Endurance Technologies (ENDU IN)


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Endurance Technologies (ENDU IN)
Rating: BUY | CMP: Rs1,241 | TP: Rs1,478
Tech led innovations to drive growth
Deep Shah [email protected] | 91-22-66322235 Amber Shukla [email protected] | 91-22-66322426

Endurance Technologies
Contents
Page No. Endurance – Diversifying beyond core .................................................................. 5
Corporate Structure............................................................................................ 5 Rich product portfolio for 2W, 3W and PV segments ......................................... 6 Story in Charts ....................................................................................................... 9 Light weighting - A structural trend to drive die-casting business ........................ 11 Breakthrough orders from Hyundai/Kia to help grow beyond 2Ws................... 12 Die-casting segment highly fragmented with presence of key players ............. 13 Europe – Focus on machining and EVs to drive growth................................... 14 Growth enablers for European business .......................................................... 15 High entry barriers led by product complexity .................................................. 16 European PV industry observed higher adoption of aluminum content ............ 18 Europe die-casting segment too highly fragmented, likewise India .................. 19 Expanding client base beyond FCA group ....................................................... 19 Healthy financial profile of European business................................................. 20 Suspension- Strong dominance in 2W/3Ws ........................................................ 21 Nascent businesses – an opportunity galore ....................................................... 22 Transmission – ENDU has a lion’s share in this segment ................................ 22 Brakes – competing along MNCs, ABS foray growth plus ............................... 23 Aftermarket – expanding brand ENDU in B2C segment .................................. 25 Financials ............................................................................................................ 26 EBIDTA and PAT CAGR of 11.4% and 15.3% in FY20-23E............................ 26 Margins drivers in place for both the business ................................................. 27 Valuations: Earning upcycle, better RoCE to drive re-rating................................ 29 Overall low business risk v/s domestic and global peers ................................. 29 ENDU is our preferred pick among ancillaries along with MSS ........................ 29

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December 28, 2020
Company Initiation

Endurance Technologies (ENDU IN)
Rating: BUY| CMP: Rs1,241 | TP: Rs1,478

Tech led innovations to drive growth

Key Financials - Consolidated

Y/e Mar

FY20 FY21E

Sales (Rs. m) EBITDA (Rs. m)
Margin (%) PAT (Rs. m) EPS (Rs.)
Gr. (%) DPS (Rs.)
Yield (%) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x) PE (x) P/BV (x)

69,177 11,308
16.3 5,655
40.2 11.1
5.5 0.4 20.3 21.5 2.5 15.2 30.9 5.8

64,602 9,867 15.3 4,437 31.5 (21.5) 7.9 0.6 14.0 15.2 2.6 17.0 39.3 5.2

FY22E 74,534 12,542
16.8 6,493
46.2 46.3 11.5
0.9 18.1 20.8
2.2 12.9 26.9
4.6

FY23E 87,836 15,623
17.8 8,664
61.6 33.4 15.4
1.2 20.9 24.9
1.8 9.9 20.1 3.9

Key Data
52-W High / Low Sensex / Nifty Market Cap Shares Outstanding 3M Avg. Daily Value

ENDU.BO | ENDU IN
Rs. 1,250 / Rs. 562 46,974 / 13,749
Rs. 175 bn/ $ 2,373 m 141m
Rs. 300.88m

Shareholding Pattern (%)
Promoter’s Foreign Domestic Institution Public & Others Promoter Pledge (Rs bn)

75.00 11.59 11.91
1.50 -

Stock Performance (%)

Absolute Relative

1M

6M

12M

9.3

37.0

21.0

3.6

1.7

6.8

Deep Shah [email protected] | 91-22-66322235
Amber Shukla [email protected] | 91-22-66322426

