Published on 15/04/2019 2:21:33 PM | Source: LKP Securities Ltd

Buy Endurance Technologies Ltd For Target Rs.1,399 - LKP Securities

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Justifies premium valuations

Endurance Technologies (Endurance) is one of the biggest suppliers of components to 2- wheelers and 3-wheelers in India, having core-competence in aluminium casting, transmission and suspension products. The company is likely to benefit from new customer wins, stricter safety norms in India and increasing demand for aluminium content in passenger vehicles across India and Europe. The company is growing at a rate faster than its peers as well as its underlying industry, hence we believe that the premium valuations of 24x on FY21E earnings, at which the stock is trading currently is well deserved. We initiate coverage on the stock with a BUY rating and a target of ₹1,399. 


Market share wins across segments expected with new opportunities in the offing

Endurance is a strong player in most of the segments in which it operates. With about 30% market share in shock absorbers and front forks business, opportunity in the form of transition of HMSI from shock absorbers to front forks would lead to further gain in market share as it is a huge opportunity coming up. In the braking component industry, we see the new stricter safety norms implementation from April 2019 to offer a robust demand for the company’s newer and existing products. In the aluminium casting industry, increase in aluminium content in domestic 4-wheelers and demand for the same in Europe driven by newer emission norms and Electric vehicles shall lead to rise in Endurance’s market share. However, the pace at which this business will grow will be slower than that of the previous two businesses. The company has an overall strong order book of ₹9.2 bn (mainly from Kia Motors, HMSI, Hero Motocorp, Yamaha India, Royal Enfield, Fiat India, Tata Motors and TVS) to be executed by FY 21E.


Multiple margin drivers to push up the profitability hereon

Endurance has been scaling up its proprietary business (Suspension, Transmission and Braking business) led by stricter safety regulations in 2-wheelers in India, which should result in share of proprietary business to increase to 60% of standalone revenues in FY2021 from 50% in FY2018 and 51% in Q3 FY19. The non-proprietary business which includes aluminum casting business has a lower margin and as its proportion is expected to go down, margins are expected to move up from here. Transition of shock absorbers to front forks by HMSI scooters has a huge scope for margin escalation as the content per vehicle of front forks is twice that of shock absorbers. Higher demand for disc brakes along with ABS will also increase the proportion of high value products, which will drive margins.


18% net profits CAGR for FY 18-21E a testimony to the success

We forecast Endurance’s consolidated revenues/net profits to clock a CAGR of 13%/18% in the period between FY18-21E, driven by strong growth in India business (16%/27% growth in revenues/net profits in the same period). We expect profitability to expand from here on the back of better capacity utilizations, operating leverage and margin expansion on robust product mix (higher share of proprietary business). 


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