Endurance Technologies Ltd
Leading the way in the Auto ancillary industry...
Hi fellow investor,
( Disclosure: I own shares of Endurance Technologies Ltd and hence my views on the topic may be biased. Everything I conclude in the article is solely my opinion, based on publicly available information. This should not be taken as financial advice. This is purely for educational purpose.)
Let’s get straight into it.
Endurance Technologies was setup in 1985, to provide aluminium die castings for scooters manufactured at Bajaj Auto’s plant in Waluj, Aurangabad. The company was started by Anurang Jain, and has since expanded from aluminium castings to proprietary products like shock absorbers, front forks, disc brakes, ABS, etc. Endurance Technologies currently has 27 plants spread across India, Germany and Italy. Endurance entered into Europe with the acquisition of a pressure die casting and machining company, Endurance Amann, in Germany, in 2007 and the acquisition of Endurance Fondalmec, in Italy, in 2008.
In the mid 2000s, the company was largely dependent on Bajaj Auto, which prior to ETL’s European acquisitions accounted for 95% of sales ( 56% post acquisition). The dependence on Bajaj has declined over the last decade, but Bajaj still accounts for 38% of sales, as of FY20. Bajaj and Endurance have a strong relationship, as the owners of the two companies are related, Anurang Jain is the nephew of Rahul Bajaj (owner of Bajaj Auto).
Endurance has managed to diversify away from Aluminium Castings by spending on R&D, and getting into technology tie ups, like with WP Performance (now KTM) , for know-how and technology for the manufacture of motorcycle suspension components, or with BWI North America Inc, for joint development of ABS products for the application in two and three wheelers. Endurance currently employs 232 R&D engineers at its 4 R&D centres in India. In India, they have been granted 16 patents and 9 design registrations, with 65 patent applications pending for approval. In FY20, Endurance inaugurated a 29 acre test track in Aurangabad, to test their products on vehicles, shorten product development cycle, get into joint development with OEMs and make it easier for OEMs to evaluate quality and durability of their products.
Endurance currently manufacturers products in four segments-
1) Aluminium Castings - some examples of automotive castings include cylinder head, cylinder block, brake drums and housings for different applications, including clutch housing and flywheel housing. Endurance is the largest aluminium die casting company in India by installed capacity. They do both, high pressure and low pressure die casting and machining for two-wheelers, three wheelers and passenger cars.
2) Braking Systems - They make two types of braking systems: drum brakes systems and disc brakes systems for two wheelers and three wheelers. Endurance has been working on developing Anti-Lock Braking System (ABS), which they plan to start supplying from FY22 to Bajaj Auto.
3) Suspension - They make shock absorbers and front forks for two wheelers and three wheelers. This includes products like inverted front forks, shock absorbers with floating piston tech, etc. used in high performance & premium bikes.
4) Transmission - They manufacture clutch assemblies for two wheelers and Continuous variable transmissions (CVTs) for scooters in India. They also produce cork based and paper based friction plates for motorcycles and three wheelers.
Endurance makes around 70% of its sales in India and 30% in Europe.
Endurance India- Endurance started its operations in Aurangabad but since has expanded to different parts of the country. Ancillary companies generally follow the OEMs, in order to keep the costs of their products down, hence most plants are set up with motive of supplying products to specific OEM assembly plants. The purchase orders are generally not binding, and can be for 1 month or more than a year, moreover the lack of success of the vehicle for which the parts were ordered, can lead to reduced sales from that plant. Endurance currently has 18 plants in India.
They are supplying products from at least one of the four segments to all major 2W OEMs- Bajaj Auto, Hero, TVS, Yamaha, Honda & Royal Enfield. The aim of the company is to supply products from all four segments, to all the OEMs. Currently only Bajaj and Royal Enfield purchase products from all four segments. Endurance initially establishes the relationship with the client by supplying casting products and then gradually develops the relationship to expand into further product lines.
Endurance has increased their sales in India in the last five years at a CAGR of 7%, and have managed to increase the operating profit at 12% p.a in the same time period.
The company includes government incentives and export incentives as revenue, rather than other income. The company’s factories located in Aurangabad, were eligible for Rs 4663.9 mn of incentives under the “Package Scheme of Incentives,2013”, over a period of 7 years from August 2013. Under these schemes, the Maharashtra government provides incentives to companies for making capital expenditure in backward regions of the state. The incentives include returning the capital expenditure made over a certain period, through tax credit. As of FY20, the company had government incentives receivable of Rs 295.7 mn and export incentives of Rs 43.8 mn on their balance sheet. The company has also applied for “PSI, 2019” , which will allow them to make capital expenditure of Rs 3500 mn over the next five years, which will be returned to the company in seven years after that. The table below shows the revenues and operating profit, excluding the government and export incentives.
