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Best proxy for the Indian 2W industry

EVs not a material threat | On the right side of OEMs and tech on PVs

After a slow recovery post lifting of COVID-related restrictions, we believe that the underlying demand drivers for 2Ws are still intact and expect 2W demand to return to 6-8% CAGR over the next five years. We prefer ENDU over 2W OEMs as the best way to play the 2W industry, given that the company has a strong positioning with all OEMs and is the beneficiary of the underlying trend in premiumization, scooterization, and electrification.

* ENDU has several levers to continue to grow faster than the underlying 2W industry, driven by: a) cross selling and client mining, b) supplies to e-2Ws/3Ws, c) ABS, and d) Brakes and clutches for over 200cc Bikes. This should help in increasing content per vehicle and narrow content gap between OEMs (BJAUT at 15-17% v/s RE at 11-13% v/s other OEMs at 5-7% v/s TVSL at 3-4%).

* The company has seen good traction in its nascent Passenger Vehicle (PV) segment (~5% of standalone sales in FY20) in the Aluminum Die-casting business. ENDU is on the right side of both customers and technology. On the customer side, it is working with the fastest growing OEMs in the Indian PV industry. Based on existing orders from Hyundai/Kia, its revenue run-rate is expected to hit its peak annual run-rate of INR3.1b by 4QFY22 (v/s less than INR1b in FY20).

* Aluminum usage in the Indian PV industry is very low (~40kg/car) v/s the global average of 160kg and 77kg for the EU Basic segment (VW Golf or Ford Focus). With further tightening of emission standards (CAFE-2 norms) and increasing penetration of Hybrids/EVs, aluminum usage in PVs is expected to increase faster. ENDU is well positioned to benefit from this trend due to its existing know-how in EU operations.

* The EU market is witnessing a transition to EVs. ENDU's EU business is also witnessing a similar shift in its business mix, with EVs and Hybrids estimated to contribute 22.5% to FY21E revenue (v/s 23.7% of CY20 EU PV registrations). About 50% of its order book is made-up of BEVs (EUR30m) and Hybrids (EUR90m) and over 80% request for quotes (RFQs) are for EVs and Hybrids.

* ENDU’s focus is on maintaining revenue during this transition. While it expects EBITDA margin to be lower than ICE products, considering the higher life of EV products (and hence lower depreciation), it expects a similar EBIT margin.

* Impact of EVs on its India business won’t be as material as content is broadly similar in e-Scooter and ICE in the Aluminum Die-casting business, whereas its Transmission business has no exposure to the Scooter segment (most impacted segment). Hence, we see no material impact of EVs on the India business.

* In the EU Aluminum Die-casting business, ENDU has more to gain than lose as aluminum usage is estimated to increase by 40-50% in BEVs. Aluminum usage in EU PVs is estimated to increase to ~199kg/car in CY25 from ~179kg/car in CY19.

* We estimate consolidated revenue/EBITDA/PAT of ~8%/13%/18% CAGR over FY20-23E. The stock trades at 27.2x/22.3x FY22E/FY23E consolidated EPS. Maintain Buy with a TP of INR1,750 per share (28x Mar'23E consolidated EPS).

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