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

Ladies and gentlemen, good day, and welcome to Amber Enterprises India Limited Q1 FY '22 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 Mr. Jasbir Singh, Chairman and CEO from Amber Enterprises. 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, CFO; Mr. Sanjay Arora, CEO, Electronics division; Mr. Sachin Gupta, CEO, Room AC division and SGA,our Investor Relations Advisors. 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 Q1 FY '22. Consumer durable industry saw a soft first quarter, with sales taking ahead amid the second wave of the pandemic that led to regional lockdowns. However, the impact was less severe compared to the last year ago, which saw a stringent nationwide lockdown with a renewed national focus on strengthening the health care infrastructure and an accelerating vaccination drive, we expect industry prospects to be positive. As we speak today, demand recovery across the sector has been faster than expected. However, the quarterly sales were disrupted due to lower offtake during last 10 days of April, May and June, which was our peak season. On the channel inventory side, there has not been much inventory in channel due to less severe lockdown compared to last year and ban on import of refrigerant fill ACs. As we speak today, channel inventory is at comfortable levels. The long-term positives for the industry and our company continues to be the following. First is PLI Scheme. We believe the additional manufacturing capacity coming under the PLI Scheme would have huge multiplier effect and help build a robust supply chain networks for the AC industry. The main objective of government for this scheme is to develop component ecosystem in India and increase domestic value addition in components from 25% currently to 75% in the next 5 to 6 years. This is going to be a very big game changer for the component ecosystem. At Amber, we are all set to leverage on this opportunity. We believe this opportunity will further strengthen our presence in the domestic market and create a solid foothold for exports market. Second is import ban on refrigerant fill ACs. As mentioned previously, the ban on imports with refrigerant fill ACs has opened opportunities for the domestic manufacturers. With this notification, OEMs can partner with us for outsourcing for room ACs.Over here, we have already signed 6 new customers since the notification has been announced. We believe with the government support along with stay at home and work from home becoming a new normal, there is a greater acknowledgment of role played by home appliances in the life of the consumers. This, combined with no penetration levels, improving infrastructure and an upwardly mobile middle class will lead to sustained growth over next few years. On the export side, presently, we are in discussion with large brands in 2 export markets, Middle East and U.S. In the Middle East market, the approval process is completed, and we have started exporting components and room air conditioners. For the U.S. markets, approval process is on track, and we expect the approvals by next financial year. 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 the consolidated financial highlights. On the revenue side, our consolidated revenue for Q1 FY '22 stood at INR 708 crores as against INR 259 crores in Q1 FY '21. For the quarter, Room AC contributed 64% of the total revenues, while components and mobility application contributed 36% of the revenues. On operating EBITDA side, for Q1 FY '22, operating EBITDA stood at INR 50 crores as against a loss of INR 3 crores in Q1 FY '21. Q1 FY '22 operating EBITDA does not include ESOP expense of INR 3.26 crores. Operating EBITDA margins for Q1 FY '22 stood at 7%. PAT for the quarter stood at INR 11 crores as compared to a loss of INR 24 crores in Q1 FY '21. PAT margins for Q1 FY '22 stood at 1.6%. Now coming to subsidiary financials. On the Sidwal, Q1 FY '22 revenues for Sidwal stood at INR 50 crores. Operating EBITDA stood at INR 12 crores and margin stood at 24.6%. With the increased focus of government for comfortable travel and high-speed movement, we believe the sector has an exciting journey ahead. We continue to remain confident to deliver and maintain healthy order book going ahead. We are also progressing well with the new product developments like dumper air conditioners for mining machines used in defense, electric AC for electric buses, AC for harvester combines for agriculture applications and Metro AC for different climate conditions in India for Mumbai Metro, Delhi Metro and Bangalore Metro. Sidwal order book stands healthy today at more than INR 425 crores. PICL, our Motor division, revenues for PICL stood at INR 36 crores for Q1 FY '22, operating EBITDA, INR 3 crores and operating EBITDA margin, 9%. As per the industry data, currently 70% of the BLDC Motors is imported. At PICL, we would like to capitalize on this opportunity, and we have already done the R&D and required CapEx for BLDC and work has also started. Our endeavor is to provide solutions for both captive users and our export customers. We are already in advanced stages with few large-sized OEMs on this product. Our electronic subsidiaries, IL JIN and Ever. For Q1 FY '22, revenue for IL JIN stood at INR 43 crores and Ever revenue at INR 18 crores. Q1 FY '22, IL JIN saw an operating loss of INR 1.7 crores and operating EBITDA for Ever stood at INR 0.15 crores. 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 boards for Room AC sector. We have added 5 new customers in IL JIN and a few more customers are in process 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 adding new customers, create a foothold in the export markets and enhance our products with a new technology 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.

