Endurance Technologies - Quality focussed Auto component manufacturer

Company Brief:

Endurance Technologies is an auto-component manufacturer whose product profile consists mainly of four categories: Aluminium Die-castings, Suspensions, Transmissions, Braking systems

It was started in 1985 by Anurang Jain, nephew of Rahul Bajaj. Initially, it was supplying Aluminium Die-castings to Bajaj Auto and later it ventured into the remaining three categories which have higher margins. These three categories are sometimes referred together as ‘Proprietary products’ by the management. Endurance’s research focus is also on the newer, higher margin segments.

The company has 16 plants in India and 8 plants in Europe. The raw materials are Aluminium and Steel. Any increase in these prices can affect the profitability of the company but the company has a clause with its customers to pass on the costs in next 3 to 6 months.

The company also has an aftermarket business whose sales contribute just around 3% of the consolidated revenues. But this is growing fast at 15%+ and also has high margins. The company has an extensive network of 12 distribution centres and 300 distributors.

The top six clients of the company are Bajaj Auto, Fiat Chrysler, Honda Motorcycles & Scooters India, Royal Enfield, Daimler & VWG.
Recent new customers to the company are TVS, Kia Motors.
Bajaj Auto contributes about 55% of domestic revenues & 39% to overall revenues. In case of Bajaj, we can also try to look at it from the other side. Endurance supplies more than 50% of all auto components supplied to Bajaj. Anurang also mentioned in a conf call that he has high share of business with RE too (30%).
With Honda and as well as Hero Motocorp, we only do castings and suspension. Transmission and Brakes would be a huge opportunity coming our way.
With Yamaha, we have alloy wheels business.
So to summarize, in RE & Bajaj, there would be volume growth and more tech items which will drive growth. For other OEMs, there is scope to increase our share of business and also add new product areas.

The company has been working on reducing customer concentration both in India (with Bajaj) as well as in overseas (with Fiat & Daimler).
The company is working on cross-selling its complete product portfolio to the new 2W OEMs it got entry into.
At the moment, OEMs are rationalizing their vendors and hence this is a good opportunity for Tier-1 supplies like Endurance to cross-sell its product portfolio. OEMs are focussing on rationalising their vendors and Endurance being a Tier-1 supplier should help them

Products:


Structural benefits to our product portfolio (as per AR FY18):

  1. Increase in Aluminium die castings requirement for light-weighting purposes and increased machine casting business for 2W, 3W and 4W leading to value addition
  2. Premiumisation in 200cc+ suspension products and replacement of shock absorbers in scooters with high value front forks.
  3. Increase in paper-based clutch assemblies, increasing business with higher value addition and CVT volume growth from rising scooter demand
  4. Rising 2W demand, higher penetration of disc brakes and its entry into 200cc+ segment with high value addition, and the Govt’s mandate for introducing CBS (combined braking system) and ABS (anti-locking braking system) in FY20 for all 2Ws.

Castings:
Endurance is the largest Aluminium die-casting company in India in terms of actual output and installed capacity. Die casting contributes to about 45-50% of total sales of the company.
Casting is a process in which a liquid metal is somehow delivered into a mold that contains a hollow shape (i.e. 3D negative image) of the intended shape. The metal is poured into the mold through a hollow channel called sprue.
Die casting is able to produce automotive parts with complex shapes in closer tolerances than many other mass production processes. Little or no machining is required and thousands of identical automotive die castings can be produced before repairing the molds. Please view a one minute video here:

Suspensions:
A motorcycle fork connects a motorcycle’s front wheel and axle to its frame, typically via a yoke, also known as a triple clamp, which consists of an upper yoke joined to a lower yoke via a steering stem, a shaft that runs through the steering head, creating the steering axis. Inverted front forks are used in high-end motorcycles. An inherent advantage of inverted forks is their weight, they’re lighter than conventional front ends. A steel fork tube is the heaviest part of a traditional fork assembly. By design, inverted forks have shorter and thinner walled fork tubes. This results in less steering inertia and more responsive handling feel. One more benefit, inverted front ends deliver better compression and rebound dampening than conventional designs. Oh and one more big benefit when you compare inverted front ends against conventional front (tube & slider) ends is their strength. Please watch a video here:

Endurance Technologies is the only company in India to produce and commercially supply inverted front-forks, which are preferred by premium brands.
With the move towards more premium products, OEMs are switching from conventional twin hydraulic shock absorbers for a motorcycle’s rear suspension, and are adopting hydraulic and gas filled mono shock absorbers. Endurance has established a sizeable presence in this market, and expects an increase in their use.

Transmission:
Endurance introduced paper based friction plates to be used in high-end motorcycles. These are preferred over the conventional cork based plates for improving clutch performance and durability. The Company has also developed CVTs for scooters, which are preferred over natural clutch assemblies.

