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Higher European share to improve Endurance Technologies' margins

Image courtesy: Escorts Ltd

Image courtesy: Escorts Ltd

 

  The stock of auto components supplier Endurance Technologies was up six per cent over the last three trading sessions after the company announced the start of commercial production at one of its units in Germany. Given the product mix which is predominantly machined casting for engine and transmission components, the European operations enjoy higher operating profit margins of 15 per cent as compared to the metric in India which is pegged at 12.5 per cent.

Europe accounts for 30 per cent of the company's consolidated revenues. In addition to the improvement in revenues and margins, the new plant in Germany should also help the company reduce its dependence on Fiat Chrysler Automobiles (FCA), its single biggest European customer accounting for over half of European revenues.

Analysts at Motilal Oswal Securities expect European operations to record annual revenue growth of 11.4 per cent over FY16-19 on the back of increased business from non-FCA customers such as Daimler and Volkswagen group. Further, margins in the Europe business are likely to remain high, driven by focus on profitable orders and continued rationalisation of content outsourcing as part of the company's overall cost control initiatives.

The company is also expected to post healthy growth rates in India on the back of premiumisation and adoption of safety measures such as combined brake systems and anti-lock brake system in two-wheelers. Endurance is the largest two-wheeler auto component supplier in India; the geography accounts for 70 per cent of its revenues. The company, which has outperformed the motorcycle and two wheeler sectors over the last few years by increasing content per bike and customer base should also do well going ahead. This is due to unmatched scale, research and development base and four key products (castings, suspension, transmission, brakes) under one roof that helps it be the go to player within the two wheeler space, according to analysts at Axis Securities. A diverse vendor base should help it bring down client risk as Bajaj Auto accounts for 60 per cent of its FY16 India revenues. However, given the improving share of volumes from Hero MotoCorp, Honda and Royal Enfield, the share of Bajaj Auto is expected to fall to 47 per cent by FY19.

The aftermarket segment, which is growing at 19 per cent is another area of opportunity for Endurance as this segment growing faster than the company's overall revenue growth of 13 per cent. Given the 100 million two wheelers in the market and the market size of Rs 5,000 crore, revenue growth from this segment is expected to be strong.

At the current price, the stock is trading at 20 times its FY18 earnings estimates and any weakness could be used to accumulate the scrip.