Analysis: Amber Enterprises India Ltd

Modified: 08-Jun-21

The current section of the “Analysis” series covers Amber Enterprises India Ltd, India’s largest contract manufacturer of fully built air conditioner (AC) units as well as components of AC and other white goods like refrigerators, washing machines etc.

“Analysis” series is an attempt to share with all the readers, our inputs to the company analysis submitted by readers on the “Ask Your Queries” section of our website.

To benefit the maximum from this article, an investor should focus on the process of analysis instead of looking for good or bad aspects of the company. She should learn the interpretation of different types of data and transactions and pay attention to the parts of annual reports etc. used to get the information. This will help her in improving her stock analysis skills.

Amber Enterprises India Ltd Research Report by Reader

Dear Dr Vijay Sir,

I have learnt a lot from your articles and analysis that you share with investors through your website. I have tried to do a bit of analysis on Amber Enterprises India Ltd, an air conditioner manufacturers in India. It would be great if you could spare some time to analyse it further and share your inputs.

Regards,

Siva Durgarao

Financial analysis of Amber Enterprises India Ltd:

The company’s sales are continually increasing from FY2014 to FY2020 at a CAGR of 26%

Operating Profit Margin Maintaining at CAGR – 8% from FY2014-20

Net profit Margin has been increasing from 2% in FY 2014 to 4% in FY2020

Current ratio -1.73,

Interest coverage ratio 2.83

Net Fixed Asset turner Ratio has been declined from 5.58 in FY2014 to 4.14 in FY2020

Receivable Days have weakened from 30 days in FY 2014 to 76 Days in FY 2020

Inventory Turnover Ratio has been declined from 11.2 in FY 2014 to 6.5 In FY 2020

Debt to Equity ratio 0.3 good sign

The Margin of Safety in the Business of Amber Enterprises India Ltd:

i) Self-Sustainable Growth Rate (SSGR): (SSGR) of Amber Enterprises Ltd is about 3%-4% Against Sales Growth of 26% CAGR FY 2014 to 2020

ii) cPAT is converted into cCFO due to high depreciation and interest

iii) Free Cash flow is negative

Regards,

Siva Durgarao

Dr Vijay Malik’s Response

Dear Siva,

Thanks for sharing the analysis of Amber Enterprises India Ltd with us! We appreciate the time & effort put in by you in the analysis.

While analysing Amber Enterprises India Ltd., an investor notices that the company had its initial public offer (IPO) in January 2018. Therefore, only limited financial history is available in the public domain. The screener website provides consolidated financial data of Amber Enterprises India Ltd from FY2014 onwards. Therefore, we have used the consolidated financial data of the company from Screener the red herring prospectus (RHP) of the company (January 2018) in the analysis.

An investor may also note that Amber Enterprises India Ltd has its business divided among the standalone company as well as a few subsidiaries. As per the FY2020 annual report, pages 27, the company has five subsidiaries.

We believe that while analysing any company, an investor should always look at the company as a whole and focus on the financials, which represent the business picture of the entire group. Consolidated financials of any company, whenever they are present, provide such a picture.

Further advised reading: Standalone vs Consolidated Financials: A Complete Guide

Therefore, in the analysis of Amber Enterprises India Ltd, we have used consolidated financials in the assessment.

With this background, let us analyse the financial performance of the company.

Amber Enterprises India Ltd Financials FY2014 20

Financial and Business Analysis of Amber Enterprises India Ltd:

While analyzing the financials of Amber Enterprises India Ltd, an investor notices that the sales of the company have grown at a pace of about 26% year on year from ₹973 cr in FY2014 to ₹3,963 cr in FY2020. Further, during the 12-months ending December 2020 (i.e. January 2020-December 2020), the sales of the company have declined to ₹2,747 cr.

While doing a detailed analysis of the financials of Amber Enterprises India Ltd, an investor notices that the company’s sales growth has not been consistent and in FY2016, the company faced a decline in its sales. In FY2016, the sales of Amber Enterprises India Ltd declined to ₹1,089 cr from ₹1,230 cr in FY2015.

While analysing the profitability of Amber Enterprises India Ltd, an investor notices that the profit margins of the company have also witnessed fluctuations. The operating profit margin (OPM) of the company increased from 7.7% in FY2014 to 10.5% in FY2016. Thereafter, the OPM has declined to 7.7% in FY2019 and further to 6.6% in the 12-months ending December 2020 (i.e. January 2020-December 2020).

In order to understand the reasons behind the periodic decline in sales and the fluctuations in the profit margins of the company over the years, an investor needs to analyse the business model of Amber Enterprises India Ltd in details. Only after understanding the reasons behind the fluctuating performance of the past, an investor would be able to make an educated guess about the future performance of the company.

Advised reading: How to do Business Analysis of a Company

After reading the annual reports of Amber Enterprises India Ltd, its credit rating reports, red-herring prospectus for IPO in 2018 the qualified institutional (QIP) prospectus of the company of 2020 and various corporate announcements, an investor notices the following characteristics of the business model of the company, which influence its performance significantly.

A) The prices of raw materials of Amber Enterprises India Ltd are volatile:

The management of the company in its prospectus for qualified institutional placement (QIP) in September 2020 intimated its shareholders that its key raw materials are aluminium, copper, steel, compressor and resin.

QIP prospectus, September 2020 (click here), page 144:

Our financial condition and results of operations are also significantly impacted by the availability and cost of our key raw materials and inputs, particularly aluminium, copper, steel, compressor and resin, as this constitutes our largest expense.

An investor would notice that out of the above-mentioned raw materials, aluminium, copper, steel, and resins are commodities and their prices keep fluctuating significantly depending on the phases of respective commodity cycles. The following charts show the significant fluctuations in the prices of aluminium, copper, steel and resins (PVC, polyvinyl chloride) over the past.

An investor may notice that for each of the commodities, the prices are very volatile and the prices have declined to 50% and then doubled in price many times.

Aluminium:

Aluminium Future Prices Historical

Copper:

Copper Future Prices Historical

Steel:

Steel Future Prices 2006 2020 Ncdex

Resin (PVC: polyvinyl chloride)

PVC Resin Future Prices Historical

Moreover, an investor would notice that the management of Amber Enterprises India Ltd highlighted that the compressor of the air conditioner is another major cost for the company. Here, an investor should note that the company highlighted the complete compressor and not its individual components/metals etc. as key cost. This is because, in India, almost all the companies import readymade compressors for room air conditioners (RACs).

IPO prospectus 2018, page 46:

In terms of bill of material, depending on the model of RAC, we manufacture up to 49% of the ODUs, 62% of the IDUs and 54% of WAC, which includes most of the critical components (except compressors, which are largely imported for the RAC industry in India)

The company intimated its shareholders that in the world, there are 8-9 large players that manufacture compressors and out of them, only one, named Highly Electricals Appliances India, is currently manufacturing compressors in India.

Conference call, February 2021, page 19:

Jasbir Singh: …There are about eight to nine manufacturers in the world largely of compressors like Panasonic manufacture compressor on their own, LG does it then we have Highly, which already is in India, which is a Chinese company, and GMCC, which is the largest compressor company of room AC in the world that has already come in India…

Jasbir Singh: No, only GMCC and Highly is present in India in fact the GMCC plant was expected to be operationalized, but because of this pandemic and visa restrictions I think that is on hold right now, so currently there is only one manufacturer which is operational which is Highly.

Highly Electricals Appliances India (Highly), the only manufacturer of compressors in India, is a joint venture (JV) of Shanghai Highly Group and Hitachi Appliances (Japan). As per publicly available information, Highly has a capacity to manufacture 2 million compressors per annum in India (Source: Business Line, January 16, 2018)

Highly Electricals Appliances India, a joint venture between Shanghai Highly Group and Hitachi Appliances of Japan, said on Thursday it has completed phase IV construction of its manufacturing base in Ahmedabad. Its compressor making capacity has doubled to 2 million units per annum.

