in our -- from our Pune facilities and the Jhajjar facilities. Both of the units are catering for the gas charging part.

Okay. Okay. And sir, one more -- one question from the -- this bookkeeping question. So can you please give us some Y-o-Y number for your subsidies, the Q3 FY '20 number, like you shared for Q3 FY '21 number?

For the subsidiaries you are wanting?

Yes. Yes. Subsidiaries.

Yes. Yes, it is -- if I talk about first Sidwal only. So last year, Q3, we did around INR 69 crores with operating EBITDA margin of INR 18.2 crores. And in Ever, it was INR 59 crores turnover with operating EBITDA of INR 1.8 crores. And IL JIN, it was INR 66 crores with operating margin of INR 4.28 crores. And PICL, it was INR 43 crores with operating margin of INR 3 crores.

Okay. Okay. Sir, last question, if you may, please, one of the last one, sir. Jasbir, sir, this is for you. Sir, what could -- what could surprise you, positive or negative, in the coming [indiscernible]? I mean one point -- 2 point or 1, extensive, that would be very helpful.

So I think we are expecting that some bit of announcement on the phase manufacturing program, which was earlier talked about in various media reports also. That is pending. So air conditioner industry actually requested for gas ban. Refrigerant-filled air condition ban, which has happened, then we also requested for PLI, which is under the way. And third one request was for the phase manufacturing program, we're gradually expecting custom duty increases on the component side and the unfinished goods side. So that could be expected. I mean our expectation is that we may hear something today. And on the negative side is, yes, if there is a larger sales which comes up, which hits a COVID sales or a big ticket -- which actually goes negative for the consumer sentiments, then definitely, that can be a negative.

The next question is from the line of Ravi Swaminathan from Spark Capital.

My first question is with respect to the 2 new facilities which are coming in. Is there a chance that we are likely to come under the PLI scheme? And if you can give some more details on the PLI scheme. We hear that close to INR 3,000 crores would be for the manufacturing and INR 2,000 crores for the components, et cetera. Why can't Amber setup, say, compressor facility also given the incentives which are given? If you can give you a broad thought process, it would be great, sir.

Well, both the facilities, yes, we'll be able to take advantage of PLI scheme. And we are hearing that the structure is still under formulation at DPIIT. We expect that in February month, we should have some draft guidelines coming out officially, and then it will go for the notification. So from 1 April, we are expecting the notification or maybe by 15th of April. Yes, both the plants will be eligible -- should be eligible for PLI and the PLI scheme. And on the component side also, our subsidiaries are also gearing up to take advantage of PLI scheme because right now, it is very difficult to say whether INR 2,000 crore will be for components or 3,000 until unless there's real structure and guidelines comes into place.

Got it, sir. And is there any plan to set up a compressor? I mean we have the largest kind of manufacturer here, and compressor comes close to 35%, 30%, 35% of the value with 5%, 6% advantages being given. Is there any thoughts on that?

Well, to be honest, I mean we actually are waiting for the PLI to come out. And after that, we will decide, it could be a possibility that we may go in for some kind of a joint venture with some customer or maybe some compressor manufacturer. If it comes to putting up a compressor plant.

Got it, sir. Got it. And my next question is with respect to HVAC space. So how much have we forayed into it? And what is the opportunity there? What percentage of our revenue is coming from the HVAC space? If you can give a [broad point also].

So room AC is also part of HVAC. That is contributing about 54% in the revenues. And we have recently started our commercial air conditioner line with 3.5- and 4.5-ton units. That has already started. And we are building up new products to add -- to go to about 17 tons. In next 2 years, we will be coming up with about 22 more products in that category, catering to the complete commercial and industrial applications. That is one part. On the other side, on the HVAC, mobility applications is contributing about 5.5% in the revenue now, and it's also moving positive.

Got it. And this commercial refrigeration, so can it be a big number to a top line? I mean, so basically, do we need any CapEx for that? Because it is in the 3-, 3-, 3.5-, 4-ton and [up to something] that you had mentioned, right? So -- and that's a pretty sizable market. So can it be a big number to our revenue?

Yes. So we are the first company which has started offering ODM solutions in this category. So I think customers are wanting a ODM who can completely come up with a complete product range. So once the complete product range is completed within next 2 years, then it is going to be a good opportunity. The space is very interesting. And by that time, right now, what is happening is because of the COVID situation, I think the commercial buildings and other parts have taken a toss. So probably, that is a little bit going on the slower side. But in next 2 years, on -- at one side, we will be ready with the product basket, complete product basket to be catered. And on the other side, the markets will come back to normalized level in the commercial space also. So I think that will be right timing for us.

Got it, sir. And my final question is with respect to exports. Exports today, so what portion of your revenue? And over 2- to 3-year period, how much is it likely to be?

It's very difficult to forecast what would be the revenue contribution in the whole balance sheet moving forward. But what we can say is that we are very serious, and teams are getting very positive responses from the customers. Exports moving forward in mid- to long-term basis will contribute significantly in the balance sheet.

Currently, how much it would be, sir, currently?

It is less than a percentage. It's very miniscule right now.

The next question is from the line of Keyur Pandya from ICICI Potential Life Insurance.