Stock Fundamentals

Endurance Technologies: Not to be cast away

Parvatha Vardhini C | Updated on January 16, 2018 Published on October 02, 2016

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Diverse products, wide client base and good operating margins are positives

The cyclical upturn in the auto industry has led to a re-rating of auto and auto component stocks over the last two years. Private equity investors of Endurance Technologies, a maker of castings, suspension, transmission and brake components, are looking to make hay while the sun shines.

Along with the promoter who plans to part with a portion of his holdings, private equity investors are looking to exit the company through this initial public offer.

The amount the company is raising for this purpose is about ₹1,150 crore at the price band of ₹467-472. Though the company has some plans to expand capacities in some of its divisions in the next one to two years and tends to follow an acquisition-led growth strategy, there is no fresh issue to raise funds for the same.

The company’s debt burden has been reduced in the last few years and, consequently, the debt to equity ratio has come down to 0.4 times now, from over one time three to four years ago. This, along with adequate cash reserves, gives the company comfortable room for expansion and acquisitions.

At the offer price, the valuation works out to about 22 times the company’s trailing 12-month consolidated earnings. Though it is a multi-product company and has a foothold in the European markets, Endurance thankfully does not bracket itself with the more established global players such as Bharat Forge, Mahindra CIE or Motherson Sumi. These stocks now trade at high PEs of over 30 times their trailing 12-month consolidated earnings.

On the other hand, Endurance’s valuation matches that of other companies in the castings and suspensions space such as Rico Auto and Gabriel India. Long-term investors can consider subscribing to the offer, as they could benefit from the company’s diversified product and client base, its investments in technology and R&D and efforts to improve profitability. But there are no immediate or short-term triggers for investors looking to make a quick buck, as the issue seems fully valued at this juncture.

Business

Endurance Technologies makes various raw and machined castings, alloy wheels, shock absorbers, front forks, clutch assemblies and braking systems for two and three-wheelers in India. While Bajaj Auto brings about 40 per cent of total revenues, the company supplies to other players such as Royal Enfield, Yamaha, Honda, H-D Motor, Suzuki and Piaggio as well.

Endurance also operates in Europe (about one-third of revenues) through acquisition of companies engaged in production of aluminium castings and moulded plastic components. Through these subsidiaries, Endurance caters to clients in the four-wheeler segment such as Jeep, Chrysler, Lancia, Alfa Romeo and Daimler.

Overall, castings (including alloy wheels) bring in 60-65 per cent of the revenues, while suspension components such as shock absorbers and front forks chip in with 20-25 per cent. Transmission, braking and after-market sales account for the rest.

Favourable prospects

What works well for the company in the current scenario is the pick-up in domestic two-wheeler sales. Sales volumes of two-wheelers have grown by 16.5 per cent so far this fiscal, in comparison with the weak volumes seen in the last two fiscals. Improving consumption has also increased demand for small trucks, including three-wheeled ones used in last mile connectivity.

Besides, exposure to premium bike makers such as Royal Enfield and Harley-Davidson will also hold it in good stead. Its diverse product portfolio gives the company ample opportunities for cross-selling, in turn giving it more bargaining power with vehicle manufacturers. Prospects for the European business look good too, with focus on relatively better placed economies such as Germany and Italy.

Revenues and profits have grown at a compounded annual growth rate of 8.1 per cent (to ₹5,240 crore) and 12.4 per cent (₹291 crore) respectively in the last four years.

Operating margins have gradually improved from 11.2 per cent in 2011-12 to 12.7 per cent in the year ended March 2016. While castings business per se does not enjoy double-digit margins, about 60-70 per cent of the company’s castings business is from value-adding machined castings.

This, along with the relatively higher profitability enjoyed on other parts supplied, has helped blended margins.

There is scope for improvement as the company seeks to expand its presence in the replacement market. Replacement market sales now bring only 3 per cent of the revenues.

Published on October 02, 2016
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