JM Financial initiates coverage on Amber Enterprises with a BUY rating and target price of Rs 4000 - 16% upside.

Amber Enterprises is a dominant EMS player in the underpenetrated Indian RAC industry with 24% market share. This has been led by a combination of intense backward integration through acquisitions in motors and PCBA, increasing ODM product range (which offers higher margins/RoICs) and sticky client relationships with its top 10 customers holding a 75%+ market share (15 plants, located close to customers). Ambit Enterprices share price closed at Rs 3269 in yesterday's session, down Rs 104 or 3.1%.

Over the past 5 years, Amber Enterprises has delivered 26%/25% CAGR in sales/EBITDA, led by increased outsourcing by brands and improving market share in the EMS space.

JM Financial believes it is poised for exponential growth over the next 5 years on:

a)      its dominant market share of 24% in the underpenetrated RAC market
b)      its strong customer base (catering to the top 10 AC brands) and wide ODM range of products
c)       favorable government policies such as production linked incentives (PLIs), phased manufacturing programme and import substitution initiatives
d)      addressing product gaps through acquisitions (PICL, Ever and IL Jin)
e)      expansion of product offerings in mobile ACs and consumer electronics

Effective implementation of the PLI scheme is likely to increase domestic value addition and creation of an export base, which could improve asset turns.

Over FY20-23E, JM Financial forecast sales and EPS to clock 17% and 26% CAGR, respectively. Upon addressing issues of lower asset turns and reduced import dependence, JM Financial anticipate that RoICs can expand to 17% by FY23E. JM Financial initiates coverage on Amber Enterprises with a BUY rating and target price of Rs 4000 (40x FY23E EPS), implying 16% upside.

Amber Enterprises Key risks:

Seasonal nature of sales
forex/tax uncertainty on high import content