My first question is with respect to the industry growth this year, what kind of growth that we can expect in terms of volumes in the industry this year as compared to last year, if you can throw some light. My second question is with respect to the BEE norm change, which is coming in 2022. So how is it likely to affect the ratings and pricing of products?

Good morning, Ravi, industry growth, it was good in quarter 4 where we saw almost about 20%. But then since -- from middle of April, some areas of India got affected and then lockdown started. So last year, industry ended up doing now since the data is out on the numbers. It's the real number which has come out is about 5.2 million against the 7 million mark of '19, '20. I expect despite of the quarter 1, I would say, soft performance due to partial lockdowns, industry should be somewhere -- should end up somewhere in our estimates near to about 6 million or 6.2 million but not to a 7 million mark, but it again depends on how quarter 4 will pan out to be. Let's see. July was very positive for the industry. Almost every customer and every brand witnessed a very good growth in July month, which was completely -- there was no lockdown in the country. And on the BEE part, yes, 1st of January, 2022 is when the new energy table is revised. So we are already geared up at Amber with all the product portfolio. We are ready to serve with the new rating. It will enhance some bit of costing on the product side worth of about INR 700 to INR 1,200 range depending on model to model. But I think we have seen in the past also that any energy table has not dissuaded the sales of the industry rather people have started going for a more energy efficient category air conditioners. So we expect the same post the implementation of the new energy table.

Got it, sir. My next question is with respect to the margins, I mean, in the gross margin, we have maintained in spite of input cost increase. So how have we managed it? Have we completed taking price increases to our customers?

Yes, Ravi, we have a quarterly lag mechanism on price increases or decreases with our customers. We cannot go to them on a daily basis or maybe a monthly basis, it's very difficult. So that's an industry norm from last about 3 decades that every quarter price gets revised. So we've been able to pass on all the impacts of the currency and commodity both to our customers successfully in all. There was some lag in IL JIN and Ever, where we introduced new customers in the month of April, which could not be passed on, which will be passed on by next quarter. Otherwise, we have been very successful in passing on all the currency and commodity exchanges.

Got it, sir. And my final question is with respect to the PLI and CapEx plans. Your views on Amber's subscription to the PLI Scheme and the CapEx plan for this year and next year.

Sure. So on PLI, we -- first of all, I'm glad to share that our new greenfield facilities, which we actually announced last year before the PLI was announced that is getting covered in the PLI. We are eligible for that. And both the greenfield facilities will be covered in that. And we are applying from our subsidiaries as well as for Amber in 2 categories. In the higher top most categories with the INR 300 crore investment in a normal investment category. And then we are also applying for our motor subsidiary in the lower intermediary side in the range of INR 50 crores to INR 100 crores. So total about INR 400 crore investment application will go from Amber side.

This is over -- for the PLI alone, sir, so this INR 400 crores?

Yes. Actually, you see we are already investing in the greenfield facilities. So our -- that is getting covered. And the only additional will be the PICL, which will be -- investment will come in next 5 years. So almost about INR 100 crores will be invested in next 5 years in the Motor division.

Got it. And CapEx for this year and next year, sir, how much will it be?

So CapEx because our greenfield facilities are -- will be -- one of them will be up and running this year. And the next one is in making. So we expect -- plus the maintenance CapEx and R&D, everything, including we should be in the range of -- on the consol, I'm talking including the subsidiary CapEx, we should be in the range of about INR 350 crores near about.

[Operator Instructions] The next question is from the line of Dhruv Jain from Ambit Capital.

Sir, I have 2 questions. One question was with respect to the PCB subsidiary. So we saw that over the last 3 or 4 quarters, the PCB subsidiaries have not been doing as well as the other parts of the portfolio. So just wanted your thoughts on that and how do you see that playing over the next 2 or 3 years?

Well, we have Sanjayji here. I think Sanjayji,would you like to answer this?

