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Cost headwinds denting profitability

Valuation and View

Led by continued cost headwinds both in S/A and Europe, Endurance’s (ENDU) 1QFY23 results were weak on all fronts. EBITDA margins continued to be under pressure as it contracted -280bp/-210bp YoY/QoQ, as S/A margins fell 200bp/330bp YoY/QoQ while Europe margins fell 350bp YoY (expanded 170bp QoQ). New order wins of Rs4.8b/Eur14.3m in S/A/Europe in 1QFY23 (v/s Rs7.5b/Eur71m in FY22) is key positive with EV now accounting for ~24% of the same in S/A. ENDU’s recent acquisition Maxwell energy too have won orders of Rs250m from Tork Motors in addition to ~4k units order to supply BMS including order from HMCL for which supplies have started from July-22.

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 ~400k/annum with expectations of chip shortage easing out, iii) expansion at disk brake facility (~470 assemblies/month by Oct’22) and drive shaft supply ramp-up beyond Bajaj to M&M/TVS. While operating costs headwinds are likely to sustain in Europe (energy cost especially), we expect operating leverage and RM pass through will provide some cushion to margins in the coming quarters. We cut FY23E EPS by ~10% to factor delay in RM recovery and elevated energy cost. We maintain BUY with revised TP of Rs1,773 (v/s 1,789 earlier) based on ~30x FY24 consol EPS (unchanged). ENDU trades at 24x FY23 (v/s 32x LPA) is comforting given expected revenue/EBITDA/PAT CAGR of 13.4%/25%/31% over FY22-24E.

Result Highlights – Weak performance in both S/A and Europe business

* Consol revenues grew ~2% QoQ (+27% YoY) to Rs21.1b (est at Rs22.9b) as S/A revenues grew ~4% QoQ at Rs16.2b (est at Rs17.7b) while derived Europe revenues de-grew ~5% QoQ at Rs4.97b (est at Rs5.2b).

* Gross margins largely remain flat QoQ at 39.6% (est at 40.4%). The management indicated decline of ~Rs20/kg and Rs6/kg so far for aluminium and steel prices (together contributing over 80% of RM cost) respectively from Aug'22. Hence believe 2H to see improvement.

* Lower gross margins coupled with higher other exp dragged EBITDA at Rs2.4b (- 5% QoQ, est at Rs3b). Margins too came in lower at 11.3% (-80bp QoQ, est at 13.3%). S/A margins contracted 160bp QoQ to 10.8% (est at 13.7%) while derived Europe margins expanded ~170bp QoQ to 13.2% (est at 12%).

* Weak op performance was partially offset by lower tax at 22.3% (est at 25.6%) resulting in Adj. PAT miss at Rs1.1b (-16% QoQ, est at Rs1.6b).

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