Nitin AgrawalMoneycontrol Research
Endurance Tech is one of the best plays in the two-wheeler auto ancillary space in India on the robust clientele, strong product portfolio, a very strong focus on research and development (R&D) to develop technologically advanced products, and focus on electric and hybrid vehicles. This coupled with strong financial performance and reasonable valuation make it a long-term buy for investors.
The business
Endurance Tech is one of the leading auto component manufacturers in India catering to two- and three-wheeler markets. It has a diversified product portfolio which includes aluminium die castings, suspension components, transmission components and braking systems. It also has a significant presence in European markets through overseas subsidiaries that are trusted manufacturers of auto components used in passenger vehicles (PV). It has presence in aftermarket both in India and abroad.
Endurance provides end-to-end solutions to its customers from the stage of product conception to design, development, testing, validation and to end-user delivery.
The company has 16 manufacturing facilities in India and eight in Europe through its subsidiaries.
Leadership position
It is the largest company in aluminium die casting in India in terms of the output and installed capacity. It is also among the top two companies in suspensions, transmissions and braking systems for two-wheeler.
Robust client base
On the back of technological superiority, proven execution track-record of new projects and quality products, the company has been able to partner with strong clients both in India and abroad. In domestic market, it caters to five out of the top six 2W original equipment manufacturers (OEMs). It also supplies to marquee clients in Europe as well.
Technological prowess – a moat
Endurance Tech has a very strong focus on research and development (R&D) as is evident from it four dedicated R&D centres, of which three are located in Aurangabad and one in Pune. It also has one technical engineering centre for aluminium die castings in Chivasso, Italy.
The company manufactures highly technology-intensive products such as rear disc brake assemblies, upside-down front forks, fully machined castings, paper clutch assemblies and rear mono shock absorbers.
As of FY18, the company has a portfolio of six granted patents, seven registered designs, and 52 patent applications, indicating its R&D prowess.
Making inroads in EV and HV segments
In light of electric mobility which is the future of mobility, the company has been focusing and investing in electric vehicles (EVs) and hybrid vehicles (HVs). The efforts are yielding results as it has received orders in Europe to supply castings in new shapes as required for such vehicles. It is also in talks regarding various opportunities with German customers — Volkswagen and Daimler — on the EV side. In domestic market, the company has been engaging well with OEMs that are developing EVs and HVs.
Focus on scooter and premium segment – key growth driver
The company has aggressively been focusing on fast growing scooter segment. Currently, this segment contributes 8 percent to sales and Endurance is working on increasing the contribution from the segment by launching products like CVT, front forks and disc brakes which are relevant to scooters. Further, these products have higher realisation than other products.
Customers’ preference changing towards premium products and is leading to strong growth in demand and Endurance Tech is well placed to capture the growth from this segment. In fact, the company has large share of business from the premium product manufacturers (Bajaj, Royal Enfield, and Yamaha) in India.
Replacement market – huge potential
Another key growth driver for Endurance Tech is the aftermarket segment. It has aggressively been targeting huge potential of aftermarket and catering to it through its direct network of distributors across India and abroad.
Capacity expansion
Endurance Tech has been witnessing a strong demand for its products and in order to cater to it, the company is expanding its capacity. Its two-wheeler suspension plant at Halol, Gujarat will start supplies from September 2018. Sanand, Gujarat plant expansion to supply aluminium castings to Hero MotoCorp’s Halol plant’s requirement has started in April 2018 and will reach its full sales of Rs.120 crore per annum by January 2019. And Kolar, Karnataka plant for supplying front fork and shock absorbers to Honda 2-wheelers will start supplies from January 2019.
Strong financial performance
Endurance Tech has strong financial performance to back. Its net revenue from operations has witnessed a compounded annual growth rate of 12 percent over FY14-18. Its earnings before interest, tax, depreciation and amortisation, however, witnessed higher growth of 14 percent over the same period. This was on the back of higher operating leverage. And, its EBITDA margin averaged around 14 percent over the same period, much higher than most of the auto ancillary companies. Profit-after-tax (PAT) also witnessed a strong growth of 17 percent over the same period driven by lower interest cost outlay.
On the back of strong operating performance, the company has been able to generate a lot of free cash flow over the years.
In terms of return ratios, the company has given average RoNW and RoCE of 22.4 percent and 22 percent, respectively, over FY14-18.
Valuation deserves premium
Given the unique position of Endurance Tech in auto component segment and its track record, it deserves premium valuations. And amid overall market volatility, the share price has witnessed 26 percent correction making the valuation attractive. It currently trades at 33.2 and 28.2 times FY19 and FY20 projected earnings.
Peer analysis
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