The manufacturing capacity of Highly, 2 million units per year is very low when compared to the annual production of about 7 million air conditioners units in India.

Conference call, February 2021, page 10:

Jasbir Singh: Well, there are total 16 manufacturers in the country at present and 16 manufacturers catering to about 7 million market.

From the above discussion, an investor would appreciate that India needs about 7 million compressor units per year and it produces only 2 million units per year. As a result, about 5 million units of compressors representing more than 70% of the total requirement of the country is imported.

When an investor analyses the import price of compressors over the last 10 years, then she notices that the prices of the compressors have been fluctuating between ₹6,000 per compressor to ₹3,500 per compressor.

Gas Compressor For Air Conditioners Import Prices India

The import prices of air compressors seem to have risen sharply to ₹16,000 per unit after June 2020 due to the military standoff between China and India. Heightened trade restrictions on imports from China followed the conflict.

It had an impact on the import prices of compressors for air conditioners because; China is a major source of these compressors for India (Source: India’s Plan To Curb Chinese Imports May Hurt Air-Conditioner Makers: BloombergQuint, June 25, 2020)

Higher duties will be a negative for air-conditioner manufacturers as compressors form 25-30% of the costs and are largely imported from China

However, the sharp increase in the prices of compressors was short-lived and the prices declined to about ₹3,500 per unit after a few months.

Nevertheless, looking at the long-term trend of prices of compressors, an investor would notice that the prices are volatile and they keep increasing by more than 70% (from ₹3,500 to ₹6,000) and then keep falling by more than 40% (from ₹6,000 to ₹3,500) even within a year.

From the above discussion about the volatile prices of the key raw material for Amber Enterprises India Ltd i.e. aluminium, copper, steel, resins and compressors, an investor would appreciate that the prices of these raw materials are very volatile and the company faces a continuous challenge to maintain its profitability.

B) Amber Enterprises India Ltd enters into only short-terms contracts for raw materials:

While reading the prospectus for QIP done by Amber Enterprises India Ltd in September 2020, an investor notices that the company enters into only short-term contracts with its suppliers for the purchase of raw materials.

The prospectus, QIP September 2020, page 144:

We typically do not enter into long-term contracts with our suppliers and typically place orders with them pursuant to short term contracts. Absence of long-term contracts at fixed prices exposes us to volatility in the prices of raw materials.

The prospectus, QIP September 2020, page 134:

We typically have long-term relationships with our suppliers that helps us reduce the uncertainty, and procure all of our raw materials in the spot markets or pursuant to short-term contracts.

An investor would agree with the situation highlighted by the company that an absence of long-term, fixed-price contracts leads to an increased risk of volatility of raw material prices. If the company entered into fixed-price, long-term contracts, then the suppliers would absorb the impact of increasing raw material prices to some extent before opening up negotiations for a price increase. However, in the case of short-term contracts, the changes in the prices of raw material are quickly passed on to Amber Enterprises India Ltd, which increases the pressure on its profit margins.

C) Amber Enterprises India Ltd attempts to pass on raw material price increases to its customers:

While reading the IPO and QIP prospectus, annual reports, and conference call transcripts of Amber Enterprises India Ltd, an investor get across multiple instances where the management has intimated the shareholders that it has price revision clauses in the contracts with its customers. As a result, the company claims to have passed on the increase in raw material costs to its customers.

Conference call, February 2021, page 6:

Jasbir Singh: We have been able to pass on the increase in commodity prices on a quarterly lag basis…..so we expect this price variation clause to be applicable in future also

However, when an investor focuses on the finer aspects of management communication, then she notices that it is not such a straightforward situation. There are many challenges.

The first challenge is that customers do not simply agree to increase prices. They resist and some times, resist strongly. It delays the increase of prices for the products of Amber Enterprises India Ltd by its customers.

Conference call, February 2021, page 6:

Jasbir Singh: …we have been able to pass on entirely whatever the costing has been done there were some customers where there was a lot of resistance seen while increasing and it did not happen in the very first day of January it happened by the mid of January, but it has happened now

Another important aspect that determines the resistance in the price increase by Amber Enterprises India Ltd is the amount of price increase. The management communicated to the shareholders that even an increase in the pricing by 5%-7% is highly significant and the industry usually takes almost a year to absorb such a price increase.

Conference call, February 2021, page 8:

Jasbir Singh: The commodity has short off the roof and I think at least about 5% to 7% range of cost increase on the finished goods side will be impacted…..but there has been incidents in the past when any sudden increases of 5% to 7% markets have taken about a year time to digest this, so it is like wait and watch scene right now, so let us 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

At times, the worry of the management about the price increase is clearly visible in its communications.

Conference call, February 2021, page 16:

Jasbir Singh: ….the only deterrent, which can happen is the price increase how the markets accept the price increase of 5% to 7% on the finished goods side so that is yet to be seen.

From the above discussion, an investor would appreciate that even though the contracts of Amber Enterprises India Ltd with its customers have price revision clauses, still, the company faces resistance from its customers. Even when it is able to get a price increase, even then, it seems that getting a large price increase is difficult because the market does not accept a large increase in prices.

As mentioned by the management, an increase of 5%-7% in the final product prices looks like a large increase. This is because, as discussed above, the air conditioner market in India is highly competitive with 16 manufacturers and as a result, the buyer has many choices.

In such a situation, an investor would appreciate that when the prices of the key raw material of Amber Enterprises India Ltd like aluminium, copper, steel, resins and compressors increase by more than 50% at times, then it would put severe pressure on the profitability of the company and would increase the resistance from its customers.

D) Amber Enterprises India Ltd operates under continuous pricing pressure from its customers:

While reading the IPO prospectus, January 2018, an investor gets to know that Amber Enterprises India Ltd is under consistent pressure from its customers to reduce its prices, which puts pressure on its profit margins.

IPO prospectus, January 2018, page 19:

Our customers often pursue price reduction initiatives and objectives with their suppliers including us. Adopting cost-cutting measures while maintaining stringent quality standards may lead to a decrease in our margins

In the above disclosure, the company has highlighted that it has to adopt cost-cutting measures; however, it cannot compromise on quality. This is because Amber Enterprises India Ltd has to give a guarantee for its products and has to bear the full cost of any product recall due to quality issues.

IPO prospectus, January 2018, page 29-30:

In some cases, the warranty period for the products manufactured by us range from 12 months from installation/commissioning of product to 18 months from date of delivery of product

In case of defective products, we are required to replace/ repair at the cost or bear sole costs of defective products replaced/ repaired by the customer to whom we have sold the products along with reasonable cost of repair/replacement or refund the purchase price of the defective product to such customer.

In case of recall, withdrawal etc. either voluntarily, or due to judicial order or in case of governmental seizure, any of which was partly, or wholly, due to our negligent/ wrongful act or omission, we shall be required to bear full costs and expenses.

Therefore, Amber Enterprises India Ltd continuously operates in an environment where it has continuous pressure from its customers for reducing prices but without any compromise on the quality of the products. An investor would appreciate that in such a situation, a company might have to take a hit on its profit margins.

Nevertheless, an investor may think that once a company like Amber Enterprises India Ltd is able to achieve good efficiencies in its operations, then it may be able to achieve a good quality of product at the lowest cost. Thereafter, it may benefit from economies of scale when it gets large orders from its customers.

However, upon further reading of the IPO prospectus, January 2018, an investor gets to know that the customers of Amber Enterprises India Ltd do not let it peacefully enjoy the economies of scale. This is because the customers ask for higher discounts as they give it large orders. Therefore, as the economies of scale come into play, the customers further reduce the prices for their orders.

IPO prospectus, January 2018, page 30:

Our customers typically negotiate for larger discounts in price as the volume of their orders increases. If we are unable to efficiently undertake manufacturing and generate sufficient cost savings in the future to offset price reductions or if there is any reduction in consumer demand for RACs and components, our sales, gross margin and profitability may reduce

Therefore, an investor would appreciate that the business of manufacturing air conditioners on a contract basis for large consumer brands is not highly profitable. There is continuous pressure on the profit margins of Amber Enterprises India Ltd with a consistent threat that if it reduced the quality of its products then, it might have to face financial penalties.

