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Import substitution to drive outperformance

3Q revenues (+24% YoY/15% QoQ) and margins at 17.3% were above estimates as the parts supplier continues to grow ahead of industry, driven by new order wins. Further margins from the castings segment are scaling up due to increased share of machining and addition of 4W customers (Kia). New order wins stand at Rs.4.4b in FY21YTD (~10% of current sales) and the company has RFQs of Rs.11.5bn (of which at least 1/3rd should be converted) as Endurance continues to win orders in the brakes segment. We raise estimates by 13% over FY22-23E to factor in the improved performance and set a Mar’22 TP of Rs.1,680. We value the stock at 30x PE (from 28x earlier) to factor in a strong order book and resilient business model.

* 3QFY21 financials: Standalone results surprised as revenue came in higher at Rs 15.2bn (+32% YoY) and EBITDA margins were at 17% (expanded+290bp YoY, -100bp QoQ). Consolidated: Consolidated revenues were healthy at Rs 20.4bn (+24% YoY, +15% QoQ), while EBITDA margin at 17.3% were higher 140bp YoY, (-40bp QoQ). PAT at Rs 2bn was up 62% YoY, 20% QoQ. European operations contributed ~25% of revenues in 3Q.

* Concall highlights: (1) Capacity expansion: The company is expanding disc brake assembly capacity to 570K units p.m. (from 285K) and the disc capacity to 675K units p.m. (from 375K) in FY22E. Endurance is also expanding capacity of alloy wheels to 160K sets (up from 120K). The Vallum plant for castings has commenced operations this month. (2) Import substitution: The company gained new orders (Rs.4.4bn new order wins in 9MFY21) as OEMs are substituting imports – i.e. TVS has given ~Rs.2bn orders, largely for brakes (which were imported). These assemblies cost over Rs.1,000 per vehicle. The ABS brake assemblies business should start in 1QFY22. (3) Margin expansion: The management is guiding for higher margin band of 14.5-16% for the core India business as the casting segment profitability is scaling up (4) Europe outlook: While 4Q production will be impacted due to component shortages, the company has Euro120m order book from EVs/hybrids.

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