Braking:
The Company is poised to benefit from the higher composition of rear disc brakes as compared to low-end drum brakes, its participation in disc brake assemblies for higher cc motorcycles and also the mandatory ABS / CBS.
Endurance has already started commercial production of CBS through a technology tie-up; and the Company has entered into a License and Technical Assistance Agreement with a leading global brake and suspension company for joint development of ABS for 2W and 3W. These products will further widen the market for Endurance.
ABS prevents the wheels from locking up, thus avoiding uncontrolled skidding of the vehicle and decreases the distance travelled without slipping.
The CBS stands for “Combi-Brake System,” a name patented by Honda. What this means is that if you apply pressure at either one brake level, braking force is applied to both wheels. In India, this system debuted on the Activa, where the rear brake lever actuated both the rear and the front brake as well.
Endurance’s strong R&D capabilities has also helped it emerge as the market leader in the disc braking systems. There is growing acceptance of disk brakes, owing to its sharp braking and ease of maintenance over drum brakes. Endurance is expected to emerge as the largest beneficiary from the rising penetration of disc brakes.
The disc brake dissipates the heat more effectively. It takes longer for the disc brake to achieve brake fade, and these perform better on steep descends. The drum brake has the potentila of collecting water inside during rain or driving over puddles. That can result in the drum brakes not performing as well in wet conditions.

European Operations:

The company’s European operations are mainly castings and machinings. These contribute about 25-30% of the sales.
The company also has operations in Europe mainly supplying to Fiat & Daimler. These two OEMs contribute about 55% of overseas revenues.
The company’s strategy with Europe is to produce in Europe for the European market and to produce in India for the Indian market. This is because we are going in a direction where we supply big components, and it is not convenient to transport these parts from India.
The Company has secured orders in Europe for EVs and HVs. It has capabilities to produce castings in new shapes as required for such vehicles.

Management:

Management continuously aims to grow higher than the auto industry by increasing their content per vehicle.
Anurang is an extremely quality-focussed businessman. Just read through one of the conference call transcript and you will see his lazer-like focus on quality first, expansion next.
Anurang is also a self-made billionaire with a good track record of diversifying the product portfolio from low-margin castings to the four categories I have mentioned above.
Management is very financials focussed and keep mentioning that they at least want to maintain 20% ROCE in their business and their fresh investments.
No sudden surprises post IPO (like no fall in margins / no fall in asset turnover…)
Management is very happy to provide a lot of info during the conference calls.

Risks:

  1. Slowdown in Auto industry can cause slowdown in Endurance too
  2. Customer concentration risk with Bajaj Auto contributing 38% of consolidated revenues
  3. Too much mix of family and business. The top customer (38% contribution) is Bajaj Auto which is run by Anurang’s uncle. Another complication is that Anurang’s twin brother, Tarang Jain also supplies components to Bajaj Auto via Varroc Engineering (recent IPO)
  4. EV disruption. Though suspensions and braking systems are safe from this, casting (low-risk) and transmission (high-risk) businesses can be affected

Valuations & Efficiency:

Currently available at P/E of 34, which is on the expensive side for an auto-component manufacturer.

2017-19 CAGR numbers below:
Revenue => 16%
PAT => 22.5%

Efficiency parameters below:
ROCE => 25%+
ROE => 20%+
PAT Margins => Increasing from 5.3% to 6.5% over the years
Assert Turnover => 4+

Working capital cycle:
Inventory days => Less than a month
Receivable days => Less than two months
Payable days => More than three months
This is leading to very strong cashflows from the company compared to its PAT.

2018 2017 2016
PAT 3907.57 3303.1 3004.5
CFO 7420.68 5370.77 6982.84

Disclosure:

No holdings. Not a buy / sell recommendation. Please do your own research.

Resources:

Annual Reports. Conference Call Transcripts. Credit Rating Reports. Wikipedia. YouTube.

13 Likes

What is reason for 20% lower circuit in stock price today?

Maybe due to following management commentary…


Also CNBC Anchor said they are diversifying into Tyre Manufacturing,which didn’t go down well with the market.

2018-19 AR Notes:

-ETL remains India’s largest die casting company in terms of output and installed capacity, one of the top 2 co’s in suspensions,transmissions & braking systems for 2w & 3w

-Has 16 plants in India at following locations: Waluj,Aurangabad(MH),Chakan,Pune(MH),Sriperumbudur,Chennai(TN),Pantnagar(Uttarakhand),Sanand,Ahmedabad(GJ),Halal(GJ)

-Co. has 5 subsidiaries in Europe, have total 9 plants in Italy & Germany

-Having incurred investments in the past 3 years, aim is to remain tight on capex for at least next 2 years

-Strategic focus is on cost controls and margin expansion

-Scope of margin accretion in high-value fully machined aluminium castings, inverted front forks, Combined Braking Systems(CBS), Anti-lock Braking Systems(ABS) and paper based clutch assemblies

-increasing content per vehicle with new safety regulation products/systems(ABS,CBS), product premiumisation, use of CVT & Front forks in more scooters

-has state-of-the-art 8-track proving ground at Aurangabad spread over 29 acres of land to conduct advanced R&D and evaluate product performance in real road conditions(this is one of its kind for an auto-component supplier)

-ETL’s ride tuning van is being used extensively by customers to optimise ride and handling of vehicle with ETL’s suspension products