We initiate coverage on Endurance Technologies (ENDU) with BUY rating and a target price of Rs1,478 (24x Mar23 EPS). ENDU is structurally placed to benefit from 1) global automotive trend of light weighting vehicles (will drive die-casting business), 2) machined and EV/hybrids in Europe (de-risk its business model), 3) dominant position in suspension of 2W/3W segments and 4) huge potential in nascent but technology enabled businesses such as transmission, brakes and after-market. ENDU’s strong focus is to drive content increase in its core castings business (100% machining), suspension business (premiumisation of 2Ws) and to build new product portfolio in its nascent businesses. We believe the stock is attractive given (i) outperformance in medium-to-long term led by deeper client-penetration levels, (ii) significant market share gains with new products/technologies such as ABS and (iii) new order wins for EV/hybrid segment in Europe.
We believe market share gains in each segment and rising domestic penetration should drive revenue/EBITDA/PAT CAGR of 8.3%/11.4%/15.3% over FY20-23. We value the stock at 24x Mar23 earnings to arrive at a target price of INR1,478. We initiate coverage with BUY rating.
Investment Arguments
Light weighting to drive growth of die-casting business – A structural trend: ENDU is a largest die-casting components manufacturer for domestic 2Ws (increasing presence in PVs too) and remains prime beneficiary of this structural trend called ‘reducing vehicular curb weight through increased use of aluminum’. Since past 3-5 years aluminum content in 2W segment rapidly increased to ~30%, while for 3W and PV it still remains at ~18-20%. This can gradually move up by another 8-10% in coming 4-5 years, along with increased demand for structured products. ENDU is well placed to drive growth of die-casting business given 1) strong brand recall 2) large distribution network, operational from strategically located manufacturing facilities and 3) is first to develop innovative products such as swing arm for KTM and head mount for 2Ws that reduces weight by 20-30%.
European business- High focus on machine and EV/hybrids to drive growth: ENDU’s European business has outperformed the industry since past 3-4 years (Revenue/EBITDA/PAT CAGR of 5%/10.9%/8.2% over FY17-20) aided by organic growth as well as supplier acquisitions. ENDU’s strategy in Europe is mainly focused on 1) Growing its share of value-added products by increasing full machining of castings and sub-assemblies (current share of machining in Europe is ~55% but targets for 100% by FY23) and 2) Securing significant orders from EV/ hybrid cars business, expected to reach peak volumes by FY22-23 (in 1HFY21 ENDU secured new business worth Eur10.8m from Audi, Maserati and Fiat Chrysler likely to start from FY2021). We believe margins in the European business may gradually inch upwards driven by increase in capacity utilization, mix improvement and cost rationalization.

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Endurance Technologies
Suspension (~28% of consol sales)- Highest dominance in 2W/3W segment: ENDU is a leader in suspension business with ~1/3rd market share in 2W segment and ~50-80% wallet share from Bajaj & Royal Enfield. We believe deeper penetration with HMCL and HMSI (especially in northern plants) will help drive 9% CAGR revenue over FY20-23. Other players like Munjal Showa (HMCL) and Showa India (HMSI) are already largest supplier for their North India plants. However, limited presence in western and southern plants creates more business for ENDU and Gabriel. We expect premium motorcycle segment to grow at 8-10% CAGR over FY20-24 following 1) Inverted or USD (up-side down) forks used in premium motorcycles having content increase of Rs6k-7.2k per vehicle 2) Similarly deeper penetration of telescopic forks in scooters have value increase of Rs450500/scooter. Given current penetration of both these technologies at ~2% and ~52% respectively, we believe there is a huge scope for growth.
Nascent business (Transmission, Brakes & Aftermarket) - An opportunity galore!
 Transmission (~7% of sales)- Increasing inroads with new customer to
drive sales: ENDU is majorly supplying clutch assemblies and friction plates to Bajaj Auto and RE. It is aggressively pursuing breakthrough with key OEMs like HMSI, HMCL and TVS for clutch assemblies and CVTs requirements.
 Brakes (~7% of sales)- Foraying into ABS and expect supply to begin
from 4QFY21: With the presence of established players like Bosch and Continental (~75% of the ABS market cumulatively) along with Nissin Brakes (Honda company), ABS market is highly fragmented. Bosch and continental together account for ~3/4th of market share with highly localized operations. ENDU is expected to commence with single channel ABS by 4QFY21E, using capacities of 400k assemblies per annum.
 After market (~3% of sales)- New product introduction and brand leverage
to drive growth: To leverage brand and deepen its products penetration, ENDU is expected to launch new products. It will also do trading of 2W/3W auto components which are not currently manufactured by ENDU.
Initiate with BUY, estimate PAT CAGR of 15.3% over FY20-23:
 We estimate consolidated revenue/ EBITDA/PAT CAGR of 8.3%/11.4%/15.3%
over FY20-23 backed by content increase, backward integration and operating leverage. We estimate ~100bp margins contraction in FY21 but expanding 150bp/100bp in FY22/23. We estimate PAT increase at CAGR of ~15.3%.
 We expect margins of the India business to improve by ~120bp from FY20 to
FY23 (on the back of increasing capacity utilization and higher share of the value added business). Margins of the Europe business should also improve by ~270bp from 19.6% to 22.3% over FY20-23 (led by shift towards more complex fully machined castings and plant consolidation).
 ENDU saw sharp re-rating in last couple of years due to sustained above
industry performance and new order wins both at domestic and European business. ENDU reported PAT CAGR of 19.6% in the past 3 years which is better than peers led by higher sales in non-die casting business. ENDU currently trades at 26.9/20.1x FY22/23 EPS (v/s 33x long period average).
4