Endurance has managed to expand margins excluding the incentives as well. Sales of all the proprietary products have increased in the last five years, helping Endurance increase their margins.
Endurance had plants for manufacturing suspensions in Aurangabad and Pantnagar, and setup additional capacities to meet the demand for their products. So in FY17, Endurance setup a 6 mn units per annum plant in Sanand, Gujarat to supply Honda with front forks and shock absorbers. In FY18, they setup a 2.26 mn units per annum plant in Halol, Gujarat, to supply to Hero Motors. This plant was setup to satisfy 100% of the demand for Hero’s Halol plant and at full capacity has revenue potential of around Rs 3000 mn per annum (currently working at 1mn units per annum). Endurance also got an order from Honda of 2.76mn front forks per annum, for their Activa scooters, and setup a plant in Kolar, Karnataka for the same. Front forks are replacement products for shock absorbers and offer higher margins to Endurance. In FY18, Endurance got an order for 40 thousand inverted front forks, worth Rs 420 mn from KTM. In FY19, they supplied 50 thousand inverted front forks to Honda, and 80 thousand to Bajaj and KTM. Endurance expects this to double to 260 thousand in FY22. Endurance got a Rs 320 mn order from TVS for front forks in FY20, with that Endurance is now supplying suspension products all their OEM customers, with significant room to expand wallet share in TVS, Yamaha and Hero.
Endurance has moved up the chain in die casting as well, as the company started providing high pressure die casting and machining products to OEMs. The machined casting products have similar margins to their proprietary products, as machining converts casting components into fully finished & ready to assemble component. They commissioned a new plant in Vallam, Chennai to supply aluminium machined casting products to Hyundai, Kia, and Royal Enfield. The commissioning was delayed due to Covid-19 and the plant became operational in FY21. Company has new orders worth Rs 2790 mn from Hyundai and Kia and expect these to begin in FY22. Endurance is supplying casting products to all its 2W OEMs except TVS. They also supply to casting products to 4W OEMs like Hyundai, Kia and Tata Motors. Company will also start supplying battery housing castings for electric scooters and three wheelers in FY22.
The Ministry of Road Transport & Highways (MoRTH) released new norms, requiring all new two-wheelers with an engine displacement over 125cc to be equipped with ABS while models with engine displacement of 125cc or below to have compulsory fitment of combi-braking system (CBS), from April 2019 (FY20). CBS controls both front and rear brakes, the mechanical version cost around Rs 200 while hydraulic versions can go upto Rs 600. Endurance only supplies the hydraulic versions as they are more profitable. They are setting up a new 600 thousand per annum capacity for CBS in Pantnagar, to de-risk production from their Aurangabad plant. While Royal Enfield and Bajaj were already long term customers, Endurance has added business from Honda, Yamaha and TVS, which they expect to start from FY22.
In FY18, Endurance announced it had entered into a License and Technical assistance Agreement with BWI North America Inc, for the joint development of ABS products for the application in two and three wheelers. The ABS component will cost around Rs 3000 and will be much higher value add than CBS. Endurance went through rigorous testing to get clearance from OEMs, and as of Q3’FY21, it has an order worth Rs 750 mn from Bajaj Auto. Endurance has setup an initial 250 thousand per annum capacity at its existing brakes plant in Aurangabad (which can be increased to upto 400 thousand p.a.). The ABS clearance took a long time, delaying their commercialisation by at least 2yrs. But with first order expected to start from FY22, company expects orders from other OEMs as well.
The new regulations have also lead to increased demand for disc brakes. Endurance had a capacity of 185 thousand disc brake assemblies per month in FY19, for both rear and front disc brakes. They expanded that to 285 thousand per month in FY20, with new orders from TVS ( for 25k per month) , Royal Enfield ( 50k per month) and Bajaj. This business has continued to grow with new orders from Honda and Yamaha in FY21, hence the company is setting a new brake assembly plant in Waluj, which will increase capacity to 570 thousand brake assemblies per month. This will increase the no. of discs from 375 thousand a month to 675 thousand per month, by August 2021. The price of a disc brake assembly set for a 2W is around Rs 1000/set and can go upto Rs 2000 for premium motorcycles.