-have 200 dedicated R&D personnel, received 9 patents, 7 design registrations, 60 patent applications under approval

-have central Advanced Engineering Group(AEG) to support all R&Ds. Within AEG, there are different cells for CAE, Road load data acquisition, Oil & friction, elastomers & failure analysis

-have technical engineering center in Chivasso, Italy, for aluminium die castings

FY19 Developments:

-Production commenced in sep’18 at 2w suspension plant in Halol, GJ to cater to requirements of Hero MotoCorp’s front forks and shock absorbers

-2w suspension plant at Kolar, KA will start supplying front forks and shock absorbers to HMSI from 3QFY20

-2nd die-casting & machining plant in Chennai is being setup on a 9-acre plot in Vallam, production is likely in 4QFY20

-Operations in Manesar plant discontinued & capacity was shifted to Pantnagar to consolidate operations and achieve economies of scale, an exceptional cost of 20 Cr. paid towards compensation for separation of workmen. Consolidation has not resulted in loss of revenue

-ETL operates from 16 plants in India, with new plants at Kolar & Vallam, total nos would go upto 18

-During FY19, acquired Italian aluminium die-casting supplier fonpresmetal gap spA with capacity of 6500 metric tonnes/annum(MTPA), renamed to Endurance Castings S.p.A.
Acquisition costs 8 mil. Euro funded through internal accruals & borrowings. FonPresmetal has cash & equivalents of around 1.9 mil Euro(net). Acquisition augments casting capacity and help backward integration. Post acquisition ETL has 6 mfg plants in Italy

-Added new value-add products to portfolio including machined aluminium castings, 2w CBS & ABS brakes assemblies and rear brakes, paper based clutch assemblies, front forks and shock absorbers for 200cc & above motorcycles

-gained presence in electric 2w & 3w business for suspension and braking products

-export of inverted front forks and rear shock absorbers for 401cc and 790cc motorcycles is in progress

Future plans:
-Expand product offerings in India,
-Expand presence in Transmission and Body parts in Europe,
-Focus on German clients and make small acquisition for high-margin business
-Considering serving South East Asia from India
-Also contemplating entering newer markets from European base
-Aim to add 7 more countries in after-market segment, as replacement market continue to show abundant growth(well positioned to reach the targeted markets through its extensive dealer & distribution networks)
-ETL is working with OEMs in developing electric & hybrid vehicles for supply of suspension products, Die-castings & braking systems
-Working on with some of its preferred customers on ‘total electric’ strategy by 2022

Risks/concerns:
-Economy slowdown results in lower consumer spend which in turn translates into declining activities for ancillary manufacturers
-Volatility in commodity prices: Aluminium & steel are important RMs for the co., also co. has pass on agreement with OEMs so fairly insulated from this risk

Other Financials:
-Revenue constituents:
Shock absorbers -36%,
Aluminium die castings -36%,
Clutch & parts -8.7%,
Disc brakes assemblies -7.6%,
Alloy wheels -7%,
Others -5%
-Performance of Subsidiaries in Europe(Italy & Germany) is quite flat in terms of growth
-Remuneration of MD(Anurang Jain) is 132 times of median employee’s remuneration(which is 4.4 lakhs) that comes around 5-6 Cr. which is 0.08% of revenue or 0.2% of Gross income
-MD, COO, CFO together draw 10 Cr. as remuneration, 0.14% of revenue or 0.3% of Gross income
-Both the chairman & MD have significant skin in the game, holds 75% of the company either direct or through family owned trusts

Disc.: 5% of Portfolio

3 Likes

Found this article today. This might be relevant to the above discussion. Approx. 10% up in share price after this news. Just a general question why it is bad news for the company to enter into Tyre Manufacturing. Is it because there is already tough competition existing in that space?

1 Like

@sbojja, right, Tyre business has been widely perceived as highly competitive, capital intensive, takes long time to break-even. There are already quite a number of domestic players in this space like MRF, Balkrishna, Apollo, JK, Bridgestone, TVS Srichakra, you name it and not to forget the Chinese imports adding fuel to the fire.
Endurance, having done with their recent expansion(newly commissioned plants in Kolar & Chennai) and acquisition(Fonpresmetal), investors community feel it is not a good idea to jump into an unrelated business and burning cash, at least not at this juncture of hue & cry about the crisis the auto sector and Indian economy is in.

1 Like

Wont alluminium die casting business suffer when Electric Scooters will become popullar,
same with clutches.

Brakes, Shock adsorbers will continue to be used in EVs , two wheelers or four wheelers

EVs adoption in two wheelers to be soon and government also want electric bikes to become popular.
E Bikes will take less power n also need minimum charging infrastructure.

As per the concall, for aluminium castings, mgmt assured that there are new opportunities opening up due to EVs like Motor housing, Battery housing, covers,etc. Overall, impact on aluminium casting business due to EVs is in wait & watch they said. (I think transmission covers,clutch housing or other transmission related Al. casting products may be impacted due to EVs).

