Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable/CRISIL A1+’ ratings on the bank loan facilities of Endurance Technologies Ltd (ETL). CRISIL Ratings has also withdrawn its rating on Rs.100 crore commercial paper program basis the company’s request. The withdrawal is in line with CRISIL Ratings’ withdrawal policy.

 

The ratings continue to reflect the leadership position of ETL in the aluminium die-casting components (ADCC; the company's largest product segment) and value-added product segments, healthy relationships with major customers and well-diversified revenue streams. The ratings also factor in ETL's large scale of operations and the sustenance of healthy operating efficiencies followed by the strong financial risk profile as reflected by robust capital structure, comfortable debt protection metrics, and large cash reserves. These strengths are partially offset by moderately high customer concentration in revenue and exposure to cyclicality in demand in the domestic and global automobile (auto) segments.

 

Consolidated revenues during fiscal 2024 increased around 16% on-year to Rs. 10,258 crore on the back of 17% on-year growth in domestic operations (including Maxwell Energy Systems Pvt Ltd; Maxwell) and 14% on-year growth in overseas operations. The growth in domestic operations was aided by healthy industry volume growth in the two-wheeler (2-wheeler) and three-wheeler (3-wheeler) auto categories. Apart from industry tailwinds, commercialisation of new business wins of the past also led to revenue growth in domestic operations. The revenue growth in overseas operations was driven by healthy double-digit growth in new car registrations and increasing share of business with existing customers.

 

Operating margins (operating profit before depreciation and amortisation, interest, and taxes) improved by 120 basis points (bps) on-year to 13.1% for fiscal 2024 on the back of improving product mix, moderation in raw material prices, and lower power & energy costs in overseas operations. Consequently, the operating profitability increased 28% on-year to Rs. 1,345 crore.

 

During the first quarter of fiscal 2025, the company’s revenues grew around 15% on-year to Rs. 2,826 crore while operating margins sustained around 13.2% as against 13.1% during the corresponding period of the previous fiscal. The year-on-year improvement in operating margins was limited on account of higher other expenses as proportion of revenues.

 

ETL is likely to register healthy revenue growth of around 8-10% over the medium-term on the back of healthy industry tailwinds especially pertaining to domestic operations and ramp-up of strong domestic and overseas order book. Robust domestic order booking of Rs. 4,270 crore (from fiscal 2020, excluding Bajaj Auto Limited) which includes Rs. 550 crore of orders in the Indian electric vehicle space (EV) and overseas order booking (from fiscal 2020) of EUR 254 million as on March 31, 2024, shall support healthy revenue growth over the medium-term. Operating margins shall sustain around 13-14% over the medium-term on the back of stable raw material prices, steady 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 0.17 time and 0.63 time, respectively, as on March 31, 2024, and these metrics are expected to remain below 0.20 time and 0.70 time, respectively, over the medium term. The financial risk profile is also supported by strong liquidity of Rs. 1,270 crore as on March 31, 2024.

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 in 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. 2,293 crore in this product segment in fiscal 2024. Apart from ADCC, domestic operations also include supply of suspension products, transmission products and braking systems, wherein ETL is among the three largest suppliers for the 2-wheeler and 3-wheeler auto segments in India. The company is a key supplier of these components to Bajaj Auto Ltd (BAL; rated CRISIL AAA/Stable/CRISIL A1+), Royal Enfield, and India Yamaha Motor Pvt Ltd, and has longstanding relationships with these customers. In recent years, ETL has been increasing its share of business with Honda Motorcycles and Scooters India Ltd (HMSI) and Hero MotoCorp Ltd (HMCL; rated 'CRISIL AAA/Stable/CRISIL A1+') for all its product segments and has secured a strong foothold with TVS Motor Company Ltd (TVS Motors) and Suzuki Motorcycle India Pvt Ltd. During fiscal 2024, the company received new orders (non BAL) of Rs.1,199 crore in India, mainly from TVS Motors, HMCL, Suzuki Motorcycle India Pvt Ltd, and Ather Energy Pvt Ltd (Ather). The company is increasing its presence in the four-wheeler segment with new orders from JLR and Punch Powertrain.

 

ETL’s EV order book has also been growing steadily over the past five fiscals. During fiscal 2024, the company won orders (excluding BAL) worth Rs. 80 crore on the back of winning eight EV programmes from five customers. That said, new order wins moderated in fiscal 2024 as against Rs. 380 crore order wins in fiscal 2023 on account of change in regulatory norms and FAME subsidies.

 

The overseas business (primarily in Germany and Italy) also benefits from healthy relationships with leading global original equipment manufacturers (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). The well-diversified revenue profile in terms of geographical spread and product segments lends stability to the overall business profile. Domestic and overseas businesses contributed about 77.0% and 23.0%, respectively, to overall fiscal 2024 revenue. In terms of products, ADCC accounted for around 42.0% of the consolidated revenue, followed by suspension products (28.0%), braking (11.0%), alloy wheels (8.0%), transmission products (5.0%), and aftermarket sales (6.0%).

 

The company’s product line other than transmission is not disrupted following 2-wheeler electrification in the domestic markets and four-wheeler electrification in overseas markets owing to higher usage of ADCC in EVs as compared to ICE (internal combustion engine) vehicles. Also, suspensions & brakes are EV agonistic products. Among newer products, driveshaft’s are EV agnostic and Battery Management Systems (BMS) are EV-centric.