In light of the above discussion, it does not come as a surprise to an investor that a contract manufacturer of air conditioners like Amber Enterprises India Ltd has very low profit margins. Over the years, its net profit margin (NPM) has been in the range of 1% to 3%, which seems very low considering the highly capital intensive nature of its business.

An investor would also appreciate that even though the company has variable price clauses in its contracts with its customers, it faces stiff resistance from its customers at the time of price increases. This is because the air conditioner market is very competitive and the final buyer can choose from many brands. As per the company, the market may take a year to absorb a price increase of 5% to 7% in the final product. Looking at the same, an investor may understand how much challenge Amber Enterprises India Ltd would face when prices of its raw material like aluminium, copper, steel, resins and compressors increase by more than 70% to 100% in commodity cycles.

Amber Enterprises India Ltd faces a difficult situation in its business. When the raw material prices go up, then it faces resistance from its customers for price increases. Whereas when the raw material prices go down, then the customers immediately push it for a price reduction. An investor noticed it in FY2016 when the sales of the company declined as the prices of the raw materials decreased. The credit rating agency, CRISIL, highlighted the decline in raw material prices as the reasons for the decline in the revenue for FY2016 in its report for the company in September 2016:

The turnover was Rs 10.85 billion in fiscal 2016, down 12% over the previous fiscal due to lower commodity prices

In light of these pricing pressures, an investor may appreciate that the operating profit margin (OPM) of the company has been fluctuating between 7% to 10%. The OPM increased from 7.7% in FY2014 to 10.5% in FY2016; however, soon thereafter, the company faced pricing pressure and the OPM of the company started declining. In FY2020, Amber Enterprises India Ltd reported an OPM of 7.9%, which further declined to 6.6% in the 12-months ended December 2020 (i.e. January 2020 to December 2020).

Looking at the tough business conditions, an investor may start to think why Amber Enterprises India Ltd has chosen to operate in such a tough capital-intensive business that demands heavy investments in the manufacturing plants without commensurate returns in the terms of steady high profitability.

We got the answer to this question when we analysed 2,800+ companies listed on Indian stock exchanges.

Read: What I learnt from brief analysis of 2,800 Companies

While analysing 2,800+ companies, we noticed that it is not only the case of Amber Enterprises India Ltd or only the contract manufacturers of air conditioners. This phenomenon is common to almost all those businesses, who choose to manufacture goods for big consumer brands. Apart from Amber Enterprises India Ltd, other businesses operating in similar tough businesses environment but in different industries and manufacturing for different consumer brands are:

  • Dixon Technologies (India) Ltd: a contract manufacturer of mobile phones, televisions, and other home appliances for Xiaomi, Samsung, Voltas, LG, Flipkart and Foxconn.
  • Hindustan Foods Ltd (HFL): FMCG contract manufacturer for Hindustan Unilever, Reckitt Benckiser, Hush Puppies shoes, US Polo Association, Danone, and Gabor etc. HFL is the company with the largest range of manufacturing items that I have ever seen. Its manufacturing range covers food, home care, personal care and leather goods. You name a product sold by FMCG companies and there is a high probability that HFL would be manufacturing it.
  • Vishal Fabrics Ltd: manufactures clothes for numerous brands like Aditya Birla Group, Pantaloons, Lifestyle, Flipkart, Myntra, and Jack & Jones etc.

While analysing these companies, we noticed that companies like Amber Enterprises India Ltd who act as outsourced manufacturers for big brands, they give away profitability for the assured business.

An investor gets a glimpse of this high assurance of future business when she reads the credit rating report of Amber Enterprises India Ltd prepared by the credit rating agency, CRISIL, in June 2015. CRISIL highlighted that on March 31, 2015, the company has an order book of ₹1,450 cr, which was more than the revenue of Amber Enterprises India Ltd in FY2015 of ₹1,230 cr.

Credit rating report, June 2015 by CRISIL:

The group has comfortable revenue visibility with order book of Rs.14.50 billion as on March 31, 2015, to be executed in 2015-16.

Advised reading: Credit Rating Reports: A Complete Guide for Stock Investors

Therefore, an investor would notice that at the start of FY2016, Amber Enterprises India Ltd had an order book, which was even more than the revenue achieved by it in FY2015. Such a situation puts companies in a comfortable position from the perspective of revenue generation. As a result, companies like Amber Enterprises India Ltd who act as outsourced manufacturers for big consumer brands choose to compromise on profit margins.

However, while analysing the assured revenue visibility and the order books, an investor may not think that big brands give a written confirmation about the products to be purchased by them from Amber Enterprises India Ltd for months or years in advance. In fact, it is exactly the opposite.

Amber Enterprises India Ltd told its investors that the big consumer brands usually provide orders for confirmed quantity only one month in advance. Rest all the projections are estimates and can change as per the needs of the customers.

February 2019 conference call, page 13:

Jasbir Singh: Generally the visibility given by the customers are for about one year, but that is then broken into quarters and monthly basis, so we get one month fixed plan with a rolling plan of next two months, now rolling plan is of course subjective term there can be plus, minus percentage terms

Amber Enterprises India Ltd highlighted to its investors in its IPO prospectus that its contracts with the big consumer brands do not contain any financial penalty if they refuse to buy the estimated number of air conditioners.

IPO prospectus, January 2018, page 18:

We do not have firm commitment long-term supply agreements with all our customers and instead rely on purchase orders to govern the volume and other terms of our sales of products. Many of the purchase orders we receive from our customers specify a price per unit and delivery schedule, and the quantities to be delivered are determined closer to the date of delivery. However, such orders may be amended or cancelled prior to finalisation, and should such an amendment or cancellation take place, it may adversely impact our production schedules and inventories. Further, where we have contracts with customers, such contracts do not bind our customers to provide us with a specific volume of business and can be terminated by our customers with or without cause, with little or no advance notice and without compensation.

Therefore, an investor would notice that big air conditioner brands have used their very high negotiating power over the contract manufacturers to push many of their risks on the contract manufacturers. As a result, the contract manufacturer has to only rely on the hope that the big consumer brand would maintain its reputation in the buyers’ mind and its ACs would sell. This is because if any big air conditioner brand loses its market position and is not able to sell ACs, then it can simply refuse to buy the originally communicated number of ACs from Amber Enterprises India Ltd without compensating it for all the investments that Amber Enterprises India Ltd might have done for it.

Advised reading: How to do Business Analysis of a Company

The management of Amber Enterprises India Ltd intimated to its shareholders that many big consumer brands follow an asset-light strategy. As a result, they have reduced the amount of inventory that they carry to such an extent that a few brands carry inventory worth only a few hours of sale.

Conference call, February 2019, page 6:

Jasbir Singh: All of the brands do not have the same kind of inventory level like we have clients like LG which are operating on just few hours of inventory and they are doing pretty level

Therefore, an investor would appreciate that in the cases like LG where almost the entire inventory risk has been pushed by the big consumer brand to its contract manufacturers. As a result, during the summer season, the contract manufacturer like Amber Enterprises India Ltd has to stock up the inventory in anticipation of higher sales. Moreover, if due to any reason like prolonged winters, less-harsh summers, erratic rainfall etc. the sales of air conditioners are down, then the players like Amber Enterprises India Ltd end up bearing the cost of holding a lot of unsold inventory.

An investor would appreciate that such a business situation indicates a very strong negotiating position of the customers with Amber Enterprises India Ltd and therefore, the company has to accept such conditions. While reading the IPO prospectus, an investor finds other instances that indicate that Amber Enterprises India Ltd has a weak negotiating position with its customers. Its customers who are big consumer brands have a very high negotiating power over the company.

Amber Enterprises India Ltd intimated in its IPO prospectus that when its customers enter into a contract, then they put many restrictive conditions on the production by the company.