On new aluminium forgings business, like, for inverted front forks product, 2 triple clamps & 2 axle clamps requirements are currently met by imports from Austria & Italy which Endurance is planning to do in-house which can reduce the cost & improve margins. For this, they have tied up for technical collaboration with an Italian company(SGM or FGM, not sure).

Clutch business which is of 6.5% in India(4.5% of consolidated) & 75% of it caters to below 150cc may go off if industry take turn towards EVs 100%.

Found below article today in ET on the same line:

1 Like

Conf Call Q1FY20:

  1. During Q1, as compared to previous year same quarter, our consolidated total net income grew by 2.8% from Rs 1864 crores to Rs 1916 crores. Consolidated EBITDA grew by 26.3% from 275.6 crores to 348.2 crores. PAT grew 32.9% over previous year. During Q1FY20, our standalone total income grew by 3.5% from Rs 1317.7 crores to Rs 1364.5 crores. Standalone EBITDA grew by 37.7% from Rs 180.8 crores to Rs 248.8 crores with an EBITDA margin of 18.2%.
  2. Bajaj Auto share of business on consolidated sales were at 37.7%. In India, there was a growth in business with Bajaj Auto at 6%, Yamaha also at 6% and Hero MotoCorp by 35% and Case New Holland by 43%.
  3. In Europe, we mainly grew 55% with VW group. Our top 6 clients, comprising about 75% of Endurance Group net sales are Bajaj Auto, Fiat Chrysler, HMSI, Volkswagen Group including Porsche and Audi, Royal Enfield and Daimler.
  4. This morning, at our Board meeting, we took in-principle approval for a proposal to pursue tyre manufacturing for 2Ws and 3Ws, for which we took approval for land acquisition, and had also indicated the estimated capex. We would like to assure all of you, that the project is at an initial proposal stage with no project activity started.
  5. We are in the process of evaluating this project and will not be going ahead unless we are 100% confident of our profit margins and the return on capital guidelines. This means that we may not even proceed with the project.
  6. As for the inverted front forks, the volume will be doubling in the next 18 months and as you know, this is a very high-value business for us.
  7. We are entering the aluminium forging business to start making triple clamps and active clamps in-house for our inverted front forks. We have signed a technical collaboration agreement with FGM in Italy. These aluminium forgings will be an import substitute and we will offer the same at lower prices to our OEM clients.This will also help us increase our profit margins and give us an opportunity to also grow this aluminium forging proprietary business to serve other 2W and 4W aluminium forging requirements, including for EVs. The supplies are targeted to start from June 2020. The potential to reach Rs 125 crores within 3 years after start of supplies.
  8. We are also extremely happy to inform all of you that we have strengthened our partnership with KTM components. We will be investing 4 million Euros over a period of 2 years in KTM Industries, which is a publicly listed company.
  9. KTM will transfer to Endurance the latest technologies for the front forks and shock absorbers, including semi-active electronic suspensions. It will also include cooperation for supplying suspensions from Endurance to KTM for electric e-bikes and electric 2Ws, and including increased exports from Endurace to KTM in Austria, China and supplies to India. This is an extremely important step for profitable growth in future.
  10. In Q1, in India, Rs 188 crores value of business has been awarded, mainly from HMSI, Kia Motors, Hero MotoCorp, TVS and Getrag with SOP starting in Q3FY20 and the peak sales reaching in FY21. In Q1 in Europe, 12.8 million Euros new business has been awarded mainly from Maserati and Fiat Chrysler where the SOP will start in 2020.
  11. Our 2W suspension plant in Halol, GJ had started supplies from September 2018. It has now reached 2600 front fork / shock absorber sets / day. The LOI (Letter of Intent) is for 6200 front fork / shock absorber sets / day.
  12. Our Kolar, Karnataka plant for supplying scooter front forks and shock absorbers to HMSI, will start supply for September 2019 and reach a peak of 3500 front forks / shock absorber sets / day from Jan 2020. We will also be supplying front forks to TVS from this plant.
  13. The Vallam plant will start supplies in Q3 of this financial year, mainly for Hyundai and Kia Motors. We are increasing business with Hyundai and Kia Motors, and now we have Rs 279 crores worth of orders per annum, which peak will be reached in 2021.
  14. The ABS brakes tie-up with BWI, USA is progressing well. Our ABS samples are in the process of being tested for performance and road endurance tests. We hope to get clearance in Q4 of this FY, by when we will be ready to start supplies also.
  15. As far as TVS is concerned, after getting the 2W disc brake assembly order, we further got orders for 2W front forks and 3W brake systems as well. The supplies for these orders will start in this FY. We are in the process of getting further orders from TVS.
