A Backdoor Stock to Profit from the Great Indian Railway Boom

The Indian stock market boasts a vast array of investment opportunities, but for many retail investors, there's a specific sector that consistently holds undeniable charm: Railways.

Despite the limited number of railway stocks available for trade, their popularity seems unshakeable. Even during periods of broader market volatility, retail investors find themselves drawn to these stocks.

This interest has received a boost recently to the stellar performance of Indian railway stocks.

Companies like IRCTC, RVNL, IRCON, RITES, and IRFC have all delivered impressive returns over the past year.

This has solidified the sector's reputation for growth potential. Even foreign institutional investors (FIIs) are at the vanguard of this investing theme.

While some railway stocks within the sector might currently appear inflated, the overall growth story for Indian railways is likely far from over.

Amber Enterprises is a proxy play that offers investors a chance to participate in the railways' growth trajectory.

About Amber Enterprises

Amber Enterprises India produces heating and ventilation equipment.

The company dominates the original equipment manufacturer (OEM), and original design manufacturer (ODM) market for room air conditioners in India.

The company is engaged in the business of manufacturing consumer durable products.

It designs and produces a wide range of goods, such as HVAC solutions and RAC, RAC, and non-RAC components for mobility applications.

It currently has 23 production facilities spread over 8 locations in India, allowing for a quick turnaround.

Additionally, it produces multi-flow condensers, inverter and non-inverter printed circuit boards, heat exchangers, motors, and other essential and reliable functional components for RACs.

Diversification Plan

Amber Enterprises' diversification strategy into electronics manufacturing and cooling solutions for railways aims to address investor concerns regarding declining revenue potential from contract manufacturing of air-conditioners.

Despite being the market leader in India's AC contract manufacturing, the company faces challenges due to brands shifting towards in-house production of room ACs.

To counter this, Amber Enterprises plans to achieve an equal revenue contribution from AC contracting, electronics, and railway segments over the next five years.

The company anticipates superior operating margins and return on capital employed in the new business ventures compared to AC contracting, thereby improving overall margins and return ratios.

Near-term growth will primarily stem from electronics manufacturing, particularly in producing bare printed circuit boards with diverse applications across defence, industrial, automotive, telecom, and consumer durable sectors.

With the Indian market for bare PCBs valued at approximately US$ 3.8 bn, of which only US$ 300 million (m) is domestically manufactured, there exists significant potential for import substitution.

So, how does this diversification plan position Amber Enterprises as a proxy for the railway industry?

Amber Enterprises Railway Venture

In January 2024, Amber Enterprises' subsidiary, Sidwal Refrigeration Industries, entered into an agreement with Titagarh Rail Systems to invest up to Rs 1.2 billion (bn) each to acquire equal control in a joint venture company/ special purpose vehicle (SPV).

The SPV will set up a new facility in India to manufacture critical railway components and subsystems used in the manufacture of railway and metro coaches and will also make fresh equity investments into Titagarh Firema.

Titagarh Firema SpA, Italy, is an associate company of the Titagarh group where the government of Italy is also an equity stakeholder.

The new SPV will also invest in Titagarh Firema while the government of Italy will invest in the entity for which it has already taken approval from Invitalia, the Italian government's investment arm.

Under the agreement, Firema will grant Sidwal, Titagarh Rail as well as the SPV a preferred supplier status and right of first refusal (ROFR) for all their products.

Vande Bharat: A Golden Opportunity Ahead

Amid the Vande Bharat initiative, Amber Enterprises discovered a promising avenue within the railway's segment via its subsidiary, Sidwal Refrigeration.

Presently contributing around 5% to the bill of material (BoM) for a Vande Bharat coach, the company, ambitiously aims to elevate this share to 25-30%, facilitated by its joint venture with Titagarh Rail.

Through this strategic collaboration, Amber Enterprises gains a foothold in manufacturing critical railway components, spanning pantographs, couplers, coach interiors, seats, pantries, and toilet seats.

This expansion strategy positions the company as a crucial player in the supply chain, capturing a significant 25-30% share of the BoM.

The railway segment presents a vast market potential, estimated at Rs 700 bn to Rs 800 bn over the next five years. Amber Enterprises sets its sights on a substantial 15-20% market share from this burgeoning sector.

Furthermore, its partnership with Italy-based Invitalia, facilitated through the Titagarh JV, unlocks global opportunities within the railway domain.

Forecasts predict a considerable surge in revenue from the mobility segment, primarily railways, reaching Rs 10 bn by FY26, compared to approximately Rs 5 bn in FY24. Amber Enterprises' strategic positioning within the railway ecosystem makes it a prime proxy for the railway boom.

As the railway sector experiences rapid growth and development, the company stands to benefit significantly, emerging as a key beneficiary and stakeholder in this thriving industry.

Amber Enterprises' Financial Performance

Amber Enterprises' financial performance over the past three years (2021-2023) paints a picture of a company on a steady growth trajectory.

The company has demonstrated revenue growth of 31.8% on a compounded annual growth rate (CAGR) basis over the period spanning from the financial year 2021 to 2023.

This performance can be credited to the continuous growing demand.

Similarly, the net profit has also increased steadily, albeit at a lower rate compared to revenue, with a CAGR of around 25.9%.

While the net profit margin has experienced a slight decline over the three-year period, averaging around 2.5%. This could be due to increasing expenses relative to revenue.

Amber Enterprises' Financial Snapshot (2021-23)

Particulars	31-Mar-21	31-Mar-22	31-Mar-23
Revenues (Rs in bn)	30.3	42.1	69.3
Revenue Growth (%)	-	38.9	64.6
Net Profit (Rs in bn)	0.8	1.1	1.6
Net Profit Margin (%)	2.7	2.6	2.4

Source: Equitymaster

Amber Enterprises started with manufacturing bare PCBs for the consumer durable space, where the margin is the lowest at around 2.5-3%.

It gained domain knowledge and proved its capabilities to gradually move up to the higher margin segment, such as aerospace which delivers nearly double-digit margins.

This has helped the company's blend margin from electronics to reach 5.5-6.0% in the last financial year compared with 2.5% when it first entered the electronics segment by buying a 60% stake in Ascent Circuit.

The electronics segment revenue is expected to reach Rs 18-19 bn in the current financial year compared with Rs 12 bn in FY24, implying growth of more than 60%.

Conclusion

Indian Railway has prepared a modernisation plan for post-election 2024, with an investment of Rs 10 to 12 trillion (tn) over the next five years for transforming railways with modern world-class facilities.

The new ticket refund mechanism would secure returns within 24 hours, replacing the existing three-day to one-week refund process.

This massive Rs 10-12 tn modernisation plan will help Indian railways to keep pace with economic growth. This investment will cover crucial aspects such as track laying, safety technology, and station upgrades.

The Indian Railways at present operates 10,754 daily train trips, and the plans to add 3,000 more trains aim to eradicate waiting lists.

Given the promising future of the Indian railway sector, proxy stocks are poised to gain significant advantages.

However, conduct thorough research before you invest in any of them. Sustained research must not be compromised despite the positive odds.

Also, you can now filter the best railway stocks in India using Equitymaster's powerful stock screener.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...