- Wealth PMS (50L+)
Nothing in life is as important as you think it is, while you are thinking about it
– Daniel Kahneman
Whenever you are (over) think about something. Take a moment and ask yourselves this, “How important is this thing to me?”.
Are you thinking about this because it’s presented to you? Or does it really matter to your decision making process?
Advertisers and good salespeople understood this a long time ago. They will present information that may be irrelevant to your use case of the product, yet, they will make you think about it while making the critical decision of making a purchase.
Whatever is in the spotlight, whether relevant or not, is probably driving your decision. The first rule when deciding consequences, step back to make some space.
Read: How to make better decisions: A critical life meta-skill
Auto stocks (2W & 4W) are topping the charts this week with Tata Motors and Bajaj Auto both rising 10%. Adani group is under pressure after the Hindenburg research report which is why we see Adani Ports and Adani Enterprises losing 20+%.
At 17604, Nifty 50 lost 2.3% over the last week and nearly 7% down from its all time high. The 10y yield is solid at 7.4% while other asset classes closed flat for this week.
Looking wider to see how the NSE 500 Index (set of top 500 listed companies) has done over different time periods. This week, 19% of stocks rose while 81% declined as the broader index lost 3%. Over the last 1 year, small-cap 250 index is down 6.3% while midcaps and largecaps are up a little.
Capitalmind Outliers is our proprietary discovery tool that helps you identify potentially promising stocks with technical trends in their favor. This week we discuss Gurgaon-based Amber Enterprises, where it appears the company’s operating efficiency seems to be under threat: they’ve seen a continued drop in their Return On Invested Capital (ROIC). We explain.
Amber is a contract designer, manufacturer, and solutions provider of all things air conditioning, for an array of leading consumer durable brands. We’ve previously written about the company here.
Popular A/C brands have increasingly made Amber and other Original Design Manufacturers their manufacturing partners in the recent past. This has led to significant growth in topline for the ODMs, and thus markets have placed premium multiples on the companies.
For instance, Amber’s revenue grew at 21% CAGR in the past five years, and trades at a TTM price-to-earnings ratio of 61.5. Note, however, TTM EPS is down 13% compared to last year, as profitability has deteriorated. What’s more, growth aspirations may have inadvertently dragged down returns on capital.
Return on Invested Capital (ROIC), after all, can be restated with some basic math as:
Amber has a market share of nearly 27% in the domestic Room Air Conditioner (RAC) industry and has 23 manufacturing plants spread across the country. Typically, such economies of scale provide a competitive advantage to companies engaged in industries with inherently thin margins. This is because fixed costs can be spread over high volumes, thus providing benefits of operating leverage, and sweating out assets helps boost returns on capital.
In Amber’s case, operating margins have deteriorated with higher input costs, down to 4% last year. Moreover, thanks to high capital expenditures, invested capital grew faster (25% FY13-22 CAGR) compared to growth in revenue (19% FY13-22 CAGR). The bottomline: invested capital turnover, too, has declined to 2.
Put the pieces together, and you have a single-digit ROIC, likely lower than the cost of capital. And growth with returns on capital lower than cost of capital is value dilutive, not accretive. This seems to reflect in the market’s perception of Amber last year.
Yet, recently the stock started breaking out and has popped up on our screener. We’ll watch it.
(Disclaimer: The information conveyed in this post is intended for informational purposes and shouldn’t be considered as investment advice. Please do your own research before making investment decisions)