Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable/CRISIL A1+’ ratings on the bank loan facilities and commercial paper of Endurance Technologies Ltd (ETL).

 

The ratings continue to reflect the leadership position of ETL in aluminium die-casting components (ADCC; the company's largest product segment) and proprietary products, healthy relationships with major customers and well-diversified revenue streams. The ratings also factor in ETL's large scale of operations and improving operating efficiency and its healthy financial risk profile, reflected in steady profitability and comfortable debt protection metrics. These strengths are partially offset by moderately high customer concentration in revenue and exposure to cyclicality in demand in the domestic and global automobile segments.

 

Revenue during fiscal 2023 grew approximately 17.0% to Rs 8,820 crore owing to strong growth recorded in domestic operations (accounted for 77% of total revenue) due to uptick in domestic sales volumes of scooters and continued momentum for demand of executive & premium motorcycles. Within domestic operations, revenue contribution is largely skewed towards the two-wheeler category. Revenue from overseas operations increased approximately 10.0% year-on-year, on the back of growth in production volume witnessed in Europe between January and March 2023. Overall operating margin contracted by nearly 110 basis points (bps) to 11.9% in fiscal 2023 owing to elevated energy prices in overseas markets and lower operating leverage due to under-utilization of capacities.

 

During the first half of fiscal 2024, overall revenue increased nearly 12.0% y-o-y on the back of 8% growth in India operations and 26% growth in overseas operations. Operating margins witnessed about 200 bps expansion to 13% on-year owing to improvement in overseas margins on the back of moderation in energy prices.

 

Overall revenue is expected to grow by 8-10% over the medium term on the back of uptick in domestic 2-wheeler volumes and strong order book position while operating margin shall remain stable at 13-14% on the back of stable raw material prices, moderation in energy costs in overseas geographies, and positive operating leverage benefits with increase in capacity utilization.

 

The financial profile remains strong, backed by net debt-free balance sheet and robust capital structure. Adjusted gearing (Gross Debt / Adjusted Networth) and total outside liabilities to adjusted networth (TOLANW) ratio were 0.15 time and 0.59 time, respectively, as on March 31, 2023, and these metrics are expected to remain below 0.20 time and 0.60 time, respectively, over the medium term. The financial risk profile is also supported by strong liquidity of Rs. 1,149 crore as on September 30, 2023.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of ETL and its operating overseas subsidiaries. This is because all the entities, collectively referred to as ETL, are under a common management and are engaged in related businesses.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Leading market position for aluminium die-casting components (ADCC) and alloy wheels, healthy relationships with major customers and well-diversified revenue streams: In India, ETL is among the leading suppliers of ADCC, with revenue of about Rs 2,073 crore in this product segment in fiscal 2023. Domestic operations also include supply of suspension products, transmission products and braking systems, wherein ETL is among the three largest suppliers for the two- and three-wheeler segments in India. The company is a key supplier of these components to Bajaj Auto Ltd (CRISIL AAA/Stable/CRISIL A1+), Royal Enfield, and India Yamaha Motor Pvt Ltd, with whom it has established longstanding relationships. In recent years, ETL has been increasing its share of business with Honda Motorcycles and Scooters India Ltd (HMSI) and Hero MotoCorp Ltd ('CRISIL AAA/Stable/CRISIL A1+') for all its product segments and has secured a strong foothold in TVS Motors. During the first half of fiscal 2024, the company received new orders (non-Bajaj Auto) of Rs. 777 crore in India, mainly from TVS Motor Company Limited, Hero MotoCorp Ltd, Suzuki Motorcycle India Pvt Ltd, Aether, Okinawa, and Ampere. The company is increasing its 4W presence with new orders from JLR and Punch Powertrain.

 

ETL’s order book has been growing steadily over the past five fiscals. In addition, its electric vehicle (EV) order book soared in fiscal 2023 on the back of winning 15 EV programmes from 11 customers. The company won EV suspension orders for Ather, Ampere, Hero Electric, and HMSI, and also won orders for EV brakes from Ather, Okinawa, Ampere, and Hero MotoCorp Limited. The company’s product line other than transmission is not disrupted following 2W electrification in domestic markets and 4W electrification in overseas markets owing to higher usage of ADCC in EVs as compared to ICE. Also, suspensions & brakes are EV agonistic products.

 

Revenues by ETL from overseas operations during fiscal 2023 were Rs. 2,053 crore or Euro 245.6 million. During the first six months of fiscal 2024, the company received fresh orders worth Euro 20 million in Europe, which includes Euro 19 million EV orders from Stellantis.

