Endurance Technologies-IPO Analysis

About the issue
After GNA Axles the next auto ancillary in the  IPO run is – Endurance Technologies. The issue is an offer for sale (OFS). In this offer for sale company will issue 24,613,024 equity shares of face value Rs 10 in the price band of Rs 467- 472 . Promoter, Anurag Jain and existing shareholder Actis Components and System Investment will raise upto Rs 1161 crore through OFS. The issue will open from October 5- October 7, 2016.

Purpose of the IPO
This public issue will be utilised to reap benefit of brand equity by listing of equity shares on the stock exchanges.

Industry Outlook
Auto ancillary industry is one of the booming sectors in India with a very positive outlook in the coming years. Recently carmakers have recorded a speedy volume growth of 21 per cent in September sales. We expect more growth across 4W along with 2W ahead of festive season in consort with seventh Pay Commission award, budgetary allocations towards rural development, increased focus on creation of irrigation infrastructure and good monsoon. As per ICRA, 2W sector expects sales growth of 10-12 per cent in FY17; which will eventually uplift automotive components companies.

Production of automotive components is driven by consumption from OEMs, exports and the replacement market. The key automotive components for OEM production demand of two-wheelers and three-wheelers in India include automotive castings, alloy wheels, braking systems, transmission and suspension. 

Company Outlook
Endurance Technologies is India’s largest 2W and 3W automotive component company engaged in design, development, testing and manufacture of alloy wheels, suspension, transmission component, brake system and aftermarket sales. Majority of revenue comes from India (67 per cent) followed by Europe (31 per cent). ETL’s revenue is driven by alloy wheels (67 per cent) and suspension (23 per cent), and is growing at a five year CAGR of 8 per cent. The company mainly caters to 2W sector (55 per cent) followed by 4W (35 per cent). 

ETL has 18 manufacturing facilities in India and 7 in Europe. It has 12 distribution centres and 256 distributors in India; and exports products to 20 countries, directly and indirectly. The company has good clientele base in 2W sector like Eicher Motors, Royal Enfield, Honda Motorcycle and Yamaha, but the prime client is Bajaj Auto. Bajaj Auto generates 40.80 per cent of earnings in the company. Bajaj Auto has successfully maintained FY17 sales guidance of 1.6 million units so far, which gives us revenue visibility in ETL.  Any slowdown in growth for Bajaj Auto may weigh on demand for Endurance Technologies. The company is growing in international markets at 13 per cent CAGR foraying into 4W OEM sector over a span of three years.

Financial Performance
The company has reported 8 per cent five year CAGR  growth in total domestic revenue with production growth at 6.1 per cent CAGR in FY16. In FY16, total revenue has increased by 7 per cent to Rs 5627 crore on a YoY basis led by rise in revenue by 10 per cent from Europe division. EBITDA and PAT of the company also are up by 11 per cent and 15 per cent respectively in FY16 on a yearly basis. Company maintains EBITDA margin above 12 per cent since FY14. PAT margin of the company has expanded by 33 bps to 5.17 per cent in FY16. Company maintains ROCE above 21 per cent since FY14. ETL has successfully reduced debt to equity ratio from 1.62x to 0.57x over FY12-16 , which has benefited PAT to grow at CAGR of 10 per cent to Rs 290 crore.

Peer Comparison and Valuation 


ETL with EPS of 20.60 can trade with upper price band P/E of 22.91x. The company looks reasonably valued as compared to Bharat Forge, Motherson Sumi and Mahindra CIE. Considering good financial numbers and reasonable valuation status of the company, we suggest to go for subscription with 1-2 year of holding period.