Endurance Technologies

Consolidated Split FY20

Revenue

Revenue by segment
3W 12%

4W

2W

32%

56%

Revenue by Geography

Others 2.4%

Europe 29.2%

India 68.4%
Source: Company, PL

Endurance – Diversifying beyond core
 Endurance Technologies (ENDU) is one of the largest auto component
manufacturer in India which offers complete solutions from designing to after sale service. The company started operations in 1985 with supplies of high pressure die-casting to Bajaj Auto and then scaled up its customer base with other leading OEMs.
 Today, it is tier-1 supplier for diverse range of technology intensive products
like 2W, 3W, 4W OEMs in India and overseas. It has market share of ~40% in 2W front forks, ~36% in shock absorbers, ~14% in clutch assemblies and ~27% in brake systems.
 It operates from 27 strategically located manufacturing facilities with 17
manufacturing plants in India and 10 in Europe.
 In the aftermarket segment, company has its distribution network spread
across 28 countries. This network spans to 335 dealers in India and 40 distributers overseas. In FY21 the company plans to foray into 3 more countries and add at least 35-40 new dealers.

Corporate Structure
Endurance- Group Corporate Structure

Source: Company

December 28, 2020

5

Endurance Technologies

Endurance-key products and segments served

Suspension

Die-castings

India

Europe

Transmission

Brakes

Key segments served

2W, 3W, PV

2W, 3W

PV

2W, 3W

2W

% of consol topline in FY20 Key customers Key competition
Growth opportunities ENDU market share (%)

27.7 Bajaj Auto, Honda 2W,
Royal Enfield, Hero MotoCorp
Gabriel, Showa India, Munjal Showa
Shift to inverted front forks /mono shocks in
motorcycles and front forks in scooters from
traditional shocks. Increasing orders from
HMCL and HMSI.

26.3
Bajaj Auto, Royal Enfield, Yamaha
Rico Auto, Rockman Ind, Sundaram
clayton, Aurangabad electricals
Light weighting, shift from fabricated to
structured products in 2Ws and PVs. Order ramp-up at Hyundai
and Kia.

~30-33%

~30-31%

29.2 Hyundai/Kia, VW
and Daimler
Nemak, GF, Ryobi
High end die castings with Machining.
Inorganic acquisitions.
~10-12%

6.6
Bajaj Auto, Royal Enfield

7.4
Bajaj Auto, Royal Enfield, TVSL and Honda 2W

Clutch India, Excedy Continental and Brembo

Value added products like CVTs, paper based clutch
assemblies. Expansion beyond Baja Auto and HMSI
for growth. ~14% of clutch
assemblies

Value added products like disc brake (v/s drum), ABS. Grab more
wallet share within customers.
~22-25% in disc brake

Source: Company, PL

FY20 Product Mix

Braking Af termarket

sy stem

3%

7%

Transmission 7%

Suspen sion 28%

Alumini um
casting 56%

Source: Company, PL

Rich product portfolio for 2W, 3W and PV segments
 Aluminium die-casting- ENDU is the largest aluminium die casting
manufacturer in India with market leadership in 2W, 3W and 4W. It is involved in designing, development and manufacturing of high pressure, low pressure, and gravity die-casting products for Indian and overseas OEMs.
 Suspension- The company manufactures products like shock absorbers for
2W and 3W, front forks and hydraulic dampers. It is the only Indian company to design, develop and manufacture adjustable & non-adjustable damping force inverted front forks and mono shock absorbers.
 Transmission- ENDU is a well-established player in transmission systems for
2W/3W. It manufactures products such as clutch assemblies, cork/paper friction plates and CVT for 2W/3W.
 Braking system- ENDU is a leading player in high performance braking
solutions for 2W/3W. It’s product portfolio includes Disk brake, ABS, CBS, Tandem master cylinder and Hydraulic drum brake.

