Endurance Technologies - Auto and Auto Components

Endurance Technologies - Auto and Auto Components

Strong order wins to over shadow weak Q4 and FY 21 Poised for a Robust FY 22.

CMP                   :        Rs 870.75 (30.06.2020)

Target                 :        Rs 1105

Period                 :        12 Months

52 Week H/L      :         1202 / 562

Endurance Technologies Ltd.

Endurance Technologies Ltd., incorporated in the year 1999, is a Mid Cap company (having a market cap of Rs 12248.22 Crore) operating in Auto Ancillaries sector.

Endurance Technologies Ltd. key Products/Revenue Segments include Aluminium & Die Casting which contributed Rs 1908.92 Crore to Sales Value (35.23 % of Total Sales), Shock Absorbers which contributed Rs 1906.54 Crore to Sales Value (35.19 % of Total Sales).

Clutch Assembly (Parts) which contributed Rs 460.86 Crore to Sales Value (8.50 % of Total Sales), Alloy Wheels which contributed Rs 365.17 Crore to Sales Value (6.74 % of Total Sales), Others which contributed Rs 253.31 Crore to Sales Value (4.67 % of Total Sales).

Other Operating Revenue which contributed Rs 44.41 Crore to Sales Value (0.81 % of Total Sales), Components & Spares which contributed Rs 34.34 Crore to Sales Value (0.63 % of Total Sales).

Scrap which contributed Rs 18.13 Crore to Sales Value (0.33 % of Total Sales), Export Incentives which contributed Rs 12.28 Crore to Sales Value (0.22 % of Total Sales), Job Work which contributed Rs 8.09 Crore to Sales Value (0.14 % of Total Sales).

Power Generation which contributed Rs 1.21 Crore to Sales Value (0.02 % of Total Sales)for the year ending 31-Mar-2019.

For the quarter ended 31-03-2020, the company has reported a Consolidated sales of Rs 1596.75 Crore, down -2.67 % from last quarter Sales of Rs 1640.53 Crore and down -15.98 % from last year same quarter Sales of Rs 1900.36 Crore Company has reported net profit after tax of Rs 106.83 Crore in latest quarter.

Weak Q4 led by challenging macro environment in both the geographies:

Endurance’s Q4 numbers came below our as well as street’s expectations as revenues declined by 16% each in domestic standalone as well as consol business. On the domestic front, it was led by weakness in the 2W industry and the overall macros. 

It was also impacted slightly by the lock down which came into effect by the quarter end. Still, this decline was lower than the underlying industries (18% fall in 2W industry in FY 20) as the company continuously won business from its existing as well as new clients and improvement in content per vehicle. Domestic margins went down to 12.7% due to one-off CSR expenses of ₹70 mn, excluding which the margins came in at 15.3%. 

On the consol business, Covid related lockdown mainly in Italy and Germany led to an underperformance in topline. Margins fell to 14.9% as the company still bore the employee costs. Consol bottom-line de-grew by 28% yoy and 13.8% qoq on weak domestic business. European margins were strong at 21.4%, thus somewhat lifting up the consol margins. However, they were still down on yoy basis. 

During the quarter, the company acquired two companies despite challenging environment. – a). 99% stake in Adler (clutch, partner since 2001) for EUR3.5m, and (b) 100% in Grimmeca (braking; partner during 2004-09 and 2015-20) for EUR2.25m. These acquisitions provide Endurance with technology for >200cc motorcycles – a future focus area for the company. 

Covid-19 impacted the business in Q4 and continued vigorously in Q1. However, from June onward the production ramped up by 50% of Covid levels. Management expects production to reach pre-Covid levels in Q3 FY21.

Major order wins and order-backlog ensures strong FY 22:

The company’s new business wins in India stood at ₹5.8 bn in FY 20 (from HMSI, RE, TVS, Hyundai- Kia and HMCL) out of which 50% will start their execution by Q2 FY21. Furthermore, ₹12.8 bn worth RFQs is under discussion; conversion rate is 50%.