  16. As far as we in Endurance is concerned, and when I speak for the ‘promoter family’ having a 75% shareholding as well, we have a very, very high focus on ensuring that we do not lose shareholder value for our 25% shareholders. We in Endurance will not take up any project unless we are very concerned on the profit margins and the returns on capital, because we have to protect shareholder value of our investors as well as the promoter family.
  17. We cannot close our eyes to any new project when the customer talks to us. I have to take it seriously. Business in B2B, especially auto components, is done on trust over a period of time. When strong relationships are forged, you get the support and that is why we are increasing our share of business on all existing product segments.
  18. Our inverted front forks have two triple clamps and two axial clamps. These are aluminium forgings which we import from suppliers in Austria and in Italy. These are very high-value products for our own in-house requirements.Apart from Bajaj and KTM Austria, we also got an inverted front fork order from Honda, which is starting in June 2020. So we said, why do not we do the forgings in-house? We can offer competitive prices to our customers, at the same time, we get higher value add, higher profit margins on the inverted front fork. So we located a company in Italy called FGM and we have already signed a technical collaboration agreement with them.
  19. Last year, we did about 130000 inverted front forks. This requirement is going up to almost 175000 and the number is going to be double in the next 18 months. New orders are expected from KTM, based on a strong partnership that we have established.
  20. Apart from these requirements, we also want to do forgings for petrol, diesel and electric vehicles, whether it is 2W, 3W or 4W. That is a new business which we will target. So it is not only for in-house requirement, we will be servicing aluminium forgings for other requirements.
    For example, in a 2W EV, the training arm, motor housing, the battery pack, the cover, suspension links, these are all aluminium forgings. If I cover 4Ws, electric or suspension arm, battery pack support, aluminium control with steering knuckle joint - these are all aluminium forgings so there is a huge requirement here also. But our first priority is to cater to our own in-house requirement. This is a very good project and it is technology intensive.
  21. For the last 11 years, we have had a very strong partnership with KTM Components, which was earlier called WP Suspension. In July, the owner of KTM, Mr. Stefan Pierer, met with me. He has a lot of confidence in Endurance. In connection with our supplies to KTM products in India and Austria, he appreciates our ability to deliver good pricing, technology and quality. He was keen to further strengthen our partnership so in that context, we plan to do some investment in the KTM Industries, a rather small investment. It would be around 4 million Euros over two years which will go a long way in strengthening our partnership.
  22. Endurance and KTM will see greater cooperation in terms of transfer of the latest technologies of front forks and shock absorbers, including the semi-active electronic suspensions used on KTM bikes above 790cc. It will also include cooperation for supplying suspension for electric e-bikes and electric 2Ws which are going to come, including scooters and motorcycles.
  23. For the Indian KTM Bajaj, we are the single source. In future, we intend to supply for electric scooters and motorcycles, whether it is e-bicycles for European market, which is a huge business, and very high-value front fork business. All these opportunities will open up for us with this tie-up, which we have done.
  24. The better result achieved in Europe compared to the general market in terms of total income was driven by significant increase in sales with Volkswagen Group, which was able to offset the reduction with FCA, where we saw reduction of 34.7%.
  25. There was a reduction in the Aluminium prices compared to the previous year. If I consider the same level of aluminium compared to the previous year, we grew 6% that means that there is a 2.9% reduction in total turnover due to the reduction of price of Aluminium.
  26. In India, we are going to have a capex not exceeding Rs 300 crores. We are continuously trying to decrease the capex looking at the near-term market. So we have regular meetings to re-evaluate. European capex is Euro 30 million.
  27. We have got 1033 crores worth of orders last year and Rs 188 crores this year. These are customers including Kia and TVS, Hero, HMSI. These orders will reach their peak by 2021.
    The major business to be affected by electrification is the clutch which is about 4.5% of our consolidated business. It is not that big. But definitely, that goes out.
  28. The new TVS orders are for the small motorcycle front forks and three-wheeler brakes. Both should start by end of Q3 or beginning of Q4, while the 2W disc brake assemblies will start from the next quarter.
  29. The scooter front forks - 2.76 million pieces per annum, will start in September, but peak will be in 2021. We have reached 3500 front fork / shocks a day from January onwards.
  30. Right now, we are doing Rs 100 crores of business with Hyundai and Kia, but 2021, we will go 3x to Rs 300 crores for sure.