Clutch assemblies and parts made up 9.4% of total India sales in FY20. The transmission segment is the only segment that will be disrupted, by the move towards Electric vehicles. Electric two wheelers will have no clutch, hence if India sells only electric vehicles, then the company will lose 9% of India sales and 6% of their consolidated sales, as of FY20. Currently, Endurance supplies clutch assemblies to Royal Enfield and Bajaj. Company has been developing and testing their CVTs with Hero and Honda since FY18, but haven’t been able to get any orders from there yet.
Endurance also produces alloy wheels, and have a capacity of 120,000 per month at their Chakan plant in Maharashtra. Due to increased demand from Yamaha and Bajaj, Endurance will be increasing this capacity by 40,000 per month to reach 160,000 per month, from Q3’FY22. At full capacity , this should increase alloy wheel revenues by around Rs 1400 mn.
Endurance is in the process of setting up an aluminium forging plant at Aurangabad, which will produce axle clamps, used in producing inverted front forks. This will be an import substitution product and will allow them to reduce the cost of production of inverted front forks. Endurance can also sell these directly to the OEMs and expects a revenue potential of around Rs 1250 mn. Endurance has entered into a technical collaboration with FGM in Italy for the same. They are also setting up a plant to manufacture wire braided hoses, which are required for ABS brakes. Both plants are expected to be operational in Q1 FY22.
Endurance has also been working on increasing their Aftermarket Sales and currently have 460 distributors in India and 41 overseas in 29 countries. They sell products like shock absorbers, front forks and parts, brake system and components and transmission parts for two and three wheelers. The casting products are sold directly to the OEMs, who then sell directly to their customers in the aftermarket.
Peers- The automotive components industry is overly competitive, and major OEMs have at least two suppliers for each product, to reduce supply chain risks. Many auto ancillaries have benefitted from OEMs reducing their China dependence. As of FY21, Endurance had the following market shares in the domestic market- Front Forks= 40% , Shock Absorbers= 36% , Brake Systems(Drum and Disc)= 27% and Clutch Assemblies= 14%
Endurance competes with following competitors in different product segments-
Endurance (standalone) compared to two of its competitors in the auto ancillary industry-
Endurance is able to earn better margins than most of their competitors due to higher capacity utilisation, higher automation and management focus on value added products. The management in the last five years, have been quick to shut down older plants in favour of newer multipurpose plants, and outsource production to their supplier network if needed. This allows them to keep cost of production lower than their competition.
Endurance Overseas- Endurance has 7 overseas subsidiaries, off which 2 were acquired in the FY21. Prior to FY21, Endurance overseas business was primarily in supplying aluminium casting products to four wheeler OEMs. In FY21, it acquired Adler SpA for € 3.5 mn. Adler (now Endurance Adler), is a 2W clutch company specialising in clutches, gears and friction plates with a niche in R&D and engineering. In May 2020, Endurance Adler acquired Grimeca Srl, for € 2.25 mn, along with its brand “G Grimeca”, IPs and patents. Grimeca specialises in designing of brake systems for motorcycle applications.
Endurance Overseas Srl is the holding company of Endurance India, setup to make strategic acquisitions in Europe.
Endurance Amann GmbH is involved in manufacturing operation of high-pressure die-casting and machined components in Germany. It has 3 manufacturing plants in Massenbachhausen, Germany. Its latest machining plant was setup in 2017, to supply casting products to Daimler and Porsche. In 2017, they won an order from Daimler worth €15mn per year, for producing adaptive gear and transmission housings and in 2018, won orders worth €5mn for 2-clutch housing to be used in Porsche Taycan.
Endurance SpA- In 2007, Endurance Overseas acquired Fondalmec SpA, which was involved in the business of manufacturing metal parts by the machining and assembling process. In 2015, they acquired Endurance FOA, which had a foundry, hence reducing their raw material costs. They merged the two entities in FY19, to form Endurance SpA. In FY19, Endurance SpA developed upper cylinder heads for VW’s new 1.5 ltr petrol engines, which will be used in their hybrid cars as well. This business will start in 2021, and will earn revenues of more than €50 mn per year. In FY20, FCA (Fiat Chrysler) accounted for 39% & VW accounted for 35% of their Revenues.