IPO prospectus, page 23:

At times, we may have to agree with certain onerous terms laid down by our customers. For instance, some of our customers have in the past required us to undertake not to manufacture similar products for other customers. Some of our customers also restrict us from selling our products at a price which is lower than their purchase price, which affects our ability to undertake business with other customers by restricting our ability to negotiate pricing terms.

We believe that an investor should keep all these aspects in her mind while she analyses the business model of Amber Enterprises India Ltd and makes an opinion about its expected sales growth and profitability in the future.

While looking at the tax payout ratio of Amber Enterprises India Ltd., an investor notices that in most of the years (FY2014-2020), the tax payout ratio of the company has been lower than the standard corporate tax rate prevalent in India.

While reading the annual reports and the prospectus of the company, an investor gets to know that the manufacturing plants of Amber Enterprises India Ltd in the states of Uttarakhand (Dehradun) and Himachal Pradesh (HP) get tax benefits from the govt.

IPO prospectus, January 2018, page 25:

We benefit from certain tax exemptions provided by the Government of India in relation some of the manufacturing activities undertaken by us at our Dehradun Unit I, Dehradun Unit III and HP unit. These tax exemptions are related to tax holidays under various statutes. Most of these exemptions are valid for a maximum period of 10 years from the commencement of such manufacturing facilities.

An investor would appreciate that due to tax exemptions on the production done by Amber Enterprises India Ltd from some of its plants, the company on a consolidated basis has a lower tax payout ratio than the standard corporate tax rate applicable in India.

When an investor analyses the income tax reconciliation table provided by Amber Enterprises India Ltd in its annual report, then also she notices that the primary reason for the lower tax payout ratio is “Income not taxable in pursuant to tax holiday”

FY2019 annual report, page 212:

Amber Enterprises India Ltd Income Tax Reconciliation

In the prospectus, the company has explained that these tax exemptions are available for 10 years. In addition, the company has also explained in the prospectus that the tax exemption is 100% for the first 5 years and 30% later on. However, the company needs to pay tax at the rate of minimum alternate tax (MAT: 18.5%).

IPO prospectus, January 2018, page 100:

such a company shall be entitled to claim a deduction of 100% of such profits and gains for five assessment years, and thereafter a deduction of 30% of such profits and gains each year.

the Company shall be required to pay Minimum Alternate Tax (“MAT”) at the rate of 18.5% (plus applicable surcharge, education cess and secondary & higher education cess) on book profits as computed under the said Section, irrespective of the tax benefits available

Therefore, an investor would appreciate that with passing time, the tax exemptions available to the company will go away and the tax payout ratio would come in line with the standard corporate tax rate.

Further advised reading: How to do Financial Analysis of a Company

Operating Efficiency Analysis of Amber Enterprises India Ltd:

a) Net fixed asset turnover (NFAT) of Amber Enterprises India Ltd:

When an investor analyses the net fixed asset turnover (NFAT) of Amber Enterprises India Ltd in the past years, then she notices that the NFAT of the company has increased from 3.2 in FY2015 to 4.1 in FY2020. An increase in the NFAT over FY2015-2020 indicates that the utilization efficiency of the assets by the company has improved over the years.

From the above discussion on the business of Amber Enterprises India Ltd, an investor would notice that the company is under continuous pressure for improving operating efficiencies in its business. This is because its customers continuously put pressure on the company to reduce prices. In such a situation of low-profit margins, one of the options available with the company is to do capital expenditure, grow big and let economies of scale help it.

However, only increasing the scale of operations is not sufficient. This is because when a company grows big and targets to have a higher share of business from its customers, then they ask for a higher discount from the company, which diminishes the benefits of economies of scale.

IPO prospectus, January 2018, page 30:

Our customers typically negotiate for larger discounts in price as the volume of their orders increases. If we are unable to efficiently undertake manufacturing and generate sufficient cost savings in the future to offset price reductions or if there is any reduction in consumer demand for RACs and components, our sales, gross margin and profitability may reduce

In such a situation, despite growing big, the company is still under tremendous pressure to improve the efficiency in its manufacturing operations to generate some profits.

The improvement in the net fixed asset turnover ratio (NFAT) of Amber Enterprises India Ltd over the years seems to be the result of this quest of the company to stay profitable under the continuous pricing pressure from its customers.

Further advised reading: Asset Turnover Ratio: A Complete Guide for Investors

b) Inventory turnover ratio of Amber Enterprises India Ltd:

While analysing the efficiency of inventory utilization by Amber Enterprises India Ltd, an investor notices that over the last years (FY2014-2020), the inventory turnover ratio (ITR) of the company has been consistently about 6.0 to 6.5. An inventory turnover of 6.0 indicates that the company needs to hold an inventory of about 2-months’ worth of sales with it at all point in time.

From the above discussion on the business model of Amber Enterprises India Ltd, an investor would remember that the big consumer brands tend to follow an asset-light strategy. Therefore, they tend to push as much inventory to its contract manufacturers as possible. They only give a tentative purchase schedule to the manufacturers and keep the option of changing the quantity or even cancelling the entire estimated purchases without any notice or any financial penalty.

An investor would remember that Amber Enterprises India Ltd highlighted to its investors in its IPO prospectus that its contracts with the big consumer brands do not contain any financial penalty if they refuse to buy the estimated number of air conditioners.

IPO prospectus, January 2018, page 18:

We do not have firm commitment long-term supply agreements with all our customers and instead rely on purchase orders to govern the volume and other terms of our sales of products. Many of the purchase orders we receive from our customers specify a price per unit and delivery schedule, and the quantities to be delivered are determined closer to the date of delivery. However, such orders may be amended or cancelled prior to finalisation, and should such an amendment or cancellation take place, it may adversely impact our production schedules and inventories. Further, where we have contracts with customers, such contracts do not bind our customers to provide us with a specific volume of business and can be terminated by our customers with or without cause, with little or no advance notice and without compensation.

As a result, contract manufacturers like Amber Enterprises India Ltd end up holding a large amount of inventory of air conditioners. The problem becomes severe during the summer and festive season where the contract manufacturers have to produce and stock a large number of air conditioners in anticipation of a higher sale.

An investor would appreciate that holding a large amount of inventory has financial implications. If the customers refuse to buy the inventory then the company may have to use a higher amount of working capital loans or delay payment to its suppliers to manage its cash flows.

Therefore, going ahead, an investor should monitor the inventory turnover ratio of Amber Enterprises India Ltd to check whether the company is able to improve in its inventory utilization.

Further advised reading: Inventory Turnover Ratio: A Complete Guide

c) Analysis of receivables days of Amber Enterprises India Ltd:

Over the last few years, receivables days of Amber Enterprises India Ltd declined from 58 days in FY2015 to 76 days in FY2020. The increase in receivables days reflects that the company is facing long delays to collect money from its customers.

Moreover, an investor would also notice that the customers of Amber Enterprises India Ltd are big air conditioner brands of the world like LG, Daikin, Hitachi, Voltas, Whirlpool, Godrej, Samsung, Toshiba, Panasonic, and Blue Star etc. An investor would appreciate that a supplier does not expect such brands to delay the payments to their supplier beyond the agreed credit terms. Therefore, it might be a case where Amber Enterprises India Ltd has to offer a higher credit period to its customers in order to incentivize them to buy from it instead of from any competitor or imports etc.

The credit rating agency, CRISIL, has highlighted this aspect of the business of Amber Enterprises India Ltd involving excessive credit period to its customers along with a high inventory-holding period in its report for the company in June 2015. CRISIL pointed out that such working capital intensive nature of its business has led to excessive reliance by the company on bank borrowings.

The group’s operations remain working-capital-intensive driven by high inventory holding, extensive credit to customers and majority of sales coming in from the last quarter of the year. The working capital intensity of operations has led to significant dependence on bank borrowings

Further advised reading: Receivable Days: A Complete Guide

An investor notice that the business of Amber Enterprises India Ltd involves keeping a high inventory as well as a high amount of receivables. Therefore, when she analyses the working capital position of the company that takes into account both the inventory and receivables position of the company, then she notices that the business of Amber Enterprises India Ltd is highly working-capital intensive.

