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Above est.; strong all-round performance in both businesses

India outlook remains positive; EU near-term challenges due to COVID

* Endurance Technologies (ENDU) reported a strong all-round beat in 3QFY21, with contribution from both businesses. While recovery in the India business continues to be strong, the EU business is seeing the impact of a second wave of COVID. ENDU’s outperformance of the underlying 2W industry would continue on the back of a content increase and the mining of recently added customers. Thus, we believe it is the best proxy for the 2W industry in India.

* We upgrade our FY21/FY22 EPS by 8%/6%, reflecting a strong performance in both the businesses. Maintain Buy, with TP of INR1,750.

Highest ever consolidated revenue and EBITDA

* Consol. net revenues grew 24% to ~INR20.4b (v/s est. INR18.8b). EBITDA grew 35% YoY to INR3.5b (v/s est. INR3.07b). This translated to adj. PAT growth of 60% YoY to ~INR2b (v/s est. ~INR1.6b). 9MFY21 revenues / EBITDA / adj. PAT declined 17%/20%/25%.

* India revenues grew 32% YoY to ~INR15.3b (v/s est. INR14.3b) – 14.5% YoY growth was reported in the 2W industry. State incentives (150bp) and op. leverage benefit boosted EBITDA margins by 290bp YoY (+80bps QoQ) to 17% (v/s est. 16.5%). EBITDA grew 59% YoY to INR2.6b. Adj. PAT rose 76% YoY to INR1.59b (v/s est. INR1.41b).

* EU business revenues grew 7% YoY to INR5.1b (v/s est. INR4.6b). In EUR terms, revenues declined 3.6%; new car registrations also declined 7.6%. EBITDA margins contracted 220bp YoY to 18% (v/s est. 15.6%), driven by higher staff and other expenses. EBITDA fell 4.8% YoY to INR921m (v/s est. 719m). Adj. PAT grew 16.8% YoY to INR395m (v/s est. ~INR187m).

Highlights from management commentary

* Outlook: 4QFY21 for India business appears very good, led by OEM schedules. For EU, vehicle registrations were down 15–20% in Jan’21 and are expected to decline 10–15% over Feb–Mar’21. This is largely attributable to COVID-19-related lockdown and restrictions.

* New business wins from OEMs (ex-Bajaj) were INR4.44b in 9MFY21, with peak sales in FY23E. RFQs worth INR11.45b are under consideration.

* Brakes business capacity almost doubled: Considering new business for disc brakes from Bajaj, TVS, HMSI, Yamaha, and RE, it is increasing brake assembly capacity by 90% from 285k units/month to 575k units/month, and disc brake capacity would be increased by 80% to 675k units/month by Aug’21.

* Alloy wheel capacity expansion: It plans to increase 2W alloy wheel capacity by 33% to 160k wheels/month from 3QFY22 (Aug–Sep).

* EUR12.6m new business from FCA, Audi, and Maserati would commence from FY22. Over the last three years, it has won EUR120m worth of orders for EVs and hybrids, of which EUR30m is for EVs.

Valuation and view

* ENDU is the best proxy on India’s 2W industry and has the scope to increase content on the back of 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 29x/23.8x at FY22/FY23E consol EPS. Maintain Buy, with TP of INR1,750 (28x Mar’23E consol. EPS).

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