Endurance Castings SpA- In 2019 Endurance Overseas acquired Fonpresmetal Gap SpA for €8.16 mn and renamed Endurance Castings. Fonpresmetal was a supplier of highly complex aluminium die casting parts in Italy, where it has a manufacturing facility at Bione in Brescia with a capacity of 6,500 mtpa. They won a new contract from FCA for €4.5 mn per year, starting production from FY22.
Endurance Engineering Srl- The company manufactures plastic components through injection moulding for Automotive applications. Company won orders worth €4mn in FY19, largely from FCA, and went into production from FY20.
Passenger vehicle sales in Europe slowed down, with registrations down 1% in FY19 and down 5% in FY20. Among the factors that contributed to the decline, an important one was the introduction of the new vehicle consumption test methodology (WLTP- Worldwide Harmonised Light Vehicles Test Procedures). Several car manufacturers have suffered delivery delays due to the complexity of the new procedures. Endurance Overseas revenues also took a hit, but they performed better than the industry due to new order wins, especially from VW. Despite the lower revenues, Endurance has managed to increase their margins, due to higher automation and vertical integration of their production.
In the last five years, company has managed to increase their business with VW, including Porsche and Audi significantly. In FY15, FCA was their largest customer accounting for 50% of their revenues in Europe. In FY20, VW was their largest customer accounting for 28% of their Revenues, FCA at 27% and Daimler at about 16%.
Capital allocation- Endurance has spent cumulatively Rs 27,753 mn in the last five years (FY16 - FY20), on acquisitions, increasing capacity and developing new products. Despite this they have been able to bring their net debt down from Rs 6,703 mn in FY15 to Rs 1907 mn in FY20. This has been possible due to improved cash generation in the last five years, and the capital employed in the business has continued to give good returns.
Outlook-
Europe business is going through a a major shift, as OEMs are spending heavily on developing new power trains for EVs. The 2030 projections show 40% of PV market being captured by EVs and hybrids. Endurance has won orders worth €110 mn in the past two to three years, for hybrid and electric technology for the new cars that will enter the market in the next 24 months. Off this €30mn was for Porsche Taycan and Audi E-tron, €15 mn each and rest €80 mn are for hybrid cars from VW, Daimler, FCA and Maserati. Currently, 45% of their products go into gasoline/diesel engines. With cars shifting to electric motors, keeping the weight of the vehicles down will be important, and hence more aluminium is going to be used in the body. The company expects the margins to be under pressure initially as they will have to change models of components to fit newer EVs. The management believes that a production of a model will last longer in EVs, like 10yrs compared to 3-5yrs in ICE. So even if the operating margins are lower, due to lower efficiency in production of newer models, the company over the medium term will not see an adverse impact as the capital outlay, will be lower as well.
Endurance Overseas is also part of the “European Battery Alliance”, along with 16 other firms, it’s a European project regarding development of new generation of electric batteries. Endurance is active on a specific project, relating to development of innovative cells and modules for automation and traction applications, and addressing the development of battery housings from aluminium alloys. Endurance Overseas, is building expertise in making battery housing through high pressure die casting.
Endurance Technologies is still working in a cyclical industry. They are dependent on the 2W production and sales. The orders they book may not materialise if the industry goes through a tough period. But they are in a much better position financially to handle such a period than they were five years ago. The company at end of FY21 had negative net debt of 3153 mn. Suppliers like Endurance focus more on the cost side and pass on any increase/decrease in raw material to the OEMs. Endurance is continuously looking to make their production facilities more lean. In FY17, they consolidated their Pune plants from 4 to 3; in FY20, they closed an old die casting plant in Aurangabad, and in Europe, in FY21, they consolidated plants their plants in Italy from 2 to 1. Endurance India has won new orders worth Rs 12,430 mn in FY18, Rs 10,340 mn in FY19, Rs 5860 mn in FY20, and Rs 4440 mn in the 9M’FY21. The orders won are 50% new and 50% replacement for previous products, and will peak in FY23. In addition to this, company has Request for Quotes of business worth Rs11,450 mn, and expects to win at least 50% of these as well. Acquisitions of Adler and Grimeca, will help Endurance get brake and clutch business in premium motorcycles in India. The suspension and brake business also have sufficient room for growth. The overall growth in the business though depends on the 2W industry growth, which is down from the highs of 2019. Endurance has been partly insulated by this, due to higher exports of 2Ws from India, and its largest customer- Bajaj being the leader in that space.
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Thanks for reading!!
Good research