Over the years, a significant amount of money has been stuck in inventory and receivables. From FY2014 to FY2020, about ₹482 cr were stuck in the inventory as it increased from ₹174 in FY2014 to ₹656 cr in FY2020. Similarly, over FY2014-2020, about ₹696 cr were stuck in trade receivables as it increased from ₹158 cr in FY2014 to ₹854 cr in FY2020. One of the biggest source used by the company to finance this money was trade payables, which increased by ₹906 cr over FY2014-2020 as it increased from ₹201 cr in FY2014 to ₹1,107 cr in FY2020.

However, when an investor compares the cumulative net profit after tax (cPAT) and cumulative cash flow from operations (cCFO) of Amber Enterprises India Ltd for FY2014-20 then she notices that the company is able to convert its profits into cash flow from operating activities.

Over FY2014-20, Amber Enterprises India Ltd reported a total cumulative net profit after tax (cPAT) of ₹411 cr. During the same period, it reported cumulative cash flow from operations (cCFO) of ₹841 cr.

It is advised that investors should read the article on CFO calculation, which would help them understand the situations in which companies tend to have the CFO lower than their PAT. In addition, the investors would also understand the situations when the companies would have their CFO higher than the PAT.

Further advised reading: Understanding Cash Flow from Operations (CFO)

Learning from the article on CFO will indicate to an investor that the cCFO of Amber Enterprises India Ltd is higher than the cPAT due to the following factors:

  • Interest expense of ₹314 cr over FY2014-2020, which is deducted while calculating the PAT but is added back while calculating the CFO.
  • Depreciation of ₹311 cr over FY2014-2020, which is a non-cash expense and is deducted while calculating the PAT but is added back while calculating the CFO.

The above factors led to a CFO, which is higher than the PAT of the company during FY2014-2020.

The Margin of Safety in the Business of Amber Enterprises India Ltd:

a) Self-Sustainable Growth Rate (SSGR):

Read: Self Sustainable Growth Rate: a measure of Inherent Growth Potential of a Company

Upon reading the SSGR article, an investor would appreciate that if a company is growing at a rate equal to or less than the SSGR and it can convert its profits into cash flow from operations, then it would be able to fund its growth from its internal resources without the need of external sources of funds.

Conversely, if any company attempts to grow its sales at a rate higher than its SSGR, then its internal resources would not be sufficient to fund its growth aspirations. As a result, the company would have to rely on additional sources of funds like debt or equity dilution to meet the cash requirements to generate its target growth.

An investor may calculate the SSGR using the following formula:

SSGR = NFAT * NPM * (1-DPR) – Dep

Where,

  • SSGR = Self Sustainable Growth Rate in %
  • Dep = Depreciation rate as a % of net fixed assets
  • NFAT = Net fixed asset turnover (Sales/average net fixed assets over the year)
  • NPM = Net profit margin as % of sales
  • DPR = Dividend paid as % of net profit after tax

(For systematic algebraic calculation of SSGR formula: Click Here)

While analysing the SSGR of Amber Enterprises India Ltd, an investor would notice that the SSGR of the company has been in the range of -1% to 5% over the years. The low SSGR is primarily due to the very low net profit margin (NPM) of the company, which is in the range of 1% to 3% during FY2014-FY2020.

The SSGR of the company (-1% to 5%) is very less than the sales growth of 26% achieved by the company during FY2014-2020. Therefore, an investor would appreciate that the company has grown at a rate, which is very high than what its business profits can support. As a result, the company has to rely on additional funds in the form of debt and equity dilution to fund its growth requirements.

Over FY2014-FY2020, the company invested almost all of its profits back into the business. It paid out dividends of only ₹15 cr out of net profits of ₹411 cr. The total debt of Amber Enterprises India Ltd increased by ₹68 cr from ₹315 cr in FY2014 to ₹383 cr in FY2020. In addition to almost entire profits and additional debt, Amber Enterprises India Ltd had to raise equity to infuse money into the business. Over FY2014-2020, the company raised a total of ₹1,030 cr by equity dilution on the following occasions (2020-09 QIP prospectus, page 84):

  1. August 2013: ₹30 cr by conversion of compulsorily convertible debentures
  2. November 2013: ₹25 cr by conversion of compulsorily convertible debentures
  3. March 2017: ₹50 cr by conversion of cumulative convertible preference shares
  4. December 2017: ₹50 cr by conversion of compulsorily convertible debentures
  5. January 2018: ₹475 cr by IPO
  6. September 2020: ₹400 cr by QIP

Therefore, an investor would notice that the business model of Amber Enterprises India Ltd, the revenue that it generates from its assets, the profits that it generates on the revenue etc. do not support its growth rate of 26% that it has achieved during FY2014-2020. As a result, Amber Enterprises India Ltd has to raise funds from additional sources of debt (₹68 cr) and equity (₹1,030 cr).

An investor arrives at the same conclusion when she analyses the free cash flow (FCF) position of Amber Enterprises India Ltd.

b) Free Cash Flow (FCF) Analysis of Amber Enterprises India Ltd:

While looking at the cash flow performance of Amber Enterprises India Ltd, an investor notices that during FY2014-2020, it generated cash flow from operations of ₹841 cr. During the same period, it did a capital expenditure of about ₹1,149 cr.

Therefore, during this period (FY2014-2020), Amber Enterprises India Ltd had a negative free cash flow (FCF) of ₹278 cr (=1,149 – 841).

In addition, during this period, the company had a non-operating income of ₹49 cr and an interest expense of ₹314 cr. As a result, the company had a net negative free cash flow of ₹543 cr (= -278 + 49 – 314). Please note that the capitalized interest is already factored in as a part of capex deducted earlier.

Further advised reading: Free Cash Flow: A Complete Guide to Understanding FCF

An investor would note from the above discussion on SSGR that the company had to raise money from additional debt and equity dilution to meets its fund requirements.

The large working capital requirements of Amber Enterprises India Ltd in the form of high inventory holding and excessive credit period to its customers have always put a strain on its financial position. The credit rating agency, CRISIL, highlighted its tough business position in its report for the company in September 2016. CRISIL also mentioned that the financial position of the company was so strained that it opted for using short-term funds for capital expenditure (capex).

Amber group’s capital structure and debt coverage metrics will remain under pressure due to large working capital requirement…..Funding of capex through short-term funds caused low current ratio of less than 0.9 time as on March 31, 2016

An investor would appreciate that using short-term funds for long-term purposes like capital expenditure is not advisable and such a situation leads to liquidity crunch and cash flow mismatches for the companies. At times, usage of short-term funds for long-term purposes has even led to the bankruptcy of the companies.

It seems that when Amber Enterprises India Ltd started using short-term funds for capital expenditure, it realized that its business is not generating sufficient profits to meet its growth aspirations and it cannot keep relying on debt. Therefore, it was quick to dilute its equity, and raised ₹100 from ADV Partners Ltd and used this money to reduce its short-term (working capital) loans.

Credit rating report by CRISIL in March 2017:

capital infusion of nearly Rs 100 crore by ADV Partners Ltd (ADV) in January 2017 in the form of compulsorily convertible preference shares (CCPS) and compulsorily convertible debentures (CCD). The funds have been used to reduce working capital debt

As discussed above in the section on self-sustainable growth rate (SSGR), an investor would remember that the growth aspirations of Amber Enterprises India Ltd have been much higher than what its business profits can sustain. As a result, after raising equity in 2017, the very next year, in January 2018, the company again raised equity by way of IPO and used the money to reduce its debt.

Credit rating report by CRISIL in March 2018:

equity infusion of Rs 475 crore in January 2018 following an initial public offering (IPO), which has primarily been used for prepayment of working capital debt and term debt.

An investor would further notice that in September 2020, nearly after two years of its IPO, the company again raised money by equity dilution via a qualified institutional placement (QIP) where it raised ₹400 cr.