Yes. Yes. Yes. So, sir the situation is that, okay, we started this year with a very positive sign of expecting to target about 35% to 40% growth in the PCB segment. But unfortunately, again, by the third week of April, we went into the second wave and all our plans actually went very heavier. And not only that we could not do whatever we wanted to do in the quarter 1 because there was a whole lot of conclusions. The industry would open for a week, then again, close the customers of ours. So that was one thing. I think for the past few quarters, since last November onwards, there has been a big shortage in the chip components, there has been a lot of price increase. There has been freight cost increases and many such things which could not really support -- did not support us to achieve our expected results. So we were planning much better results than what actually came forward to. So at the same time, we are also trying to enter into -- come out of just consumer durable PCB makers. We want to enter into other areas like electrical fans, then in the entertainment side the speakers, wearables, smart switches and OTT devices. So once we enter into all these areas, we hope that the PCB will be much better than what we have performed up to now.

And sir, my second question was with respect to the PLI. So you mentioned that you would be investing about INR 300 crores from Amber, right. So what kind of components will be covered, right? So it's going to be -- what kind of components and will subassemblies of ACs also qualified there? And what is the revenue that you're kind of expecting from that?

So component, there are almost about 9 components which have been covered in PLI, which are sheet metal, injection molding, then heat exchangers, motors, PCB boards. These are the 5 components which Amber will be applying and also cross-flow fan, 6 components. Then copper tube, aluminum and compressors. These are 3 -- and service valves. So in total, about 10 components have been categorized by government for PLI, out of which Amber will be applying for 6 categories.

And sir, do you think you'll be able to meet the ceiling?

We will be able to meet what?

The -- meet the ceiling requirements of the PLI Scheme?

Yes, yes. We are eligible for that.

And sir, just 1 last bookkeeping question. If you could just give the RAC volume data for this quarter, sir.

So in RAC, we have done 4,78,000 units this quarter.

[Operator Instructions] The next question is from the line of Abhishek Ghosh from DSP Mutual Funds.

Sir, if you can just help us understand the business opportunity, which is kind of coming through because of the whole non-tariff barrier, which was imposed in the last year of October. What is the kind of business opportunity that is kind of coming out of that restriction?

Good morning, Abhishek. For the import ban, which was actually levied last year in month of -- last week of September, we have seen a very positive data of imports going down from the period of October till March, almost about 85% of import reductions have been seen. So as commented in my commentary that almost we have added 6 customers with which we started in Phase 1 gas charging facilities. And now they are -- out of 6, 4 have been converted into manufacturing customers, where we will be starting supplies as ODM with them and OEM with them from the month of December. And with 2 customers, we will be starting from January or February. So that is the -- we see an increase in volume by next financial year, almost about 800,000 numbers should be added because of these new customers by next financial year.

Okay. And do you believe that a lot of the customers are also putting up shops or -- because I think the total import size is about 1.8 million to 2 million. So you're saying 40% of that you'll be able to capture. So is it going to the rest of the contract manufacturers? Or is it people are also putting up shop for producing there or manufacturing their own units?

So basically, about 15% to 20% still continues to be imported. And if we reduce that, out of that, almost 50% has come to us. And remaining like, companies like Havells and some other companies who had their own facilities. So they have started in-house. And anybody -- we haven't heard apart from them, anybody putting up on new facilities. But in case somebody puts up a new facilities and do not wish to go for outsourcing, we will be happy to serve components to them because they will be needing components for their assemblies.

Okay, okay. And sir, the loss in IL JIN in the current quarter, this is more to do with the commentary that you mentioned that the gross -- price hikes could not be initiated with the newer customers that you have boarded on, right? That's the way to look at it?

Two factors, yes. One was this factor, which you spoke; second was, as Sanjayji told that we started this financial year in anticipation of hitting about 35% to 40% growth. And so our fixed expenses went up, which could not be reduced due to this lockdown period of 2 months' time. That also impacted. But now I think in next 9 months, you will see a good -- decent growth in IL JIN and Ever.

And sir, all these smaller, relatively smaller motor and the PCB makers, they would be also in deep trouble because of the overall volatility and the issues that Mr. Sanjayji spoke about. Any thoughts on the overall industry?

Yes. I think everybody suffered because of the chip shortages and these kind of disruptions. So I haven't seen anybody who's passed on clearly. Most of them have gone through the same cycle.

