Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable/CRISIL A1+’ ratings on the bank loan facilities and commercial paper of Endurance Technologies Limited (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 besides its healthy financial risk profile, as indicated by 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 2022 grew approximately 15.0% to Rs 7,549 crore, primarily driven by higher prices emanating from raw material inflation, while volume growth remains muted on account of industry-related headwinds. Domestic operations account for approximately 75.0% of fiscal 2022 revenue, while overseas operations carried out at the subsidiary level account for the balance. Within domestic operations, revenue contribution is largely skewed towards the two-wheeler category. Volume growth from two-wheelers was impacted due to industry-wide impact on production arising from semiconductor shortage and low rural demand for entry-level vehicles. As a result, the 19.0% year-on-year increase in standalone revenue is primarily on account of price-led growth arising from higher raw material prices. Revenue from overseas operations increased approximately 4.0% year-on-year, primarily attributable to higher prices, as volumes remain subdued due to global macro-economic headwinds.

 

Consolidated Operating margin contracted by nearly 290 basis points (bps) to 12.8% in fiscal 2022. Standalone operating margin contracted by approximately 260 bps to 12.8% on account of muted volume growth, resulting in lower cost absorption, while operating margin from overseas subsidiaries contracted by nearly 370 bps to 12.8% on account of constrained volume growth and energy cost escalations in Europe. Consequently, overall adjusted earnings before interest, tax, depreciation and amortisation (adjusted EBITDA) declined by nearly 9.0% to Rs 966 crore. During fiscal 2022, key raw materials, specifically aluminium and steel, witnessed sharp increase in prices, and given that, the company has price escalation clauses in its agreements, ETL was largely able to pass on absolute price increases to end-customers.

 

Overall revenue during the first half of fiscal 2023 increased nearly 25.0% on account of volume-led and price-led growth. The increase in turnover was driven by 33.0% year-on-year growth in domestic operations, while revenue growth from overseas operations was muted. Overall operating margin contracted by approximately 260 bps to 11.4% during the same period, largely on account of raw material inflation and energy cost pressures in Europe.

 

Turnover is projected to increase 11.5% during fiscal 2023, while operating margin is expected to be lower in fiscal 2023 as compared to fiscal 2022 but shall be higher than levels reported for the first half of fiscal 2023 (11.4%) aided by easing of cost pressures via compensation/price caps announced by European Government for high energy costs.

 

During fiscal 2023, ETL acquired 51.0% stake in Maxwell Energy for Rs. 135 crore, and balance 49.0% stake for a maximum of Rs. 175 crore shall be purchased in a phased manner in five tranches over the next five years, with consideration linked to financial targets. The acquisition shall facilitate ETL’s foray into an EV-centric product line, providing battery management system (BMS) to auto OEMs.

 

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 0.11 time and 0.50 time, respectively, as on March 31, 2022, and these metrics are expected to remain strong at 0.17 time and 0.56 time, respectively, as on March 31, 2023. In addition, interest coverage and net cash accrual to adjusted debt ratios are projected to be 89.58 times and 1.22 times, respectively, in fiscal 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 to Annexure - Details of Consolidation, 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 and alloy wheels, with revenue of about Rs 2,114 crore in this product segment in fiscal 2022. 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, 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 of its product segments. During the first half of fiscal 2023, the company received new orders of Rs. 762 crore in India, mainly from HMSI, Hero MotoCorp Ltd, Hero Electric, Aether and Tata Motors Ltd. Commercialization of the aluminium forging business should support backward integration and revenue diversification, and thereby enhance profitability and operating performance.

 

ADCC revenues by ETL from overseas operations during fiscal 2022 were Rs. 1,887 crore. During the first nine months of fiscal 2023, the company received fresh orders worth Euro 67.4 million in Europe, mainly led by Porsche, Daimler and 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 and Daimler AG (Daimler; rated 'A-/Positive/A-2' 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 75.0% and 25.0%, respectively, of overall revenue. In terms of products, ADCC and alloy wheels contribute around 53.0% to the consolidated revenue, followed by suspension products (28.0%), braking (8.0%), transmission products (5.0%) and aftermarket sales (6.0%).

 

Stable operating efficiency

Adjusted return on capital employed has been healthy at 15.0-24.0% over the three fiscals through 2022, backed by astute cost control, stable asset utilisation and operating profitability. In addition, the working capital cycle is managed effectively, as reflected in negative operating cycle of -10 days as on March 31, 2022, thereby resulting in healthy cash conversion.

 

Strong financial risk profile

The capital structure remains robust with adjusted gearing and TOLANW ratio at 0.11 time and 0.50 time, respectively, as on March 31, 2022. Prudent working capital management and high cash conversion has resulted in lower dependence on external debt. 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 53.0% to the domestic revenue and 40.0% of overall revenue in fiscal 2022. The top three customers in Europe accounted for nearly 69.0% 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 635-915 crore per annum over fiscals 2023 to 2024, will sufficiently cover debt of Rs 175-307 crore over the same period. Domestic Bank limit utilisation averaged 17.0% over the 12 months through November 2022. Liquidity is further aided by cash and equivalent of around Rs 711 crore as on September 30, 2022. Moderate capex shall largely be funded through appropriate mix of debt and internal accrual. Healthy capital structure enables the company to grow inorganically via acquisitions, which will also be covered prudently.

Outlook: Stable

Endurance 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

• Revenue contribution from top-3 customers around 50.0% on sustained basis.
• 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/acquisitions leading to gearing of over 0.8 time and gross debt to EBITDA ratio of over 1.5 times

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 73% 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. 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. Through an Indian subsidiary, during fiscal 2023, the Company acquired Maxwell Energy and has entered into advanced electronic business.

 

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

 

In the first six months of fiscal 2023, at a consolidated level, revenue was Rs 4,474 crore and EBIDTA was Rs 511 crore, against Rs 3,581 crore and Rs 504 crore, respectively, in the corresponding period of the previous fiscal.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs.Crore)	Complexity Level	Rating Assigned with Outlook
NA	Cash credit**	NA	NA	NA	271	NA	CRISIL AA+/Stable
NA	Letter of Credit and bank guarantee#	NA	NA	NA	245	NA	CRISIL A1+
NA	Bill discounting*	NA	NA	NA	50	NA	CRISIL AA+/Stable
NA	Packing credit in foreign currency@	NA	NA	NA	180	NA	CRISIL A1+
NA	Proposed short-term bank loan facility	NA	NA	NA	172.03	NA	CRISIL A1+
NA	Commercial paper	NA	NA	7-365 days	100	Simple	CRISIL A1+

 **Interchangeable with non-fund based limits and other fund based facilities

*Interchangeable with other non-fund based facilities up to Rs 50 crore

@Interchangeable with short term Loan

#Interchangeable with other non-fund based facilities up to Rs 245 crore