Press release dated November 8, 2020, for Q2-FY2021 results, page 2:

To cater to the surge in domestic demand arising from the structural shift, we have successfully completed a QIP of Rs. 400 crs during the quarter.

When an investor analyses the balance sheet of Amber Enterprises India Ltd on September 30, 2020, to understand the utilization of the funds raised through QIP, then she notices that most of the money is used to repay trade payable i.e. to make payment to its suppliers for the purchase of raw material.

To analyse the changes in the balance sheet position of Amber Enterprises India Ltd from March 31, 2020, to September 30, 2020, an investor needs to do a fund flow analysis.

Read: Fund Flow Statement Analysis: The Ultimate Guide

Amber Enterprises India Ltd Fund Flow Analysis Balance Sheet September 30, 2020

While doing the fund flow analysis of Amber Enterprises India Ltd from March 31, 2020, to September 30, 2020, an investor notices that the major sources of funds for the company have been:

  • Decrease in current assets i.e. release of money from trade receivables and inventory: ₹420 cr.
  • Increase in equity and reserves i.e. QIP adjusted for losses incurred in H1-FY2021: ₹372 cr.
  • Increase in borrowings (non-current + current) by about ₹100 cr

An investor notices that most of this money is used by the company to repay its suppliers (trade payables): ₹746 cr.

An investor may note that money is a fungible commodity, therefore, to see the broad contours of the flow of money, we analyse the net position of increase and decrease of funds in different items instead of looking at what exact purpose any cheque deposited in the bank account was used for.

From the above fund-flow analysis, it seems to an investor that Amber Enterprises India Ltd is diluting its equity to repay its suppliers for the purchases of raw material. It may look similar to new-age startup companies, which burn cash in the business and repay their suppliers by diluting equity in series A, B, C and numerous other rounds.

An investor would appreciate that if a company needs to dilute equity to repay suppliers, then it needs to reassess its business model.

From the above discussion on SSGR and free cash flow, an investor would note that Amber Enterprises India Ltd has been growing at a rate, which is beyond what its business profits can sustain. As a result, it has to regularly dilute its equity to raise additional money to repay debt and pay its suppliers. In the recent past, equity dilution has been a regular affair for the company.

Going ahead, an investor should keep a close watch on the financial position of the company. She should pay attention to whether Amber Enterprises India Ltd is stretching itself more than what its business can support. An investor would appreciate that every successive round of equity dilution reduces the proportionate stake owned by existing investors and effectively reduces any return that the company may generate for its shareholders.

Self-Sustainable Growth Rate (SSGR) and free cash flow (FCF) are the main pillars of assessing the margin of safety in the business model of any company.

Further advised reading: 3 Simple Ways to Assess “Margin of Safety”: The Cornerstone of Stock Investing

Additional aspects of Amber Enterprises India Ltd:

On analysing Amber Enterprises India Ltd and after reading its past annual reports, its IPO and QIP prospectus, credit rating reports and other public documents, an investor comes across certain other aspects of the company, which are important for any investor to know while making an investment decision.

1) Management Succession of Amber Enterprises India Ltd:

The company was promoted by Mr Kartar Singh and his two sons, Mr Jasbir Singh (age 45 years) and Mr Daljit Singh (age 42 years). Currently, as per the FY2020 annual report, page 18, Mr Kartar Singh is the Chairman Emeritus of the company, Mr Jasbir Singh is chairman & CEO and Mr Daljit Singh is MD of the company.

Mr Jasbir Singh and Mr Daljit Singh both are young, in their early to mid-forties, and are playing an active role in the management of the company.

Going ahead, an investor should keep a close watch on any development related to the relationships among the promoter-family. She should especially focus on any ownership issues between Mr Jasbir Singh and Mr Daljit Singh. This is because any ownership issue may lead to a significant restructuring within the group.

Regarding any existing ownership or other issues among the promoters, an investor may directly contact the company for more information and clarifications.

Further advised reading: How to do Management Analysis of Companies?

2) Curious case of private equity investor, Ascent, transferring shares of Amber Enterprises India Ltd to the promoters at ₹1 per share:

While reading the history of major equity-events of the company, an investor notices that in January 2017, ADV Partners Ltd through its arm Ascent Investment Holdings Pte. Ltd (Ascent) purchased a 36% stake in the company from Reliance Alternative Investment Fund (Fairwind) and promoters, Mr Kartar Singh.

Credit rating report by CRISIL, March 2017:

In January 2017, ADV became a significant shareholder in Amber by purchasing nearly 36% equity stake from its owners: 34% from Fairwind Trustees Services Pvt Ltd (sold its entire stake) and 2% from the promoter Mr Kartar Singh.

The cost of acquisition of shares for Ascent was about ₹237.3 per share.

IPO prospectus, January 2018, page 34:

Pursuant to the SSA, 2,107,037 CCPS were allotted to Ascent at a price of 237.30 per CCPS and upon conversion of CCPS, 2,107,037 Equity Shares were allotted to Ascent.

However, an investor is surprised when she reads in the IPO prospectus of Amber Enterprises India Ltd that in September 2017, Amber Enterprises India Ltd, Ascent and the promoters entered into an agreement after which Ascent transferred 95,000 shares to the promoters (Mr Jasbir Singh and Mr Daljit Singh) at ₹1 per share.

IPO prospectus, January 2018, page 170:

Pursuant to the Letter Agreement dated September 26, 2017 as amended by the amendment dated November 30, 2017 entered among the Company, Ascent and the Promoters, Ascent agreed to transfer 95,000 Equity Shares to the Promoters (47,500 Equity Shares each to Jasbir Singh and Daljit Singh) at a consideration price of 1 per Equity Share aggregating to a total consideration of ₹ 95,000 prior to filing of this Red Herring Prospectus.

Pursuant to the Share purchase agreement dated December 20, 2017 between our Company, Ascent, Jasbir Singh and Daljit Singh, Ascent has transferred 47,500 Equity Shares each to Jasbir Singh and Daljit Singh on December 22, 2017.

Therefore, an investor would appreciate that Ascent had invested in the shares of Amber Enterprises India Ltd at a cost of about ₹237.3 per share. However, it transferred shares to the promoter at ₹1/- per share.

This is a strange transaction where there is a transfer of economic interest of about ₹236.3 per share from Ascent to the promoters. An investor may contact the company directly to understand the other leg of this transaction i.e. what was the other aspect of the transaction in lieu of which Ascent transferred shares of Amber Enterprises India Ltd to its promoters at a price of ₹1 per share.

Advised reading: Why We cannot always Trust What Management Claims

3) Overstating of profits by Amber Enterprises India Ltd:

While reading the IPO prospectus of the company, an investor notices that during FY2013, FY2014 and FY2015, Amber Enterprises India Ltd did not recognize the mark to market losses on its derivative contracts in its profit and loss statement. The auditor of the company highlighted that this decision of the company is not correct as per the guidance notes of ICAI and the accounting standards.

The auditor also highlighted that the profits of Amber Enterprises India Ltd were overstated due to the non-recognition of these losses by the company. In FY2013, the profits were overstated by ₹62.5 cr.

IPO prospectus, page 442-443:

For the Fiscals 2015, 2014 and 2013, the Company (on a consolidated basis) had not recognized mark to market losses on the derivative contracts taken in the form of interest rate swaps, currency options and forward currency contracts entered into by the Company (on a consolidated basis) to hedge its unrecognized firm commitments and not recognized foreign exchange fluctuation loss on foreign currency monetary items which was not accordance with the guidance note issued by ICAI and Accounting Standard 11 “The Effects of Changes in Exchange Rates”.

If the Company had followed the relevant guidance of ICAI and AS-11, the short term borrowings and current liabilities as March 31, 2013 would have been higher by ₹625.40 million and reserve and surplus as on that date would have been lower by ₹625.40 million. Further Profit after tax would have been lower by 625.40 million for Fiscal 2013.

Therefore, an investor would appreciate that while analysing the financial data of the company, she should do deeper due diligence and not take the presented data at face value.