Okay, okay. And sir, in terms of Sidwal, given the newer opportunities that you're talking about, what is the total addressable market size or opportunity that Sidwal will typically kind of bid for because it includes railways, metros, dumper. So how should one look at the total addressable annual opportunity size for Sidwal?

Actually, it's volatile right now, the addressable market because in railways, if we see only 30% of the coaches being produced in the 3 factories were air conditioned till last year. Now with the new notification that has gone up to almost 50% and number of coaches, production is also going up. So if we combine that, plus as our honorable minister, I think last week only suggested that almost 1,071 kilometers of metro new lines are being laid out in 27 cities. So combining that plus the other addressable market for Sidwal, it's going to be a good market size. Earlier, it used to be in a span of just INR 600 crores, INR 700 crores, but now it is going to double and triple.

Okay. And sir, just 2 last questions from my side. We have seen a lot of inflation in the overall AC product itself because of the issues we discussed, plus the whole norm change will further increase. So what is the total increase that one should expect over the last 6 months to 1 year that would have happened in the overall product of an AC?

Abhishek, total, 10% to 12% impact on finished goods pricing has been passed on to the consumers by all brands. Some dated in 1 shot and most of the brands dated in staggered manner. But the beauty of the market is that despite of 10% to 12% increase in the product pricing, everybody was positive in Q4. And also in July, we have seen a robust growth. So I think markets have very well accepted that 10% to 12% increase. And plus, as you asked about the BEE impact, which I stated that it will be in the range of about INR 800 to INR 1,200 per air conditioner depending on model to model. As we have seen in past also, in the 3 BEE table change, it has never disrupted the industry by volumes. In fact, consumers have tend to be shifted towards more premium products, which saves more energy.

Okay. And just one last question from my side, sir. In the -- for the PICL, there's also this change in norm which is coming for fans. So would you also go in for BLDC motors for fans and other things because you spoke about for IL JIN and Ever. But for PICL also, would you kind of open up that opportunity for you guys?

Yes, we are doing that. In fact, we did not had BLDC portfolio earlier. Now I mentioned that in my commentary that we are -- we've done the CapEx. We are ready with the product for AC industry. Now we will be diversifying the portfolio in different applications.

The next question is from the line of [ Vineet Prasad ] from Investec.

I have 1 question. Sir, if we look at what our customers have reported in terms of the Q1 performance, if you look at their segmental capital employed. It appears that these companies like Voltas, Blue Star are carrying slightly higher than usual inventory with them. So would that mean that for next quarter or so volume offtake from Amber could be slightly lower than what it is generally?

No, it's not like that. In fact, we have only 4 or 5 players out of 52 brands who are listed in the industry. And if we see about the Japanese players and Koreans and other brands, they are not sitting at that high inventory levels. So overall, our take is that the inventories in overall numbers are less than as it was last year in pandemic. So -- and the July has been positive, so inventory is getting liquidated whatever smaller numbers we have. So it will come to a normalized level by September, October.

Okay. Okay. Sir, just 1 more question regarding the volume numbers that you mentioned. Can you just give a sense how business was or how volumes move in each of the 3 months just to indicate how demand is coming back and what was -- how much was it impacted due to the second wave?

I don't have actually month-wise data in hand right now. We'll provide it separately, we'll send it to SGA, which can coordinate with you.

Sir, if it is...

4,78,000 against, I think 1,90,000 last year.

Yes. Sir, even quantitative -- sorry, qualitative color on this would be helpful. How it has moved over in April?

Yes. April, we were growing. I think April, we were about 25% up as compared to this. Then the last 10 days got disrupted, but the financial year started with a very good sign. And July has also been very positive.

The next question is from the line of Naval from Emkay Global Financial Services.

Just to check the number, you stated that your volume number this quarter was 4,78,000. So if I imply your realizations have gone up almost 19% on Y-o-Y basis. So can you throw some color on this product mix? Or we have -- the only product mix or we also added gas refilling revenues in this because earlier it was not. So any color there.

So gas filling, volumes have not been added in this. But yes, of course, the revenue has been added in the air because that's primarily a job work kind of a thing. It's not a very big revenue, which is contributing to the whole INR 708 crores. But I mean -- but overall, yes, it's been a little bit of a product mix, I would say, because that's not in our hand. We move as per the market. So some of the high-value premium products were sold more and a little bit high RM costs also contributed. So it's a mix and match of a couple of factors.

