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Margins impacted, Outlook promising

Endurance Technologies Ltd is one of India’s leading automotive component manufacturers with operations in India and Europe. It mainly caters to twoand three-wheeler OEMs in India and supplies aluminium casting products to four-wheeler OEMs in Europe. The company operates 16 plants in India, 9 plants overseas and 4 R&D sites.

* Q3FY22 consolidated revenue remained flat sequentially at Rs. 1,889cr (-7.4% YoY), owing to lower automobile industry sales.

* EBITDA margin contracted 300bps to 11.2% on lower realisations and higher costs. Resultantly, PAT declined 29.0% QoQ to Rs. 95cr.

* Focus on more value-add and profitable product mix is expected to aid sales in future. Despite the input costs remaining inflated, we expect gradual recovery in margins on superior product mix and improvement in content per vehicle. Hence, we upgrade our rating on the stock to BUY with a rolled forward TP of Rs. 1,770 based on 26x FY24E adj. EPS.

Drop in two-wheeler and auto sales impacted topline

During Q3FY22, Endurance recorded 7.4% YoY declines in revenue to Rs. 1,889cr (+0.1% QoQ) on account of lower sales recorded by its automobile clientele. The twowheeler industry in India saw a drop of 19.7% YoY in sales, owing to chip shortages. Scooters sales de-grew by 25.9% YoY and motorcycles declined by 16.4% YoY. The automotive industry in India recorded a de-growth of 17.2% YoY. Moreover, in the EU (incl. UK), the number of new car registrations went down 23.4% YoY, with the European automotive market being deeply impacted by semiconductor shortages and soaring energy prices.

Margin contracted due to increased input costs

EBITDA declined 21.4% QoQ to Rs. 211cr (-41.1% YoY), as margin contracted 300bps QoQ to 11.2% (-630ps YoY), primarily owing to lower realisations and large commodity price increases, esp. for aluminium alloy and steel. Company recognized Rs.31cr in costs towards voluntary separation scheme with the view of improving operational sustainability and plant operations. Additionally, it did not receive any mega project incentive from the Maharashtra government during the quarter. Consequently, Adj. PAT went down 29.0% QoQ to Rs. 95cr (-53.0% YoY).

Key concall highlights

* Endurance Overseas acquired 100% equity stake in Veicoli Srl of Italy in a bid to expand its innovative solution offerings in the European mobility market. The acquired firm enables fleet operators to increase route efficiency, enhance safety, optimise maintenance activity, and reduce fuel costs.

* Added manufacturing and integration facilities in Patnagar and Chennai.

* Company entered into a technical collaboration with FMG Italy for production of aluminium forging axle clamps with supplies to start from next month.

* Commenced production of Abs assemblies and started its supply to Royal Enfield.

Valuation

The focus on new deals and backward integration product areas, along with revival in demand in the auto industry should aid future growth for the company. Although margins remained strained this quarter, we expect gradual recovery in margins in coming quarters on superior product mix and improvement in content per vehicle. We expect earnings to grow at healthy 21.7% CAGR over FY21-24E. Hence, we upgrade our rating on the stock to BUY with a rolled forward target price of Rs. 1,770 based on 26x FY24E adj. EPS.

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