The Endurance Technologies stock has corrected 28 per cent from its one-year high of ₹1981 touched in early November 2021. A prolonged slowdown in two-wheeler sales – which brings a majority of the domestic revenues for the company, pressure on margins due to high input prices (aluminium alloy, silicon, etc) both in the Indian and European operations, as well as general market volatility have contributed to the fall. Long-term investors though can use such corrections to accumulate the stock in small quantities. While two-wheeler sales may continue to witness some pressure in the near-term, periodic value additions to the product line and supplies to the electric vehicle (EV) segment are long-term positives.

At ₹1423 now, the stock trades at about 25.6 times the estimated FY23 earnings. This valuation is on par with more established multi-product, global tier-1 suppliers such as Bharat Forge. But at the same time, it is also at a good discount to Sona BLW Precision Forgings which trades at 71 times.

Better placed

Endurance Technologies supplies aluminium castings and machining, suspension (front forks, shock absorbers) transmission (CVT, clutch assemblies), braking systems (ABS, CBS, disc brake, etc) to the domestic auto industry. The company derives about 60 per cent of its revenues from bikes and scooters, about one-third from four wheelers and the remaining from the 3-wheeler segment. Domestic auto sales, which was already in a cyclical downturn when Covid happened, has been taking its own time to recover. From an 18 per cent year-on-year fall in domestic volumes in 2019-20, the industry saw volumes further shrink by 13 per cent in 2020-21. In the first ten months of this fiscal, overall industry volumes is down 4 per cent so far.

Two-wheeler sales has been the worst hit, with volumes in this segment still down about 8 per cent year-on-year in April 2021 – January 2022. On the other hand, passenger vehicle (cars, UVs, vans) sales are well into positive territory, despite the disruption caused by the semi-conductor shortage. Three-wheeler sales are going strong too. In the near term, domestic two-wheeler sales could continue to remain under the weather.

While Covid did bring in a preference for personal mobility, commuter bikes (75-110cc) which constitutes 50-60 per cent of the total motorcycle sales volumes in India, is a price sensitive segment. Price hikes over the last two years due to reasons ranging from BS VI transition to high input costs as well as rise in fuel prices as well can keep demand subdued . Endurance is however better placed, considering that it also supplies to passenger vehicles and three-wheelers. Even among bike manufacturers, the company’s biggest client is Bajaj Auto., whose focus on executive and premium bikes, exports and three-wheelers acts a cushion against the lacklustre offtakes in mass market bikes.

Value additions

Secondly, what favours Endurance is its value additions to the product line from time to time. This gives room for supplying more content per vehicle to clients and also brings better margins. For one, the company is focusing on fully finished machined castings as compared to raw castings and semi-finished castings for vehicles. Aluminium machined casting business for non-automotive applications like gensets and the telecom industry is another. In September 2021, the company started supply of two-wheeler ABS assemblies which are high technology components, with very few suppliers in the fray. It has recently added driveshafts, which is again a high technology component, to its product portfolio. 

For driveshafts, the company is starting business with Bajaj Auto in May 2022. Besides, it is also at an advanced stage in obtaining orders from TVS for three- wheelers and from Mahindra for three wheelers and four-wheelers for driveshafts. Endurance is not behind in riding the EV bandwagon. The company has already started supplies of brake assembly, suspension, and aluminium castings for electric scooters and three wheelers of OEMs such as Bajaj Auto, TVS. While it is already has Ather Energy in its fold, OLA Electric, Okinawa, Ultraviolette and Hero Electric are also on the radar.

In the nine months ended December 2021, the company won ₹ 585.4 crore of new businesses from OEMs other than Bajaj such as TVS, Hero Motor Corp, Royal Enfield and Ather Energy. This includes Rs 319 crore new orders for EVs for components. New order win also includes non-automotive casting business of approximately ₹100 crore for applications such as gensets and telecom.

Financials

Europe brings in 27 per cent of the revenues for the company, where it supplies engines, suspension and transmission components for four wheelers including EVs. Like in India, auto sales in Europe has been in a downturn. Apart from high input costs, high power costs has also hurt profitability in this geography. However, the long-term outlook looks promising here too. In the last three years, the company has won €130 million (about ₹1100 crore) worth of business for electric (Audi, Porsche) and hybrid cars (Volkswagen, Daimler, BMW, Stellantis and Maserati). These orders are expected to reach peak volume in FY25.

Headwinds from low volumes and high raw material costs saw consolidated profits halving to ₹95 crore in the quarter ended December 2021 over the same quarter in the previous year. Net sales dropped 7.5 per cent to ₹1889 crore. Operating margins came in at 10.7 per cent vis 16.7 per cent a year ago. The company expects cost pressures to ease to an extent, going forward. Endurance is also getting into backward integration in some product areas, which will help in cost control.

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