We hosted the top management of Endurance Technologies (ETL) for investor meetings in the US and UK. Management highlighted what makes ETL the most profitable among peers despite its lower prices.
It will continue outperforming India 2Ws led by: (1) sharp content increase, (2) deeper in-roads into Hero & HMSI (60% of India 2Ws vs. 15% of ETL India revenue), and (3) upcoming safety norms (boosts ETL’s disc brake sales). Recovery in Bajaj (50% of ETL India) is a bonus. ETL remains one of our top pick in India Autos with its FY18-20 earnings CAGR of >30% (amongst the highest in our coverage). In a scenario of uncertainty in the sector, the better visibility in ETL’s earnings growth justifies its premium valuation. Our numbers are unchanged and we reiterate ‘Buy’ with TP of Rs 1,690.
A key driver of ETL’s lower cost compared to peers is high economies of scale (having four products distributes overheads and also helps negotiating while sourcing), strong vendor base, strategy of outsourcing non-core operations and in-sourcing more profitable ones. Another driver is its efficient utilization of plants.
ETL had 18 plants in India and consolidated it to 16 last year. Despite a new plant coming up in H2FY19 (in Karnataka), the plant tally will remain 16 as it shifts its Manesar plant production to Pantnagar (both had relatively lower utilization).
Plants are becoming multi-customer with scale. Pantnagar plant will now cater to not just Bajaj, but also Honda Motorcycle and Scooters (HMSI), which will drive utilization.
Endurance enjoys high share of business (>80%) with Bajaj Auto and Royal Enfield (RE) – these are the only OEMs where it is supplying all its 4 products (casting, suspension, transmission and brakes). Going ahead, deeper in-roads with Hero MotoCorp (32% of India 2Ws vs. 3% of ETL’s India revenue) and HMSI (27% of India 2Ws vs. ~12% of ETL’s India revenue) are triggers for outperformance.