In EU, new order wins stood at EUR42.7m in FY20 from the likes of Audi, BMW, VW, Porsche, FCA, Maserati etc. In the last 2 years, Endurance won EUR110m worth orders – EVs (EUR30m from Audi and Porsche) and Hybrid (EUR80m from VW, Daimler, BMW, FCA and Maserati); execution has started this year and should reach peak volumes in 2023. RFQs worth EUR45m are under discussion with VW for EV/hybrid cars.

We expect near to medium-term revenues to be favorably impacted by the ramp-up of supplies of suspensions at HMCL/HMSI’s plants and increase in supplies of brakes to TVS. Expected foray of Endurance into HMCL and HMSI’s northern plants would increase the chances of higher revenues.

In the domestic die casting business, we expect recent order wins from Hyundai-Kia to ramp up (with a 6-month delay) from Oct 20 with the commissioning of the Vallam plant. We are aware that supplies of fully finished, machined castings tremendously help Endurance’s growth prospects and Endurance has a strong presence in this industry.

Commercial supplies of 2W ABS have been further delayed. Now, the company expects supplies only in 4QFY20. This would drive the high margin ABS business in FY 22. 

• Disc and clutch business for HMSI started in Q2 FY 20, while the front forks business for HMSI commissioned in Q4 FY20, due to which the share of HMSI in Endurance’s business increased from 8% to 13% yoy in FY 20. 

• The acquisitions of Adler and Grimmeca would help Endurance with high end technology for the supply of clutches and brakes in the >200 cc motorcycles and scooters. This business is expected to provide a fillip in FY 22 through supplies to its three main clients. 

• With the ‘Aatmanirbhar Bharat’ mission gathering steam, the company sees great opportunity in the CBS and Aluminum alloy wheels business in the domestic markets and shock absorbers for HMSI in South America and SE Asia which would replace Chinese vendors 

• We expect Indian operations to report revenue CAGR of 5% through FY20E-FY22E; while expecting margins to bounce back to ~16% by FY22E. 

• We expect EU revenue to continue to benefit from the growing order book. We also note the growing customer diversification and order wins in the electric/hybrid cars space. 

We anticipate EU operations to report revenue CAGR of 3% through FY20E-FY22E; while forecasting margins to continue to be aided by the growing proportion of value-added products and come in between 21-22% in FY22E. 

Margins to move upwards in FY 22 through increased business of value added products We foresee supply of an array of value added, high margin products in FY 22. ABS production starting in Q4 FY21 will add content per vehicle of higher cc 2W in FY 22. 

Increased business of front forks (price is 3x of shock absorbers) through higher business from HMSI will assist margins very well. Increased production of aluminum die castings and alloy wheels through capacity expansion at Vallam plant will yield higher profits for the company. 

Higher business in Europe through new business wins and increased business with existing clients in the high margin hybrid/EV businesses will augur well for the margins. We expect consol margins to range at 17-18% in FY 22. Outlook and valuation We expect FY 21E to be a very subdued year on the back of Covid-19. However, despite a washout Q1, with a long line-up of order wins and strong RFQs for the remaining three quarters of FY 21E and FY 22E, we expect a very strong FY 22E. 

Increasing orders from existing clients, new businesses in both India and Europe, higher content per vehicle and capacity expansions at a low capex will result in a robust bump up in FY 22 numbers. 

Profitability lift up, improvement in return ratios will be the result of higher product mix and risen electrification & hybridization in Europe. 

Endurance derives about 66% of its console top line from 2Ws and considering the rising importance of social distancing and personal mobility, we believe 2W industry to be preferred medium of transport and therefore Endurance shall be an attractive investment case. On the back of Covid and associated delay in various projects, we have pruned down our estimates and target price to ₹1,105. Maintain BUY (valued at 25x FY 22E earnings).

It has already reached 50% retrenchment price from its rock bottom fall. Now it has a strong potential to move up from the current level to upward.

Note: The analysis is based on the information received from the company fundamentals and its technical trends. Investing in securities always depending upon the market conditions and risk. 

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