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Diverse product portfolio for 2W segment

Endurance Technologies

Source: Company Key products for 3W segment

Key products for 4W segment

Source: Company December 28, 2020

Source: Company 7

Endurance Technologies
Tier 1 supplier of tech intensive products for 2W, 3W and PV OEMs in India

Source: Company, PL

December 28, 2020

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Endurance Technologies

Story in Charts

Company

Competitive positioning vs domestic peers - ENDU stands tall

R&D (% RoCE (%) of sales)

EBITDA Asset Structural (%) Turns (x) factors led innovation

EV led risk on business

Endurance

1.1

21.7

17.0

1.4 High

Low

Minda Ind Motherson Bosch

2.3

11.9

12.1

0.4

12.1

8.6

5.0

10.0

20.4

1.2 Moderate 1.5 Moderate 0.8 High

Low Low High

Bharat Forge

1.0

7.1

16.1

0.7 Moderate High

Exide* Suprajit Engg MRF Sudram Fasteners Varroc Source: Capitaline

0.3

17.0

10.5

0.3

13.1

15.4

0.7

12.7

16.7

0.6

15.7

16.7

3.5

3.1

8.3

*R&D expenditure as of 2019

0.6 Moderate 1.0 Moderate 0.9 Moderate 1.0 Moderate 1.2 Moderate

High Low Low Moderate Low

Competitive advantage
Moderate
High Moderate High
High
Moderate High High High Moderate

Key products
Die casting, Transmission, Suspension and Braking systems Switch, Light, Horns, Alloywheels, Seats, Sensors Wiring harness, Plastics (interior/exterior), Mirrors Fuel injection systems and EV components CV and PV forging components and industrial forging components Lead acid batteries - auto and non auto applications
2W cables and Halogen lights
Automotive tyres
Fasteners - Auto and non-auto applications Lightings, 2W plastics, electrical and metal parts

Entry of new customers to drive growth

OEMs

FY20 sales (Rs m) FY22 sales (Rs m) expectations Growth (%) Key drivers

Honda 2W Hero MotoCorp Yamaha TVS Hyundai and Kia

6,080 2,100 2,070
Nil Negligible

9,000 3,500 2,500 1,650 3,070

48.0 Brakes, inverted front forks and scooter suspension parts 66.7 New orders for brakes and front forks for Gujarat plant 20.8 Alloy Wheels and brake assemblies
NA Brakes and front fork for 2W and 3W NA Machine castings

Source: Capitaline

December 28, 2020

Gradual decline in die casting revenue mix

Segmental Growth (INR m)

FY20

FY21E

Aluminium die casting and machining

38

34

% YoY

-14

-10

% Mix

56

54

Suspension % YoY % Mix

19

17

-2

-8

28

27

Transmission % YoY % Mix

4

5

-3

4

7

7

Braking Systems % YoY % Mix

5

5

23

4

7

8

Aftermarket % YoY % Mix Source: Company, PL

2

2

-33

4

3

3

FY22E 38 11 52
20 15 27
6 20
8
7 40 10
2 20
3

FY23E 42 11 49
24 22 28
7 22
8
10 40 12
3 15
3
9

Consol Revenues/EBITDA/PAT (Rs m) Sales EBITDA PAT

87,836

Endurance Technologies

India accounts for major chunk of revenues

Others 2.4%

Europe 29.2%

69,177

52,304

15,623 8,664

11,308 5,655

6,795 2,994

5,009 688 336

FY06

FY16

Source: Company, PL

FY20

FY23E

India 68.4%
Source: Company, PL

Share (%) of tech-led products increasing…

Aluminium Casting Suspension Braking Systems Aftermarket

4

5

5

4

3

5 5

5 6

4 6

5 6

7 7

23 24 26 26 28

Transmission

3

3

3

8 7

10 12

8

8

27 27 28

63 60 58 59 56 54 52 49

FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E Source: Company, PL

…to drive profitable growth for ENDU

PAT (Rs m)

Growth (%) (RHS)

10,000

8,000 18.3

26.7

18.3

14.2

6,000

9.9

4,000

46.3 50.0
33.4 40.0 30.0 20.0 10.0 0.0

2,000

-21.5

-10.0 -20.0

0

-30.0

FY16 3,005 FY17 3,303 FY18 3,908 FY19 4,950 FY20 5,655 FY21E 4,437 FY22E 6,493 FY23E 8,664

Source: Company, PL

Gradual decline in the share of die-casting

70%

65%

63%

60%

55%

50%

45%

40% FY16

Share of die-casting (%)

60%

58%

59%

FY17

FY18

FY19

56% FY20

Source: Company, PL

FCF to grow by ~22% CAGR over FY20-23

9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000
0

FCF (Rs m)

8,425 7,088

5,185 4,642

3,157

2,209 1,567

2,207

FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

Source: Company, PL

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Endurance Technologies (ENDU IN)