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 reaffirmation reflects 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, 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 in fiscal 2022 is likely to grow by 10-15% marginally over a lower base reported in fiscal 2021, amidst the pandemic. Healthy orders in hand from existing and new customers and better-than-industry performance, backed by strong market position supported performance in the current fiscal. Operating margin should also be healthy at 14-15%, though slight moderation may take place due to a rise in raw material and energy prices. For the six months ended September 30, 2021, ETL reported healthy consolidated revenue of Rs 3,582 crore and an operating margin of 14.3%.

 

Though the pandemic affected performance in the first quarter of fiscal 2021, revenue only declined by around 5%, aided by pick-up in demand in the two-wheeler industry from the second quarter onwards and execution of new orders received in fiscals 2019 and 2020, for domestic as well as overseas markets. Operating profitability was also healthy at 15.7% (16.5% in fiscal 2020) aided by a lean cost structure, focus on profitable and value-added product mix, sharp recovery in revenue and cost optimisation initiatives.

 

The financial profile remains strong, backed by the net debt-free status of ETL. Annual debt of Rs 100-200 crore per annum over the medium term is expected to be serviced from cash accrual of Rs 750-1,000 crore per annum. Capital expenditure (capex) is expected to be around Rs 400 crore to Rs 500 crore in fiscal 2022 and should may remain moderate over the medium term. While the company may go for inorganic growth, ETL will look at smaller acquisitions which would be funded prudently. As a result, ratio of gross debt to earnings before depreciation, interest, tax and amortisation (EBITDA) is expected to remain below 0.7 time over the medium term in absence of any large, debt-funded acquisitions.

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 aluminum die-casting components (ADCC), 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 1,700 crore in this product segment in fiscal 2021. Domestic operations also include supply of suspension products, transmission products and braking systems, where 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), TVS Motor Company Ltd and Hero MotoCorp Ltd ('CRISIL AAA/FAAA/Stable/CRISIL A1+') for all of its product segments. During the first six months of fiscal 2022, the company received new orders of Rs 236 crore in India, mainly from Hyundai Motor India (CRISIL AAA/Stable/CRISIL A1+), Tata Motors Ltd (CRISIL AA-/Stable/CRISIL A1+), Case New Holland, Hero MotoCorp, Mahindra & Mahindra (CRISIL AAA/Stable/CRISIL A1+) and Sanmina.

 

ETL received fresh orders worth Euro 10 million in Europe during the same period, mainly led by Porsche, Daimler, Case New Holland and Stellantis (Fiat’s new JV). Entry into the aluminium forging business should support backward integration and revenue diversification, and thereby enhance profitability and operating performance.

 

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-/Stable/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 73% and 27%, respectively, of overall revenue; in terms of products, ADCC contributes around 53% to the consolidated revenue, followed by suspension products (28%), braking (7%), transmission products (around 5%) and aftermarket sales (5%).

 

* Improving operating efficiency

Adjusted return on capital employed has been healthy in the range of 18-25% over the five fiscals through March 2021, backed by astute cost control, better asset utilisation and operating profitability. Operating margin sustained at 14-16% in recent fiscals, owing to improving cost efficiency as well as incentive income from the Government of Maharashtra. In the first half of fiscal 2022, nearly Rs 60 crore was recorded as incentive.

 

Besides its cost-control initiatives, the increasing share of proprietary products and aftermarket sales in the overall revenue has aided the margin profile. Working capital too is managed prudently, as reflected in historically healthy receivables of around 50 days and inventory of around 30 days.

 

* Strong financial risk profile

Financial risk profile is aided by healthy cash accrual, prudent working capital management and controlled capital spending. Higher cash accrual and lower dependence on external debt kept adjusted gearing low at 0.19 time as on March 31, 2021. Gearing is likely to remain below 0.2 time as on March 31, 2022 and over medium term, largely due to the net debt-free status acquired in fiscal 2020. Acquisition of small companies, if any, will be funded prudently, and debt-servicing indicators and liquidity should remain healthy. Any major debt-funded capex/acquisitions is a key rating sensitivity factor.

 

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/FAAA/Stable/CRISIL A1+') contributed about 54% of the domestic revenue and 39% of overall revenue in fiscal 2021. The top three customers in Europe accounted for nearly 70% 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% of consolidated revenue. Business prospects of ETL, is 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 750-1,000 crore per annum, will sufficiently cover debt of Rs 100-200 crore per fiscal in 2022 and 2023. The fund-based bank limit of Rs 746 crore was utilised negligibly, at an average of around 15% over the 12 months through November 2021. Liquidity is further aided by cash and equivalents of around Rs 900 crore in September 2021. Moderate capex plans are likely to be funded through 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

* Substantial increase in revenue and profitability, most likely on account of addition of customers or increase in share of business with current customers or acquisition, resulting in cash accrual of beyond Rs 1,500 crore and continued improvement in key financial metrics, such as gross debt to EBIDTA

* Sustenance of strong financial risk profile and build-up of cash surplus

 

Downward factors

* Significant impact on the operating performance and debt metrics of the company

* Large, debt-funded capex/acquisitions leading to gearing of over 0.8 time and gross debt/EBITDA 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 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 27 plants across India, Germany and Italy.

 

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 2022, at a consolidated level, revenue was Rs 3,581 crore and EBIDTA was Rs 504 crore, as against Rs 2,373 crore and Rs 356 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	271.0	NA	CRISIL AA+/Stable
NA	Letter of Credit and bank guarantee#	NA	NA	NA	245.0	NA	CRISIL A1+
NA	Bill discounting*	NA	NA	NA	50.0	NA	CRISIL AA+/Stable
NA	Packing credit in foreign currency@	NA	NA	NA	180.00	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	100.0	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