Have you ever been on a spontaneous bike race with your friends? If yes, have you wondered about who makes the brakes, transmission and suspension on your bike? The answer (especially if you own a rather pretentious Royal Enfield), is likely to be Endurance Technologies. The company is a mixture of two distinct businesses. One business is wired towards the the two wheeler market in India (accounting for about 70% of revenues) and the other businesses targets the four wheeler market in Europe (accounting for the balance 30%). Endurance makes aluminium castings, suspension, transmission and brake systems and is the largest component maker in its markets. It has 18 plants in India (mostly in Pune and Aurangabad) and another 7 in Europe (Germany and Italy) and employs about 5000 people. It earned a tidy Rs 5274 crore in FY 2016. As for profits, they amount to about 5% of this revenue. Its Indian revenues have grown at a steady 8.4% since FY 2014 whilst its European revenues have grown at a more dramatic 19.4%.
There are reasons to believe that Endurance is in for a smooth ride. CRISIL estimates that India's per capita income grew by 12.5% per annum from 2005 to 2016 whilst the average prices of two-wheelers grew by just 7% making two wheelers ever more affordable. This is especially true of rural India where the penetration rate is just 39% of the target market. The European market is also set for a boom due to the shift from steel to (more environmentally friendly) aluminium castings (which Endurance makes).
So what speed bumps will investors in Endurance encounter? First, the fact that 43% of its revenues come from Bajaj alone make it a one relationship bet. Second, the company's raw materials (which eat up about 60% of revenue) are aluminium and steel. They currently trade close to historically low levels. This may change.
- Actis, a Private Equity firm which currently owns 13.72%. This holding will fall to zero
- Anurag Jain, the Managing Director who currently owns 42.13%. Of this, he is selling off 3.78%.
- Is the company's earnings before tax more than Rs 50 cr in the last twelve months?
Yes, it is 413 cr and grew at an average rate of about 18.44% in last 5 years.
- Will the company be able to scale up its business?
Yes, the company is the largest player in 2&3 wheel auto ancillary segment in India. All of its four segments (Aluminium castings, Suspension, Transmission and Brake systems) are expected to report solid growth on the back of growing sales and improving economy. Its European business is growing at the rate of about 20%. The automobile industry is moving from conventional steel towards aluminium and magnesium castings which help to lower the level of emissions. This change is likely to drive demand of aluminium castings especially in European region. Aluminium castings total revenue contribute close to 63% of the company's revenue out of which 30% comes from Europe.
- Does the company have recognizable brand/s, truly valued by its customers?
Yes, Endurance is the largest player in two and three wheeler automotive component category in India and deals with a number of auto players such as Bajaj, Royal Enfield, Honda,etc Long standing relationship with customers especially Bajaj (Revenue Contribution 43%) shows the trust and brand value enjoyed by endurance.
- Does the company have high repeat customer usage?
Yes, it is a very sticky business. Endurance has strategically set up its plants near the assembly lines of its largest customers. This ensures higher repeat orders due to lower cost and better accessibility.
- Does the company have a credible moat?
No. Whilst the company has long standing customers who face relatively high switching costs, there are no barriers to entry or exit in the industry or any special technology that is specific to Endurance Technologies.
- Is the company sufficiently robust to major regulatory or geopolitical risks?
Yes, there are no major regulatory or geopolitical risks to the company's business.
- Is the business of the company immune from easy replication by new players?
No, there are no barriers to entry or exit or technological barriers.
- Is the company's product able to withstand being easily substituted or outdated?
Yes, there isn't much technological innovation going in this field and major products like alloy wheels, suspension, transmission and brake systems are an essential part of every automobile even if we move from conventional car to electric cars.
- Are the customers of the company devoid of significant bargaining power?
No, the top 3 customers contribute 65.31% to revenue and top 8 contribute 83.57% with Bajaj alone contributing 43.19%. The company regularly faces pressure from its customers to reduce the price of its products.
- Are the suppliers of the company devoid of significant bargaining power?
Yes, steel and aluminium are the main raw materials consumed by the company. These commodities are actively traded and company purchases them at their market determined price or enters into contracts with suppliers with quarterly resets. Sometimes due to the quality requirement, the company's customers make arrangements with its suppliers for the provision of raw materials.
- Is the level of competition the company faces relatively low?
No, although Endurance possess loyal customers, the auto ancillary space remains highly competitive.
- Do any of the founders of the company still hold at least a 5 per cent stake in the company? Or do promoters totally hold more than 25 per cent stake in the company?
Yes, the founders will continue to hold 82.50% of the company (Actis, a Private Equity firm will exit the company). It is to be noted, as per SEBI rules, the promoters' holdings are required to be less than 75% within 3 years of listing.
- Do the top three managers have more than 15 years of combined leadership at the company?
Yes, the Chairman Mr Naresh Chandra and the Managing Director Mr Anurag Jain have been associated with the company since incorporation in 1999.
- Is the management trustworthy? Is it transparent in disclosures in consistent with Sebi guidelines?
Yes. There is nothing in the public domain to suggest otherwise.
- Is the company free of litigation in court or with the regulator that casts doubts on the intention of the management?
No. the company is facing a no of cases in the courts pertaining to violations of labour laws, intellectual property rights, environmental law and packaging regulations.
- Is the company's accounting policy stable?
Yes, company has followed a consistent accounting policy in its filings.
- Is the company free of promoter pledging of its shares?
Yes, there is no promoter pledging.
- Did the company generate current and five-year average return on equity of more than 15 per cent and return on capital of more than 18 per cent?
Yes, it generated an 5 year average return on equity of 26.17% and return on capital employed on 19.14%.
- Was the company's cash flow-positive during the previous year and at least four out of the last five years?
Yes, it was positive in all 5 years.
- Did the company increase its revenue by 10 per cent CAGR in the last five years?
Yes, it grew by 10.87%.
- Is the company's debt-to-equity ratio less than 1 or is its interest coverage ratio more than 2?
Yes, the debt-to-equity ratio is 0.57 and interest coverage is 9.9.
- Is the company free from reliance on huge working capital for day to day affairs?
Yes, it actually has a negative cash conversion cycle meaning that its debtors pay it money faster than creditors collect money from it.
- Can the company run its business without relying on external funding in the next three years?
Yes, company has not raised equity funds since 2006 (the current issue is an offer for sale by existing shareholders), its debt has been consistently falling over the past several years and it has been paying regular dividends over the past 5 years offering a yield of 2.11% at an issue price of 472.
- Have the company's short term borrowings remained stable or declined (not increased by greater than 15%)?
Yes, although short term borrowings have increased in last 2 years they are dramatically lower than what they were in FY13 and before.
- Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
No, at a price band of 467-472, the operating earnings yield is about 4.93%
- Is the stock's price to earnings less than its industry median?
Yes, at the price band of 467-472, the price to earnings ratio is about 22.79 which is less than industry average of 28.32.
- Is the stock's price to book value less than its industry median?
No, at the price band of 467-472, the price to book ratio is about 4.54 which is more than industry average of 3.57.