Conf Call Q2FY20:

  1. Endurance standalone business degrew by 3.4%. In Europe in first half of FY20, automotive sales degrew by 0.6%. European operations have posted a total income growth of 1.5% in Euro terms.
  2. In the last 6 months, we have lowered our capex by Rs 64 crores, working capital by Rs 65 crores and lowered our raw material cost and employee cost. Therefore, you are seeing better profit margins inspite of degrowth in sales.
  3. There was a sizeable growth in business with Hero MotoCorp by 27% in first half. In Europe, in Euro terms, we grew 51.9% with Volkswagen Group including Porsche.
  4. Since April 2019, Rs 343.5 crores value of new business has been awarded and we have Rs 1225 crores of request for quotes in hand, which doens’t include new business of Bajaj Auto. This new business which we have acquired is mainly Kia Motors, HMSI, Mero MotoCorp, Royal Enfield, TVS and Tata Motors.
  5. Our 2W suspension plant at Halol, GJ started the production in Sep18 last year and is now supplying 100% of the front fork and shock absorber requirements of Hero MotoCorp’s Halol plant, which stands today at 2700 sets of front fork and shock absorbers per day. We are expecting to reach 6200 sets per day as per LOI by end of next FY.
  6. Our Kolar, Karnataka plant for supplying front fork and shock absorbers had started supplies to HMSI this year in September 2019 and will reach 3500 sets of front fork and shock absorbers per day by Feb20. This includes the replacement of scooter shock absorbers by front forks.
  7. In Chennai, our second die casting and machining plant at Vallam will start supplies by end of next month. The customers to start with would be Kia Motors, Hyundai and RE. We expect the sales in Q4 of this financial year to be approximately Rs 35 crores.
  8. The internal supplies of front fork’s forging business will start from July 2020. The potential to reach Rs 125 crores of sales within 2.5 to 3 years thereafter.
  9. The ABS brakes tie-up with BWI is also progressing. Our ABS samples are in process of being tested for performance and road endurance by our OEM customers, at present. We are closely engaged with them. We hope to get clearance in Q4 of this FY, by when we will be ready to start supplies also.
  10. As far as TVS is concerned, after getting the 2W disc brake assembly order, we further got orders for 2W front forks and 3W brake assemblies. The 2W front fork supplies have already started. The supplies for all these orders will start in this FY. We are in the process of getting further orders for brakes and suspension from TVS.
  11. Our test track at Aurangabad is one of the best tracks for 2W and 3W testing in India and will help us to give “first-time-right” products to all our OEM clients.
  12. We are also increasing our business with Hyundai and Kia Motors and now we have Rs 279 crores per annum of business, where peak sales will be in FY22. We are further working on orders from Hyundai and Kia Motors.
  13. Endurance brakes business as a share of our total business in India was at around 7% last year. This has now grown to 10% largely because of increase in the number of disc brake assemblies with combined brake assemblies becoming mandatory from April upto 125cc and also ABS which has become mandatory above 125cc. We are starting to sell brakes by the end of next month for TVS Apache.
  14. As far as our market share goes, we supply about 20% of the requirement of disc brake assemblies and about 31% of the discs. The numbers are different because, to, Yamaha we supply about 65000 to 70000 discs in a month which are exported to their plants in South East Asia also. So you can say Endurance has 20% of the India business, so there is a huge scope for increase there. I believe it is Brembo which is the market leader. I know there are some companies importing from China also which I think we will substitute in due course of time based on technology and price. There is a huge potential as you know Endurance is a cost leader. I have always mentioned that our prices are lower than what our competition gets.
  15. Our first focus would be to get our product cleared and then our focus will be to grow our share of business like we have always done in the last 20 years in proprietary business. So our first focus today stands of getting our ABS cleared with our first OEM customer and then we can talk about share of business later.
  16. We are one-third SOB with Royal Enfield in oil filling and disc brakes. Rest I think is done by Brembo.
  17. EBITDA margins improved in European business due to the better mix compared to the previous year. It is not due to reduction of Aluminium prices, because the reduction is a pass through with the customer.
  18. The improvement in Europe margins is owing to better mix compared to the previous year, due to the increase of share of the Volkswagen business, which comprises more complex parts using highly automated production lines. We grew with VW about 46% Q2 and in H1 by 51%. It is a better EBITDA business compared to the previous business with Fiat Chrysler.
  19. The proprietary business is about 53% of our India business. If you add your Aftermarket sales, it is even higher.
  20. For the OEMs, there would be other EV components we are going to be supplying for the new EVs but I would not like to speak more on those. But for the Chetak which was launched - that will have our products.
  21. At this moment, I’m very happy to inform you about the 1.5 litre cam-carrier business that we had announced with Volkswagen. This has proved to be a highly important acquisition for us, because 50% of the total volume of Volkswagen 1.5 liter would be assembled with hybrid technologies. It is an important opportunity considering that we are producing more or less 120,000 units per month.
  22. We have enough capacity now. The expansion capex now will only happen in any new products, aluminium forgings or any new projects which we may do.
  23. BS-VI won’t have any impact on aluminium die castings business except some small design changes in the toolings.
  24. While we have got a breakthrough to PVs with Hyundai, Kia and Tata Motors, we are seeing inquiries from other OEMs as well. The competition we have is Sundaram Clayton, Sunbeam and Jay Hind Industries in Pune. These three are quite strong in PV and CV.
  25. In the second quarter, VW is 29.2% of our turnover compared to 27% of Fiat Chrysler. In six months, we have had reduction of 33% in Fiat, even if they lost in the market only 9.9%. This is due to the large reduction that we are seeing in the diesel tech in European market. There was a reduction of more or less 20%, in some countries 40% compared to previous year in diesel car sales. We historically have been a supplier of diesel component for Fiat and for this reason we have had a major impact compared to the market. Fortunately we are compensating this impact with Volkswagen. We are producing for them only gasoline components and so we are compensating which we have suffered with FCA. In the process, our exposure to diesel is reducing.
  26. In Daimler, we have had 18.3% degrowth compared to the previous year, even if they grew 9.2% in Europe. This is due to the lower sales from Europe to Nafta and tariff war between US and China. From Endurance, we produce the components for Series M cars that Daimler is producing in the US from where they export to China. We are affected by this duty policy and so we have had a reduction in business with Daimler.
  27. There are huge opportunities for other Aluminium forgings required for 2Ws, 3Ws, PVs that we will do in the next stage. So this is our new project and as we are talking we are looking at other projects which we will announce later once we are 100% clear on that, but we are working on other projects also right now.
  28. We have been doing clutches now for motorcycles and 3Ws. So CVT will be a new product in the transmission side once the testing is complete.
  29. Degrowth in our sales to the customers everywhere has been less than what they have degrown.
  30. In PVs, we are focusing on machined castings. The CAPEX is higher but the ROI is much better in machined castings because the value add is good in machining. So OEMS are also now getting more and more open to give machined-castings business as compared to the past. One of our major focus areas is to do fully machined castings even for the existing business. So to answer your question, castings for PVs with machining is a good business to be in with very good EBITDA margins. It will be comparable to the proprietary business.