 

The overseas business (primarily in Germany and Italy) also benefits from healthy relationships with leading global OEMs, including Volkswagen AG (Volkswagen; rated 'BBB+/Stable/A-2' by S&P Global Ratings), Stellantis NV (rated, BBB+/Stable/A-2 by S&P Global Ratings) and Mercedes-Benz Group AG (Mercedes; rated A/Stable/A-1 by S&P Global Ratings). Thus, a well-diversified revenue profile in terms of geographical spread and product segments, lends stability to the overall business profile. Domestic and overseas businesses contribute about 77.0% and 23.0%, respectively, of overall fiscal 2023 revenues and stood at similar ratio during the half year ended September 2023. In terms of products, ADCC contribute around 47.0% to the consolidated revenue, followed by suspension products (27.0%), braking (9.0%), alloy wheels (7.0%), transmission products (4.0%), and aftermarket sales (5.0%).

 

• Stable operating efficiency: Adjusted return on capital employed has been healthy at over 15% over the three fiscals through 2023, backed by various cost control measures, stable asset utilisation and operating profitability. In addition, ETL has managed its working capital cycle effectively during this period; the company has maintained a low net working capital cycle, thereby, resulting in strong cash conversion. Over the medium term, the sustenance of optimum asset utilizations, stable margin profile, and low net working capital cycle, will ensure continued strong cash generation, leading to strong coverage of capital expenditure (capex) and fixed obligation requirements.

 

• Strong financial risk profile: The capital structure remains robust with adjusted gearing and TOLANW ratio at 0.15 time and 0.59 time, respectively, as on March 31, 2023. Prudent working capital management and high cash conversion has resulted in lower dependence on external debt. As a result, the company’s interest coverage ratio has also been healthy at 52.51 times during fiscal 2023. The company intends to incur annual capex of approximately Rs 750-850 crore per annum over the medium term which is expected to be largely funded through internal accruals. In the absence of any large debt-funded capex plans, the company’s key financial metrics i.e., adjusted gearing and TOLANW ratio are expected to remain below 0.2 time and 0.6 time, respectively, over the medium term. In addition, the company’s balance sheet continues to remain net debt-free since fiscal 2020.

 

Weakness:

• Moderately high, though reducing, customer concentration and exposure to cyclicality in demand in the automobile industry: While the revenue profile of ETL benefits from healthy geographical and product diversity, the company remains susceptible to customer concentration in each of its markets. Bajaj Auto Ltd ('CRISIL AAA/ /Stable/CRISIL A1+') contributed about 50.0% to the domestic revenue and 38.0% of overall revenue in fiscal 2023; the same stood at 51% and 38%, respectively as of September 2023. The top three customers in Europe accounted for nearly 67.0% of revenue from the region.  High focus on research and development, wide product portfolio and faster adoption of new technologies should augment the share of business with customers going forward.

 

Performance in the domestic market is thus closely aligned with that of key customers. Though the company has increased its focus on the aftermarket segment, which has high growth potential, dependence on OEMs remains high, as they form over 90.0% of consolidated revenue. Business prospects of ETL are therefore, exposed to cyclical demand patterns inherent to the automobile industry and ability of the OEMs to sustain their market share in the domestic and overseas markets.

Liquidity: Strong

Expected cash accrual of Rs 950-1,050 crore per annum over fiscals 2024 to 2025, will sufficiently cover debt re-payment obligations amounting to Rs. 120-200 crore over the same period. Domestic bank limit utilisation averaged 9.0% over the 12 months through to October 2023. Liquidity is further aided by cash and cash equivalent of around Rs 1,149 crore as on September 30, 2023. Capex requirements will be largely funded through internal accruals, with limited reliance on external funding. Healthy capital structure enables the company to grow inorganically via acquisitions, which shall also be covered prudently.

 

ESG Profile

CRISIL Ratings believes ETL’s Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile.

 

The auto component sector has a moderate impact on the environment owing to moderate emissions, water consumption and waste generation. The sector’s social impact is also moderate considering the impact of operational activities on the company’s own employees. The company is focusing on mitigating environmental and social risks.

 

ETL’s key ESG highlights:

• The company has disclosed that it aims for 50% renewable energy consumption as a percentage of total energy consumption by 2030.
• The company’s attrition rate has marginally decreased from 16.40% in 2022 to 16.10% in 2023.
• ETL’s governance structure is characterized by 50% of its board comprising independent directors, split position between chairman and Managing Director (MD), and presence of investor grievance cell.

 

There is growing importance of ESG among investors and lenders. ETL’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given its share of overseas borrowings in its overall debt and has access to both domestic and foreign capital markets.

Outlook: Stable

ETL will continue to benefit from its strong market position, revenue diversity and healthy operating efficiency as well as its healthy financial risk profile and comfortable liquidity.