Advised reading: How Companies Inflate their Profits

4) Launching QIP without obtaining all the required approvals:

While reading the prospectus for the QIP dated September 10, 2020, an investor notices that Amber Enterprises India Ltd was required to take approval from the State Infrastructure and Industrial Development Corporation of Uttarakhand Limited (SIIDCUL). However, as per the prospectus, it had not received approval from SIIDCUL for a change in its capital structure. The company communicated in its prospectus that it is yet to receive approval from SIIDCUL.

QIP prospectus, September 2020, page 68:

As these plots of land have been transferred from UPSIDC to State Infrastructure and Industrial Development Corporation of Uttarakhand Limited (“SIIDCUL”), we have made an application to SIIDCUL seeking consent for the change in capital structure and shareholding pursuant to the Issue. As of the date of this Placement Document, no response has been received from SIIDCUL within the time frame set out by us in our application to them. While we believe that we have taken adequate steps to seek their consent, we cannot assure that SIIDCUL will not take any adverse action against us under the terms of the respective lease agreements. We cannot assure you that we will satisfy these conditions in time or that any further consents are not required. Accordingly, we may be considered in default of the lease deeds and may be liable to penalty and subject to any other action that may be taken, including termination of the lease deed.

An investor may contact the company directly to know whether the company received the said approval for a change in the capital structure (QIP) from SIIDCUL. If yes, then whether there are any conditions put up by SIIDCUL. If no, then what remedial measures, Amber Enterprises India Ltd plans to take in this regard.

5) Instances showing weak internal controls in Amber Enterprises India Ltd:

While reading the annual reports as well as the IPO and QIP prospectus, an investor gets to know a few instances, which indicate that the internal controls and processes at Amber Enterprises India Ltd need strengthening.

5.1) Fraud conducted on the company:

While reading the IPO prospectus an investor gets to know an instance of financial fraud in FY2016, where a person could impersonate as an authorized vendor of the company and Amber Enterprises India Ltd transferred ₹0.18 cr to the bank account of the person. Later on, Amber Enterprises India Ltd recognized its mistake and filed a complaint with the police. The company recognized the entire amount as a loss.

IPO Prospectus, January 2018, page 306:

an instance of misappropriation of funds as detailed in note 42 to the financial statements, wherein a party impersonating as an authorized vendor of the Company, fraudulently misled the Company to transfer USD 29,327 (equivalent to Rs 1.80 millions) to its bank account. The Company has filed a first information report with the police department in this reference and has recorded entire amount as expense in the statement of profit and loss.

This instance indicates that the internal processes of the company left the scope for improvement.

5.2) Continuous delays in depositing undisputed statutory dues with govt. authorities:

An investor notices that every year from FY2013 to FY2020, Amber Enterprises India Ltd had reported delays in depositing undisputed statutory dues to govt. authorities. The auditors of the company have highlighted these delays in their report every year. However, still, the company is not able to eliminate these delays in the deposit of undisputed dues.

IPO prospectus, page 415, auditor’s observations for FY2013:

Undisputed statutory dues including provident fund, investor education and protection fund, employees’ state insurance, income-tax, sales-tax, wealth tax, service tax, custom duty, excise duty, cess have generally been regularly deposited with some delays

FY2020 annual report, page 118:

Undisputed statutory dues including provident fund, employees’ state insurance, income-tax, sales-tax, service tax, duty of customs, duty of excise, goods and services tax, value added tax, cess and other material statutory dues, as applicable, have generally been regularly deposited to the appropriate authorities, though there has been a slight delay in a few cases.

An investor should note that in organizations where internal controls are weak and the processes need strengthening, at times, frauds become known. Amber Enterprises India Ltd had such an instance in FY2016 where someone could take benefits of the weak processes and could impersonate as an authorized vendor and get money from the company.

There are many other examples in the corporate world where companies with weak process controls were victims of frauds.

An investor may read the analysis of National Peroxide Ltd (a Wadia group company) where the auditor has highlighted that the internal controls of the company are weak and need strengthening. Later on, the company was hit by fraud conducted by the employees including senior management (Managing Director) of the company.

Read: Analysis: National Peroxide Ltd

Therefore, an investor should keep a close watch on the public disclosures done by Amber Enterprises India Ltd to assess whether the company is able to improve its process controls or the lapses are continuing.

6) Loan taken by Amber Enterprises India Ltd from promoters in FY2020:

While reading the FY2020 annual report, an investor notices that Amber Enterprises India Ltd took a loan of ₹8.16 cr from its promoter Mr Jasbir Singh and it repaid the same within the year.

FY2020 annual report, page 227 (₹ lacs):

Loan received:

  • Mr Jasbir Singh: ₹816.00

Loan repaid:

  • Mr Jasbir Singh: ₹816.00

An investor may note that such a loan may be an attempt by the promoters to help the company meet a temporary cash-flow shortfall. However, such an event may indicate a cash-flow mismatch or liquidity crunch. An investor may note that after the close of FY2020, in September 2020, the company raised equity by way of QIP and used it to repay its suppliers (trade payables).

For further clarifications, an investor may contact the company directly to get more information and clarifications about the need for the company to resort to promoters to take a short-term loan and whether it faced any liquidity crunch or cash flow mismatch during the year.

Advised reading: How Promoters benefit themselves using Related Party Transactions

7) Name of Mr Kartar Singh not included in the list of promoters in the annual report of Amber Enterprises India Ltd:

While reading the annual reports of the company, an investor notices that the company has disclosed only the shareholding of Mr Jasbir Singh (22.45%) and Mr Daljit Singh (19.32%) as the total promoter shareholding of Amber Enterprises India Ltd (41.77%) (Source: FY2020 annual report, page 98).

The company has not included the shareholding of Mr Kartar Singh (father of Mr Jasbir Singh and Mr Daljit Singh): 2.25%

Amber Enterprises India Ltd Promoter Shareholding FY2019 And FY2020

This is in contrast to the disclosures by the company to Bombay Stock Exchange (BSE) where the company has shown Mr Kartar Singh as the promoter-shareholder (click here).

An investor may contact the company for clarifications in this regard.

8) Errors in the annual reports of Amber Enterprises India Ltd:

While reading the annual reports of the company, an investor notices that at some places, the company seem to have done some errors while presenting the data to the shareholders.

In the FY2018 annual report, while reading the table showing “Indebtedness of the Company”; the investor notices that the company has done a few errors while doing the calculations.

FY2018 annual report, page 106:

Amber Enterpreises India Ltd Indebtedness FY2018

In the above table, an investor would notice that the middle section “Change in Indebtedness during the financial year” has the following errors:

  • The net change in the total indebtedness (last column) is mentioned by the company as an increase of ₹41,824.39 lac. However, if this were true, then the total indebtedness at March 31, 2018, would have been ₹79,728.89 lacs (=37,904.50 + 41,824.39). Whereas the total indebtedness at March 31, 2018, is ₹5,064.83 lacs. This is because; the company has done an error in the calculation of net change in the total indebtedness. The actual value should be a decrease of ₹32,839.67 lacs.
  • This entire error in the calculations has happened because in the “Change in Indebtedness during the financial year” section under the unsecured loans column, the company has first shown a reduction of ₹3,232.64 lacs. However, in the row of “net change,” the company wrongly mentioned an increase of ₹3,232.64 lacs of unsecured loans.

Similarly, in the FY2019 annual report also, Amber Enterprises India Ltd has done mistakes in the data presented in the table showing “Indebtedness of the Company”.

FY2019 annual report, page 101:

Amber Enterprises India Ltd Indebtedness FY2019

In the above table, an investor would notice that the middle section “Change in Indebtedness during the financial year” has the following errors:

  • The net change in the total indebtedness (last column) is mentioned by the company as an increase of ₹9,733.26 lac. However, if this were true, then the total indebtedness at March 31, 2019, would have been ₹14,798.09 lacs (=5,064.83 + 9,733.26). Whereas the total indebtedness at March 31, 2019, is ₹16,348.09 lacs. This is because; the company has done an error in the calculation of net change in the total indebtedness. The actual value should be an increase of ₹11,283.26 lacs.
  • This entire error in the calculations has happened because in the “Change in Indebtedness during the financial year” section under the unsecured loans column, the company has first shown an increase of ₹1,550.00 lacs. However, in the row of “net change,” the company wrongly mentioned NIL (-) change in the unsecured loans.

