Endurance

By Geetanjali Kedia

Endurance Technologies is entering the primary market on Wednesday 5^th October, 2016, with an offer for sale (OFS) of upto 2.46 crore equity shares of Rs. 10 each, in the price band of Rs. 467-472 per share. OFS by PE firm Actis and promoter will raise Rs. 1,162 crore at the upper end and represents 17.50% of the post issue paid up equity share capital. Actis, with investment of Rs.368 crore since Dec 2011, is fully exiting its 13.72% stake, on a 5 year CAGR return of 20% pa. Promoter Anurang Jain is selling 3.78% in the OFS, whose holding will shrink to 82.51% from current 86.28%. Issue closes on Friday 7^th October.

Endurance Technologies is an auto component maker, manufacturing raw and machined aluminium castings, alloy wheels, suspensions, transmission components and braking systems, at its 18 plants spread across India’s auto belt, in addition to 7 in Europe (5 in Italy and 2 in Germany). While 54% of consolidated sales cater to two wheelers, 37% sales meet the needs of four wheeler OEMs, with balance being three wheelers (8%), LCVs and HCVs. Exports to Europe accounting for a third of the revenues, balance come from Indian operations for the country’s largest aluminium die-casting company, in terms of FY16 output.

Like many other auto component maker, it faces high risk on client concentration, as top 3 customers accounted for 62% of FY16 sales (Bajaj Auto top customer with 40% of sales, FCA Group Italy (mainly four wheelers) constitutes 15% sales and top 8, 83% of sales. Other customers include Royal Enfield, Honda Motorcycle, Yamaha and other OEMs like Hero, Mahindra, Tata, Suzuki, Fiat. Company plans to commission a new machining plant in Germany in FY17, while by FY18, it plans to establish a greenfield plant at Gujarat to supply suspension parts to Hero.

For the past 4 fiscals, company’s consolidated revenues have grown at 8% CAGR while PAT has grown at 12% CAGR, with average RoCE remaining in the 20-21% range. So company’s growth can be termed as consistent and moderate. Its FY16 consolidated sales were up 7% YoY to Rs. 5,241 crore, and EBITDA was 11% higher YoY at Rs. 710 crore, resulting in 13.5% EBITDA margin. Net profit surged 15% to Rs. 292 crore, leading to an EPS of Rs. 20.70, on the current equity of Rs. 140.66 crore (FV Rs.10 each), post share consolidation from FV Rs. 4 to Rs. 10 each and 7:1 bonus issue in May 2016. Similar to peers, company’s depreciation burden is huge, at Rs. 250 crore annually, leading to cash EPS of Rs.38.50 for the previous fiscal.

Q1FY17 consolidated revenue stood at Rs. 1,443 crore, while EBITDA margin remained stagnant at 13.4% with EBITDA of Rs. 193 crore, despite 200 bps reduction in material cost as % of sales, from 58.3% in FY16 to 56.3% in Q1FY17. Net margins for the first quarter were same as the previous fiscal, at 5.5%, leading to a net profit of Rs. 80 crore, with EPS of Rs. 5.69 and cash EPS of Rs. 10.67.

As of 30-6-16, consolidated net worth stood at Rs. 1,535 crore, while total debt was at Rs. 956 crore. Knocking off cash and equivalents of Rs. 244 crore, net debt stood at Rs. 712 crore, indicating a comfortable net DER of less than 0.5:1. Company’s working capital position is also very strong, with inventory of less than one month sales and outstanding debtors at less than 2 months. 

At the upper end of the price band, company will have market cap of Rs. 6,639 crore and EV of Rs. 7,352 crore, which translates into EV/EBITDA multiple of 10.4x and 9.3x and PE multiple of 22.7x and 19.8x for FY16 and FY17 respectively. On cash earnings, multiple works out to 12.3x and 10.8x respectively. Smaller peer Rico Auto, manufacturing fully machined aluminium and ferrous casting components and assemblies with annual topline of Rs. 1,100 crore, is currently trading at EV/EBITDA and PE multiples of 7x and 14x respectively, on estimated FY17 earnings and on 8x, based on cash earnings. Larger peer, TVS Group’s Sundaram Clayton, with annual topline exceeding Rs. 12,000 crore, is ruling at EV/EBITDA and PE multiples of 7x and 20x respectively, based on the current year estimates.

On peer comparison, largely, the current offering is fairly priced, leaving little room for immediate appreciation. Being a primary market offering, Endurance should have priced the issue at a minimum discount of 15% to the fair value, as an incentive to potential shareholders. However, being an OFS, this was probably not considered! 

The company scores on the its scale and size, consistent financial performance and strong balance sheet position, although valuations are rich. However, to ride the favourable industry dynamics and positive market sentiment for the auto ancillary space currently, one can apply, with a long term view. 

Disclosure: No Interest.