Rating Sensitivity factors

Upward factors:

• Significant increase in scale of operations and substantial diversification in customer profile while maintaining operating profitability at 13-15%.
• Sustenance of strong financial risk profile and build-up of cash surplus.

 

Downward factors:

• Significant impact on the operating performance and debt protection metrics of the company
• Large, debt-funded capex or /acquisitions leading to gearing of over 0.8 time on a sustained basis

About the Company

Incorporated in 1985 in Aurangabad, Maharashtra, ETL is a leading manufacturer and supplier of ADCC for automobiles. The company also manufactures suspension, transmission and braking products for mainly two- and three-wheeler OEMs in India and derives nearly 77% of its revenue from the domestic market. Overseas operations are managed by two direct subsidiaries: Endurance Amann GmbH (Germany) and Endurance Overseas Srl (Italy). The company supplies casting and machining products to leading four-wheeler OEMs in Europe and also cater to aftermarket for two-wheeler components. Recently, it has acquired controlling stakes in two Italian companies to strengthen its technology base in proprietary two-wheeler components. ETL has 31 plants across India, Germany, and Italy. Company is also equipped with an in-house tool room, a 29-acre proving ground, 5 DSIR approved R&D facilities in India, and 2 technical centers in Italy. During fiscal 2023, the company acquired 51% equity in Maxwell Energy and has entered into advance electronic business with an agreement to acquire 100% over the next 5 years (further raised to 56% in FY24) 

 

Mr Anurang Jain, the promoter, along with his family members and /trusts, owns 75% of the company's equity capital; the remaining is held by the public.

 

In the first six months of fiscal 2024, at a consolidated level, revenue was Rs 4,995 crore and earnings before interest, depreciation, tax, and amortization (EBIDTA) was Rs 640 crore, against Rs 4,474 crore and Rs 511 crore, respectively, in the corresponding period of the previous fiscal.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs. Crore)	Complexity Level	Rating assigned with outlook
NA	Cash credit&	NA	NA	NA	60	NA	CRISIL AA+/Stable
NA	Working Capital Facility~	NA	NA	NA	100	NA	CRISIL AA+/Stable
NA	Cash Credit^	NA	NA	NA	40	NA	CRISIL AA+/Stable
NA	Working Capital Demand Loan!	NA	NA	NA	50	NA	CRISIL AA+/Stable
NA	Letter of credit & Bank Guarantee@	NA	NA	NA	120	NA	CRISIL A1+
NA	Proposed Short Term Bank Loan Facility	NA	NA	NA	393.03	NA	CRISIL A1+
NA	Letter of Credit%	NA	NA	NA	80	NA	CRISIL A1+
NA	Letter of credit & Bank Guarantee#	NA	NA	NA	35	NA	CRISIL A1+
NA	Letter of Credit$	NA	NA	NA	40	NA	CRISIL A1+
NA	Commercial paper	NA	NA	7-365 days	100	Simple	CRISIL A1+

& - Multicredit working capital lines, fully interchangeable with other facilities

^ - Fully interchangeable with EPC / PCFC / FBP / FBD / EBRD / PSCFC; fully interchangeable with inland bills purchase / discounting

% - Interchangeable with working capital overdraft facility to the extent of Rs 25 Cr, PCFC & EPC  of Rs 50 Cr & WCDL/STL  of Rs 80 Cr.

$ - Interchangeable with Bank Guarantee up to Rs. 30 crores; Interchangeable with SBLC for Buyers’ Credit up to Rs. 40 crores; Interchangeable with capex LC up to Rs. 30 crores

# - Fully interchangeable with EPC/PCFC/FBP/FBN/FBD/EBR; interchangeable up to Rs. 2 crore with LFR; fully interchangeable with short-term loan-non committed line of credit (NCL-STL); interchangeable with overdraft facility up to Rs. 1 crore

@ - Interchangeable with overdraft facility up to Rs.30 crore; Interchangeable with short-term loan facility up to Rs.35 crore; interchangeable with standby letter of credit (Trade) facility up to Rs. 120 crore; interchangeable with with bonds and guarantee up to Rs. 25 crore; interchangeable with shipping guarantees facility up to Rs. 20 crore; fully interchangeable with preshipment financing under export orders facility; fully interchangeable with export bills discounting facility and export invoice financing facility; full interchangeable with import invoice financing facility, import letter of credit; interchangeable with commercial standby letter of credit up to Rs. 20 crore

! - Interchangeable with OD limit to the extent of Rs 40 Cr and fully Interchangeable  with PCFC/EPC and letter of credit

~ - Includes WCDL of Rs 50 Cr, fully avaialble for Pre-shipment export finance  and post shipment export finance