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Inline; India business recovers

New order wins combined with recovery in EU

* 2QFY23 consolidated performance was led by recovery in India operations, which was diluted by weakness in the EU operations and consolidation of Maxwell Energy. While ENDU has been winning new orders both in the India and EU markets, the recent acquisition of Maxwell opened up new opportunities in the electronic business (BMS, telematics etc.) for EVs.

* We have maintained our FY23 EPS estimates, but raise FY24 EPS estimates to factor in for better-than-expected recovery in 2Ws and new order wins, as well as Maxwell acquisition (loss making). We reiterate our Buy rating with a TP of INR1,680 (27x Sep’24E EPS).

India business leads to overall revenue beat

* Consolidated revenue/EBITDA grew 25%/4.5% YoY to INR23.6b/INR2.7b while PAT remained flat YoY at INR1.3b. 1HFY23 revenue grew 25%, EBITDA remained flat while PAT declined 5% YoY.

* India business: Revenue grew 27% YoY to INR19.05b (est. INR15.2b), as against a production growth of 8% YoY in the underlying 2W industry. EBITDA margins at 12.2% (v/s est 11.8%) declined 200bp YoY due to higher RM costs, partly offset by lower staff costs. Adj. PAT grew 7% YoY to INR1.3b (v/s est ~INR1.15b).

* EU businesses: Easing semi-conductor supplies led to 42% YoY growth in PV production in Germany, though EU (including UK) new car registrations declined 0.4% YoY in 2QFY23 on a low base. ENDUs EU business revenues grew 26% in EUR terms (19% growth excluding the benefit of high aluminum prices). EU EBITDA margins declined 230bp YoY to 11.6% (v/s estimated 12.2%) due to higher energy costs (4.4pp impact).

* 1HFY23 CFO declined 37% YoY to INR2.4b due to higher working capital requirement. This in turn led to a decline in FCFF to INR45m (v/s INR1.2b in 1HFY22) with a relatively higher capex of INR2.4b (v/s INR2.6b in 1HFY22).

Highlights from the management commentary

* New orders win (ex BJAUT) in 2QFY23 was at INR2.5b (v/s INR4.4b in 1QFY23), with 80% of order wins in 1H being new businesses and 20% being replacements. This includes EV-related order wins (incl. BJAUT) of ~INR1.1b in 2Q (v/s INR1.1b in 1Q), taking the total EV-related order wins to ~INR4.9b as of Sep-22. Recently, it won INR1.2b orders for EV from Hero Electric for BMS and suspensions.

* Maxwell has ~INR1.75b orders in hand, including a ~INR0.7b recent order from Hero Electric.

* EU business won EUR10.7m new orders in 2QFY23 (v/s EUR14.3m in 1Q)

* RM cost benefit would start reflecting from 3QFY23 in both India and EU, as a large part of its RM is Aluminum (51% in India, 100% in EU) and Steel (32% in India. Energy cost was at its peak in 2QFY23, impacting margins severely (440bp). However, going forward, the impact of energy cost should moderate as a) price have corrected substantially from its peak in 2Q), b) customers have agreed for partial pass through from 1st Jan, and c) there is some support from the government.

Valuation and view

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

* The stock trades at 36.2x/24.1x at FY23E/FY24E consolidated EPS. We reiterate our Buy rating with a TP of INR1,680 (27x Sep’24E consolidated EPS).

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