Looking at the above instances of errors in the presentation of data by the company in the annual reports, an investor would appreciate that she should increase her level of attention while reading the annual reports and other disclosures by the company.

Advised reading: Understanding the Annual Report of a Company

The Margin of Safety in the market price of Amber Enterprises India Ltd:

Currently (March 25, 2021), Amber Enterprises India Ltd is available at a price to earnings (PE) ratio of about 155 based on consolidated earnings for 12-months ending December 2020 (i.e. January 2020-December 2020). The PE ratio of 155 does not offer any margin of safety in the purchase price as described by Benjamin Graham in his book The Intelligent Investor.

However, we recommend that an investor may read the following articles to assess the PE ratio to be paid for any stock, which takes into account the strength of the business model of the company as well. The strength in the business model of any company is measured by way of its self-sustainable growth rate and the free cash flow generating the ability of the company.

In the absence of any strength in the business model of the company, even a low PE ratio of the company’s stock may be signs of a value trap where instead of being a bargain; the low valuation of the stock price may represent the poor business dynamics of the company.

Analysis Summary

Overall, Amber Enterprises India Ltd is a company that is has grown its sales at a fast pace of 26% year on year from FY2014 to FY2020. However, the company has witnessed fluctuating profit margins during this period. Even in one of the years, FY2016, the company saw a decline in its sales.

An investor realizes that the major raw materials of the company aluminium, copper, steel, resins and compressors are cyclical products where prices undergo periods of sharp increase followed by periods of sharp decrease. Amber Enterprises India Ltd has attempted to protect itself from such sharp raw material price movements by way of variable-price contracts with its customers. However, an investor realizes that the customers of Amber Enterprises India Ltd are very large consumer brands, which have a very high negotiating power over the company. As a result, the customers give a lot of resistance to any price hike whereas they ask for immediate price decline when raw material prices decline.

In addition, the customers continuously put pressure on Amber Enterprises India Ltd to reduce the prices of its products by cost-cutting. If the customers order large quantities from the company, then they ask for higher discounts. Amber Enterprises India Ltd has to put up large manufacturing capacities; however, the customers do not give a firm commitment of the number of AC units to be purchased in advance. They commit for only one month at a time. In addition, they may any time cancel any previously estimated purchase quantities without any notice or financial penalty.

Due to its poor negotiating position, Amber Enterprises India Ltd ends up holding a lot of inventory as well as ends up giving very large credit periods to its customers. This results in working-capital intensive business operations. The company ends up making very low profit margins. Moreover, the company attempts to grow in size to benefit from economies of scale by doing capital expenditure. However, the low-profit margin and high working capital needs leave very little business profits for the capital expenditure (capex). As a result, the company ends up using short-terms loans for capex.

Over all, an investor notices that Amber Enterprises India Ltd has grown much beyond what its business profits can support. As a result, very frequently, the company has to dilute its equity to repay its debt. In September 2020, Amber Enterprises India Ltd raised money by a QIP and used most of its proceeds to pay its suppliers (trade payables) for its purchases of raw material.

The aspirations of Amber Enterprises India Ltd to grow more than what its business profits can support has made equity dilution a regular event for the company. In the recent past, Amber Enterprises India Ltd has diluted its equity after every gap of one or two years.

While analysing the public disclosures of Amber Enterprises India Ltd, an investor notices that at one point in time, one of the private equity investors sold shares of the company to its promoters at a price of ₹1 per share whereas the investor had purchased them at the cost of ₹237.3 per share.

At other times, the investor notices that the company had overstated its profits by not recognizing the unrealized losses on derivative contracts. An investor notices that the company launched its QIP before it received approval from one of the govt. departments. The company has continuously delayed depositing undisputed statutory dues with the govt. authorities. The company did not incorporate the name of the promoter-family member, Mr Kartar Singh as a promoter in the annual reports whereas it had included it in the list of promoter shareholders in its disclosure to the Bombay Stock Exchange.

These are some of the aspects for which an investor may seek clarifications from the company.

An investor also notices that there are errors done by the company in its annual reports while presenting the data of debt of the company. Therefore, an investor should be extra-cautious while analysing the data presented by the company.

Going ahead, an investor should keep a close watch on the profit margins of the company, its working capital position, any future equity dilution and related party transactions of the company with promoters/group entities. An investor should also keep a close watch on instances indicating weak process controls in the company.

Further advised reading: How to Monitor Stocks in your Portfolio

These are our views on Amber Enterprises India Ltd. However, investors should do their own analysis before making any investment-related decisions about the company.

You may use the following steps to analyse the company: “Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger Stocks

I hope it helps!

Regards,

Dr Vijay Malik

P.S.

Disclaimer

Registration status with SEBI:

I am registered with SEBI as a research analyst.

Details of financial interest in the Subject Company:

I do not own stocks of the companies mentioned above in my portfolio at the date of writing this article.

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14 thoughts on “Analysis: Amber Enterprises India Ltd

  1. Thank you, Dr Vijay Malik, for your valuable opinion on Amber Enterprise India Ltd. I have learned many things from your analysis especially, about the customer side of the company and the error which the company has committed. Your analysis always gives me a new perspective toward the companies that I am studying.
    Sir, if possible, please write a post on how to identify companies which are value trap companies and what are main see in these type of companies.

  2. Hello Vijay Sir,
    Thank you for a very detailed analysis. I have one query on trade receivable days and inventory days. How many trade receivable days and inventory days should be generally considered as good? Thank you,
    Ashish

  3. Dr Malik Sir,
    I read the complete analysis of Amber Enterprises India Ltd and once again, it refreshed my awareness about the following:
    1) Computation of negative Free Cash flow and how capex is funded by short term sources by clearly comparing the flow of funds between two dates of the balance sheet.
    2) The need to read IPO and QIP prospectus and relate this information to the analysis.
    3) Other methods used by promotors to benefit themselves by purchasing the shares from ADV at a nominal value of Re 1/-
    Finally, though the order position is auguring well; the same is not necessarily reflected in the growth in sales and profits and investors need to be cautious while seeing the interviews of promotors in business TV channels and take investment decisions.
    Thank you

  4. Dear Dr. Vijay
    This is a very comprehensive evaluation of the stock and a great framework for looking at other similar stocks.
    However, you’ve ignored the industry tailwinds, the size and growth of the industry, competition and headrooms there. Without this, is it not a very uni-dimensional way of looking at a company?

    • Dear John,
      Thanks for sharing your views. In case, you have any specific information to share, then you may share it here as a comment so that other readers may also benefit from it.
      Regards,
      Dr Vijay Malik

      • Currently. these contract manufacturers are primarily engaged for the final assembly of the units, which is a margin squeeze business. With the Govt Atmanirbhar campaign and a focus on the segments like this, companies like Amber Enterprises have an opportunity now and thrust to move up the value chain and increase their earning power. As per the tech scientific data, this segment for household and industrial segment is expected to grow at 17% CAGR for the next few years. Maybe a forward-looking view of the segment may give another perspective.

        • Dear John,
          Thanks for providing your views. You may share your forward-looking views on this segment in detail, which may help the readers analysing Amber Enterprises India Ltd.
          Regards,
          Dr Vijay Malik

  5. Dear Sir.
    Very comprehensive and insightful analysis as always. Equity dilution for sorting the working capital issues i.e. repaying suppliers exposes the inherent weakness in the business model. The high bargaining power of large brands wherein they don’t carry any inventory risk and can in fact cancel the purchase orders without any financial penalty is very detrimental.
    Thanks & Regards,
    Ranjan

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