 

• Healthy operating efficiency to sustain over the medium-term as reflected by stable operating margins, healthy return metrics, and low net working capital cycle: As on March 31, 2024, ETL had a domestic order book stands at Rs. 4,270 crore (excluding BAL) and overseas order book stands of EUR 251 million. Gradual ramp-up of order book shall ensure healthy asset utilisation and translate to revenue growth of 8-10% over the medium term. Operating margins are also expected to sustain around 13-14% over the medium-term on the back of stable raw material prices, steady energy costs in overseas geographies, and positive operating leverage benefits with increase in capacity utilization. Healthy revenue growth and stable operating margin shall ensure adjusted return on capital employed of over 15%, which ETL has sustained over the five years through fiscal 2024.

 

In addition, ETL has also managed its working capital cycle effectively by maintaining a negative net working capital cycle of around 11 days as on March 31, 2024. The company has historically maintained a negative net working capital cycle, and thereby translating to strong cash conversion. Over the medium term, the sustenance of optimum asset utilizations, stable margin profile, and low net working capital cycle, will ensure strong coverage of internal cash accruals vis-à-vis working capital and capital expenditure (capex) requirements with limited reliance on external borrowings.

 

• Strong financial risk profile: The capital structure remains robust with adjusted gearing and TOLANW ratio at 0.17 time and 0.63 time, respectively, as on March 31, 2024. Prudent working capital management, and high coverage of internal cash accruals vis-a-vis capex and debt re-payment obligations, has ensured low dependence on external borrowings, and the same is also reflected in the capital structure as marked by adjusted gearing. The company intends to incur annual capex of approximately Rs 750-900 crore 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 0.20 time and 0.70 time, respectively, over the medium term. In addition, the company’s balance sheet continues to remain net debt-free since fiscal 2020.

 

Weaknesses:

• Moderately high, though reducing, customer concentration: 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. BAL contributed about 51% to the domestic revenue and 39% to the overall revenue of ETL in fiscal 2024, as against 50% and 38%, respectively, in fiscal 2023. The top three customers in Europe accounted for nearly 67% of the revenue from the region. That said, ETL’s efforts through research and development and wide product portfolio have not only ensured increasing share of business with key customers such as HMSI and HMCL, but also inclusion of new customers such as TVS Motors, Suzuki Motorcycle India Pvt Ltd, and Ather Energy Pvt Ltd (Ather) which shall help the company reduce the overall customer concentration.

 

• Exposure to cyclicality in demand in the domestic and overseas auto industry: The business prospects of ETL are susceptible to cyclicality in the auto industry and ability of the OEMs to sustain their market share in the domestic and overseas markets, given that over 90% of ETL’s revenue is driven by auto OEMs. That said, the company is focusing on increasing its presence in the aftermarket segment and increase the revenue share to 10% in fiscal 2028 from 5-6% currently through expansion of distribution network and entry into new domestic and overseas geographies. In addition, efforts are being undertaken to increase the revenue share of non-auto applications. The active efforts of the management shall aid in countering the cyclical demand patterns in the auto industry. 

Liquidity: Strong

Expected cash accrual of Rs. 1,100-1,300 crore per annum over fiscals 2025 to 2026, will sufficiently cover debt re-payment obligations amounting to Rs. 200-300 crore over the same period. Domestic bank limit utilisation was negligible over the 12 months through to July 2024. Liquidity is further aided by cash and cash equivalent of around Rs. 1,270 crore as on March 31, 2024. Capex requirements will be largely funded through internal accruals, with limited reliance on external funding. Working capital intensity is expected to remain low owing to the sustenance of a negative net working capital cycle. Furthermore, 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. In addition, the company also aims to achieve 50% carbon neutrality by 2030. During fiscal 2024, ETL increased carbon neutrality to 35% and the proportion of renewable energy in total energy increased to 12.9%.
• The company’s lost time injury frequency rate (LTIFR) reduced from 0.22 in fiscal 2023 to 0.11 in fiscal 2024.
• 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

The business risk profile of ETL will continue to benefit from its established market position in the ADCC segment and healthy market share in suspension, brakes, transmission, and alloy wheels. The business risk profile will also continue to benefit from the increasing share of business with existing customers and inclusion of new customers on the back of a wide product portfolio, followed by the sustenance of healthy operating efficiencies. The financial risk profile is expected to remain robust on the back of net debt free balance sheet, strong debt protection metrics, and large cash reserves.

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 the auto industry. 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 machined aluminium die casting and machining products to leading four-wheeler OEMs in Europe and also cater to aftermarket for two-wheeler components. In addition, the company also has 100% stake in Italian companies, namely Endurance Adler SpA, Frenotecnica Srl, and New Fren Srl, which shall not only strengthen its technology base in proprietary 2-wheeler components but also enable ETL to establish a presence in European aftermarket. 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 two technical centers in Italy. During fiscal 2023, ETL entered the advanced electronics business by acquiring 51% equity in Maxwell Energy with an agreement to acquire 100% over the next five years (raised to 56% in fiscal 2024).

 

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.

Any other information: Not Applicable