Company looks interesting from next two to three years perspective -
Auto cycle revival + increasing share of business with OEMs + premiumization of bikes leading to more demand for company’s proprietary products + backward integration through forgings + proprietary products’ margin expansion + economies of scale as capex phase is over now + PE expansion through bull market.

Each individual factor above may have a small contribution but all summed up together, I believe can give at least 15% compounding.

Discl: Not holdings but very interested.

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ABS for 2 wheeler is the next major trigger but as company admitted in the latest conference call that there was a delay of 8-9 months already in finishing testing of the product and they want to bring it by next 2-3 quarters. EV is definitely a threat as company indicated that they will loose 8% of india business because of no clutch.

Minda , Mahindra CIE has got aluminium casting business and they are also ramping up their production

Disc: Invested, from the launch of IPO

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Thanks for your comments @Nibin_Issac .

Agree EVs can hurt 5% of consolidated business. However I’m not very worried about it as it is only 5%. Adoption of EVs will happen gradually over the years than at once. Increasing share of business and new businesses like forgings for Endurance should compensate for it I believe.

Other issue to me is the Europe business is not very exciting. Only VW story is good. FCA and Daimler are down. FCA down as they were supplying to diesel cars but no explanation on why they couldn’t win gasoline or EV business from the same customer. They said they are compensating with VW but that is through gasoline cars and not EV. This gasoline car business with VW may hit the same issue as diesel business with FCA. Though diesel cars are being shunted badly in Europe, gasoline cars don’t have much time too. EV adoption is very fast in Europe. I’m more worried about this than the 5% transmission business.

What are your thoughts on Europe business?
Personally I’m very bullish on standalone but not comfortable with the Europe business.

They supply engine ,transmission and suspension parts to OEM (around 40% to FCA) and engine parts are their high margin products. Engine parts will be become obsolete when EV comes up and that leaves out transmission and suspension parts . Suspension and transmission parts needs to be light weighted for EV and i guess they are currently into that. Management indicates that they will be going for inorganic growth in Europe which i guess will be a key.

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Thanks for sharing your thoughts Nibin.

It seems lots of Auto ancillary players like to go through inorganic route in Europe. Do you know why? Previously we had Motherson, now it is Endurance. Probably Varroc too (not sure on varroc).

Is it because European companies are not good at stressing the assets? Are they not good negotiators when it comes to pricing? Are they not efficient operators? Are they bad capital allocaters in general?
(Apologies if it sounds racist, but want to understand why many Indian companies are able to explore Europe through inorganic growth).

Going global is the dream of many Indian companies once they reach a level of stability in Indian market and got strong cash flows and low gearing. As per a report ,endurance grows at a rate of 50x from 1995 -2005. I guess the luring part is that these European companies provide them manufacturing plants at strategic locations, new technologies and also new customers . In 2019 endurance acquired fonpresmetal , their 2nd largest customer was Bosch which i guess was new client for endurance. Endurance started with die casting with in house technologies and acquired transmission and braking systems technologies through European acquisition and partnership

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OEM / Business Castings Suspensions Brakings Transmission Opportunity
Bajaj Auto 1 1 1 1 Already doing almost 2500 crores worth business, so kind of matured. Remaining all OEMs in India do business of 2500 crores. New products like ABS, Forgings will first be tried out with Bajaj.
KTM 0 1 0 0 Will be exporting more and more suspension products after new contract for high-end bikes like 790cc. Will also supply for their electric bikes.
HMSI 1 1 0 1 Brakes are already in process. Share of business in other segments is increasing.
Royal Enfield 1 1 1 1 Matured share of business.
Hero MotoCorp 1 1 1 0 Transmission business is under testing. Share of business with Hero is increasing.
TVS 0 1 1 0 TVS is a new customer. Lot of potential to increase share of business. Transmission and Castings are already under discussion.
Yamaha 1 0 1 0 Yamaha is a small player
Hyundai / Kia 1 0 0 0 New customer but received huge orders worth 300 crores.
Tata Motors 1 0 0 0 New customer. Breakout to CVs.
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Endurance has got plants in italy and germany . Their main clients VW, Daimler is going to have an impact due to EV.

