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Focus on backward integration continues   

Valuation and View – Healthy order wins to help drive outperformance

Endurance (ENDU) 3QFY23 consol results were in?line as better?than?expected margins in Europe business at 12.4% (+450bp QoQ, est 12.4%) was lower margins in S/A at 11.1% (+30bp QoQ, est 11.5%). Europe margins recovery was led by falling energy prices, and energy cost related compensation from government (Italian government) and customers (~60% recovery of inflated energy cost). New order wins of Rs8.8b/EUR67.4m in 9MFY23 (v/s Rs6.9b/Eur25m in SA/Europe is 1HFY23) is healthy considering weak volumes in domestic 2Ws and Europe. ENDU’s EV specific orders at ~Rs5.8b (includes Rs1987.8 of new orders from Ather, Hero Electric. Rs230m for front forks).   

Near?term challenges withstanding, we believe ENDU should continue to outperform industry growth driven by i) new order wins at both domestic/Europe, ii) ramp up in ABS supplies to ~1.2m units/annum by 2HFY24, iii) backward integration accelerated with setting up of paper plate manufacturing plant by 1QFY24 as its are mainly imported from China/US and in?house manufacturing of ABS valves. Operating costs headwinds are likely to ease in Europe, especially energy cost in addition to decline in RM inflation should drive margins expanding ~300bp over FY22?25E to 16%.  We cut FY24/25 EPS by ~4?5% to factor delay in RM recovery and weak volumes. Maintain BUY with revised TP of Rs1,763 (v/s 1,709 earlier) as we roll forwarded TP to Mar’25 consol EPS (v/s Sep’24). ENDU trades at 25.3x/19.8x FY24/25 EPS (v/s 32x LPA) is comforting given expected revenue/EBITDA/PAT CAGR of 14%/23%/27% over FY22?25E.

Result Highlights – Consol results in?line, EUR subs margins positive

* Consol revenues de?grew 10% QoQ, (+11% YoY) at ~Rs21b (est Rs22.1b). S/A revenues de?grew 15% QoQ (+7% YoY) at Rs16b (est Rs17.7b) while derived Europe revenues grew 10.5% QoQ (+25% YoY) at ~Rs5b (est Rs4.3b). There was no Maharashtra state PSI incentive recorded in 3QFY23.   

* Consol EBITDA was flattish QoQ (+18% YoY) at Rs2.4b (in?line) with margins expanded 110bp QoQ (+60bp YoY) at 11.4% (in?line). S/A margins expanded 30bp QoQ (flattish YoY) at 11.1% (in?line) while Europe margins (derived) expanded 450bp QoQ (+300bp YoY) at 12.4% (est 8.5%). This was led by margins recovery was led by falling energy prices, and energy cost related compensation from governments (Italian government) and customers (~60% recovery of inflated energy cost). Consol Adj.PAT grew 2% QoQ (+14.4% YoY) at Rs1.1b (in?line).

* 9MFY23 performance – Consol revenue/EBITDA/Adj.PAT grew 20%/6%/3%.

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