Okay. And second question is on commercial AC. If you can give incremental insight there, how we are progressing any order book update you want to share, some insight there?

Yes. I think we started with 2 products last year. I mean, last quarter 4, where we did about INR 7 crore, INR 8 crore revenue. This year, we are expecting about INR 45 crores to INR 50 crores revenue from CAC and the product profile is adding. But we have Sachin here on the call. Sachin, would you like to answer -- throw some light here?

Sure, sir. So sir as Jasbirji, told that CAC we started with mainly 2 products which was under the range of Ductable. And I would say, light commercial air conditioner outdoor unit. So now with the revenue focus on our R&D and the product line of expansion, so we are able to add a lot of new products. So the primarily being the cassette series for the indoor site. So if you see today, whatever sells in India, majorly 2 brands are manufacturing, rest all are imported to our country. So we will be the first ODM in the country to come up with our own design for the cassette series. Apart from this, we will be starting with the Ductable range of 8.5 ton and 11 ton. Last year, our time focus was 5.5 ton. So this year, with add-on of the cassette series plus add-on of the bigger tonnages of the Ductable. So as Jasbirji, said that we shall be targeting somewhere around INR 40 crores to INR 50 crores of turnover from CAC.

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

I just want to understand on the Middle East exports, you said that we've already started exporting RACs as well. Could you help us with how much volume we have done in the first quarter. And how do we expect volumes to fill up here in the next say FY '22 and FY '23?

Good morning, Madhav, so it's been a -- first, I would say, sales towards Bahrain and other countries, components are definitely going from last 2 years, but Room AC was the first shipments, which we did. I think, Sachin, can you throw some light more here on the Middle East markets?

Sure, sir, sure. So sir, if you see some Middle East, basically, so we are divided into 2 kind of products. So one is the range of 50 hertz, second is the 60 hertz. So we started with the 50 hertz of the products. And the biggest challenge to serve these countries getting the G-mark and PD certification, which we are not able to get in India. So we had to get those certifications from China, which took us almost like 8 to 9 months. So we received our certification in the month of March this year. And post that, we got the product approval from this market. So the quantities that we are asking for the first quarter, we did somewhere around towards 2,000 numbers, which included Bahrain and Dubai visually, primarily. And moving ahead, so this year, I would say, overall, we shall be closing to somewhere around tune of 8,000 to 10,000 of exports this year in the total financial year FY 2022. And moving ahead, we see once our products received to that market. So we have a lot of customers who are asking us for the samples, plus, we are now moving ahead with the 60 hertz as well. So we will be able to add our product reach to this Middle East sector as well. So we expect like 30% to 40% of the growth in next 3 years for this export market for Middle East.

Understood. And when we're competing in the Middle East market, how is our competitiveness versus, say, Thailand and China, are we able to compete reasonably well in the cost side and the design factor that's according to the market?

So sir, if you see more or less likely today, the value addition in India in terms of components we make everything, including motors and PCBs. So our dependency lies majorly primarily on the compressor part only, right? Now the compressor part for the China, the Thailand market is also here, Thailand does not make any compressor, even it's outsourced for them. So more or less, we are competitive in fact, I would say the trade advantage better lies with our country rather than from China. So what we have seen is that, so there is a visibility of maybe 2% or 3% in terms of FOV prices. But with the freight coming into picture, so we are like set off against China.

Understood. And U.S. market, we are expecting FY '23 for the approvals and some export to pick up, right, basically for the next fiscal?

So sir, U.S. market is a bit different. You see in the Middle East, the challenge was to get the certification, while in the product net sales in India, more or less with a small tweaking, we were able to send it to the Middle East market. While U.S. is a totally different story where we need to come up with a new product line up. So right now, we are in the designing phase with the customer inputs, we are able to come up still I will say to the mark-up stages. So next one year will go in terms of making the final tool, the sample. Then next year, we'll take up into that approval. So we expect that FY '23, we should be in a position of sending initial lot of maybe 1,000, 2,000 quantity.

Okay. And just 1 last question for the U.S. market for many products that -- the duties that U.S. imposing on Chinese imports is quite high. Is that like a similar duty advantage that India would have because of the U.S.-China trade war on AC imports from China into U.S.