With the on-going turmoil in Italy, it is quite obvious that its 6 plants in Italy and 3 German will be shut close for an extended period. This is going to reflect poorly in the AR.

image

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Takeaways from conference call

 India business remained under pressure. Revenues in India business declined by 16%
yoy in 4QFY20 led by (1) sharp decline in production volumes from all the major 2W
OEMs and (2) decline in metal prices, which was partially offset by (1) double-digit
growth in HMSI led by supply of front-forks and (2) single-digit growth in the aftersales
market. In this quarter, the company reversed incentive of Rs70.44 mn, which they have
received under Package Scheme of Incentives 2013, Government of Maharashtra.

 Strong order-book growth led to outperformance in standalone business. For
FY2020, revenues for the company declined by 10.5% yoy (adjusted for Rs874 mn of
government grants in FY2020) whereas two-wheeler production volumes declined
by >15% yoy in FY2020. Outperformance of the company can be attributed to new
order wins from two-wheeler OEMs. The company has won new orders worth Rs5.9 bn
in FY2020 mainly from TVS Motor (for two-wheeler front forks and three-wheeler brake
assembly), Hyundai-Kia, Hero MotoCorp and HMSI out of which the company will
commence production for 50% of the orders received. The company has also received
quotes worth Rs12.8 bn from Hyundai-Kia, HMSI, TVS Motors, Tata Motors and Hero
MotoCorp for which the company is in discussion. The company will start supplying ABS
to Bajaj Auto in FY2021. EBITDA margin improved by 150 bps yoy to 15% mostly led by
gross margin expansion. The company reported PAT of Rs4.3 bn (+14.8% yoy) on
account of lower tax rate. In terms of revenue mix, the company derived 13% from Bajaj
Auto, 8% from Royal Enfield, 12% from HMSI and 4% from Hero MotoCorp in FY2020.

 European business impacted by shutdown. Endurance’s Europe revenues were down
by 16% yoy in euro terms (down 16% yoy in rupee terms) in 4QFY20. In FY2020,
revenues declined by 3% led by (1) 5% yoy decline in European new car registrations and
(2) decline in aluminum prices, partly offset by order wins from VW and Daimler. The
company has won EUR43 mn worth of new orders in FY2020 mainly from VW, FCA,
Maserati, and Porsche. Over the past two years, the company has won orders worth
EUR110 mn for electric and hybrid car applications. Due to strong order wins for VW
(including Audi and Porsche), market share (in the overseas business) of VW (29% of the
overseas revenues) overtook FCA’s market share (28% of the overseas revenues) for the
first time in FY2020.

 Plant update. (1) Halol plant. The company supplies suspension parts to Hero
Motocorp. The company started production from September 2018 and currently has
reached production of 6,000 front-fork sets per day in March 2020 and (2) Karnataka
plant. The company started supplying front-forks to HMSI from 4QFY20. The company
will supply 2.7 mn front-fork sets by FY2021 (3,500 sets per day). The company will also
supply to TVS Motor from this plant.

 Other key points. (1) Net consolidated cash stood at Rs361 mn at end of March 2020,
(2) the company will incur capex of Rs1.5 bn in standalone operations and EUR35 mn in
overseas operations in FY2021E, (3) the company expects orders for inverted front-forks
to double in the next two-three years, (4) the company derives 71% of the revenues from
Indian operations in FY2020, (5) two-wheeler segments form 78% of standalone
revenues in FY2020, (6) the company has acquired Adler (technology provides for clutch
parts and CVT) and Grimeca (braking assembly partner) in FY2020 and (7) the company
sees business opportunity in alloy wheels from the medium-term perspective as some
OEMs were importing alloy wheels from China.

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Half of other income of 27 crores is miscellaneous income in the annual report 2018-2019. What the misc income comprises of is not mentioned anywhere. Is it something to worry about?

Conference call takeaways
 Standalone business recovered sharply during the quarter with July, Aug and Sep sales
at 71%, 104% and 123% vs last year. Oct sales at record high level of Rs 5.6bn (+35%)
 Won Rs 3.6bn of new business in India in H1 (excluding Bajaj), Rs 2.8bn in Q2. In Europe
won EUR 10.8mn of new order
 Additionally, ENDU has Rs 12.3bn of RFQs
 600k unit brake assembly at Pantnagar to start by Jan’21; 17.2k units cylinder head
LPDC plant in Pantnagar to start by Mar’21; Vallam plant to supply castings to Hyundai,
Kia and RE will start operations from next month
 Employee restructuring/VRS would save Rs 49mn in India and EUR 0.6mn in Europe
 New orders included Rs 320mn order from Hyundai; Hyundai Kia combined would reach
peak rate of Rs 3.07bn revenues by Q4FY21.
 ENDU will start supplying braking, suspension and casting including Battery house
casting for electric scooters in 2021
 Company isn’t seeing any impact of covid lockdowns in Europe on its business yet
 Production is running at high capacity for domestic as well as Europe business
 Actively looking at organic and inorganic growth in technology oriented, new product

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