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Buy Endurance Technologies Ltd For Target Rs.1,950

Above est; strong beat in India business drives performance

India to grow faster than industry; EU outlook remains positive

* Endurance Technologies (ENDU) posted a strong beat in the India business in 1QFY22. While the EU business remains strong, its outperformance of India in the underlying 2W industry would continue on the back of (a) a content increase, (b) the mining of recently added customers, and (c) ABS supplies from 3QFY22. ENDU is the best proxy on the 2W industry in India.

* We maintain our estimates. Maintain Buy, with TP of INR1,950 (28x Sep’23 EPS).

Highest ever consolidated revenue

* Consol. net revenue declined 21% QoQ (+181% YoY) to INR16.9b (est. INR12b). The EBITDA margin declined 115bp QoQ (+735bp YoY) to 14.4% (v/s est 12.7%). Adj. PAT fell 36% QoQ to INR1.2b (est. INR511m).

* India business: S/A revenue fell 28% QoQ (+223% YoY) to ~INR11.5b (est. ~INR7.1b), against 35% QoQ decline for the 2W industry. The EBITDA margin declined 145bp QoQ (+12.6pp YoY) to 13.4% (est. 8.6%), benefitting from incentives of ~INR288m (~250bp). EBITDA fell 35% QoQ to INR1.54b and adjusted PAT declined 42% to INR804m (est. INR108m). It provided for a VRS expense of INR314m for 177 personnel at the Chakan plant. The Maharashtra PSI incentive stood at INR287.8m.

* The EU business was flat QoQ (+119% YoY) at INR5.4b (est. INR4.9b). The EBITDA margin fell 115bp QoQ (+45bp YoY) to 16.7% (est. 18.6%), impacted by RM cost inflation (80bp) and mix. Adjusted PAT declined 17.5% QoQ to INR398m (est. INR403m).

Highlights from management commentary

* New order wins of INR531m (v/s INR1.94b in 4QFY21) were seen from Hyundai, TTMT, HMCL, and M&M. This is new business (not replacement), largely for fully machined castings. Furthermore, it has RFQs worth INR16.6b (v/s INR15b in 4QFY21). It would continue to focus on supplying products to OEMs over the next two years.

* The supply of 2W ABS would commence from the second half of Sep’21. 2W ABS market size is 3.5m p.a., with Bosch having 85% market share. ENDU would start with producing ~2k/month, which would be ramped up to ~20k/month by Apr’22; a full ramp-up is expected to 33k/month by FY23E.

* It plans to introduce atleast one new product segment in FY22, which would be a fuel-agnostic product with lower competition. It would share further details in the coming quarter.

* EU new order wins of EUR7.13m (v/s EUR6.7m in 4QFY21) were seen from Porsche, Daimler, and NCH. An EUR120m order (50% of the total order) in the last three years has come from EVs/hybrids (EUR30m for EVsfrom Audi and Porsche, whereas EUR90m for hybrids from VW, Daimler, FCA, and Maserati). In 1QFY22, 7.5%/25% of revenue was generated from EVs/hybrids.

* The EU business could see 10–11% growth in volumes in FY22.

Valuation and view

* ENDU is the best proxy on the Indian 2W industry, with scope for an increase in content, led by technological changes and new products. Coupled with its knowledge in aluminum die-casting in the EU, we believe there is scope to increase contribution from the PV segment.

* The stock trades at 35.3x/26.4x at FY22/FY23E consol. EPS. Maintain Buy, with TP of INR1,950 (28x Sep’23E consol. EPS).

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