| Endurance Technologies Limited | ||||||
| Long-term rating upgraded to 'CRISIL AA+ '; outlook revised to 'Stable' | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has upgraded its ratings on the long-term bank facilities of Endurance Technologies Limited (ETL) to ‘CRISIL AA+/Stable’ from 'CRISIL AA/Positive’, while reaffirming its rating on the short-term facilities and commercial paper at ‘CRISIL A1+’.
The upgrade reflects ETL’s continued better-than-industry performance in India and overseas in the past few fiscals and, likely, over the medium term and the company’s strengthened market share across product segments because of increase in share of business (SOB) across large two-wheeler original equipment manufacturers (OEMs) in India and passenger car OEMs in Europe. The upgrade also factors in continuance of healthy return on capital employed (RoCE) of 20-25% and financial risk profile with net debt free balance sheet as well as presence of strong liquidity in the form of cash and equivalents of around Rs 910 crore as on September 30, 2020.
In fiscal 2021, the operating performance is expected to be better than expected, with decline in revenue limited to around 10% against earlier expectation of 18-20% owing to demand pickup in the two-wheeler industry in India and execution of new orders received in fiscals 2019 and 2020 for domestic as well as overseas markets. Moreover, operating profitability is also expected at 15-16% in fiscal 2021 (similar to the last fiscal) against earlier expectation of 12-13% in spite of the impact of the Covid-19 pandemic in the first quarter because of a lean cost structure, sharp recovery in revenue and cost optimisation initiatives undertaken by the company.
After the impact of Covid-19 in the first quarter, the company reached pre-Covid-19 monthly run rate in the second quarter itself. Performance in second half of the fiscal is also expected to remain healthy owing to continued healthy demand from end user industries. Revenue is expected to grow in double digits over the medium term, backed by new business of Rs 440 crore received in the first half of fiscal 2021 and Rs 950 crore in fiscal 2020. Operating profitability, too, is expected to improve over the medium term because of the increasing share of value-added products across segments and sustenance of some of the cost-optimisation measures.
The financial profile remains strong, with the company remaining net debt-free. Debt obligation of Rs 150-170 crore per annum over the medium term is expected to be serviced from cash accrual of Rs 900-1,000 crore per annum. Capital expenditure (capex) is expected to reduce in fiscal 2021 compared with the previous fiscal and should remain moderate over medium term. While the company may go for inorganic growth, it will be funded prudently. As a result, ratio of gross debt to earnings before depreciation, interest, tax and amortisation (EBITDA) is expected to remain below 0.6 time over the medium term in absence of any large, debt-funded acquisitions.
The ratings continue to reflect ETL's leading position in the market for 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. |
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:
In India, ETL is among the leading suppliers of ADCC, with revenue of about Rs 2,000 crore in this product segment in fiscal 2020. 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. In the first six months of fiscal 2021, the company received new orders of Rs 361 crore in India, mainly from Hero MotoCorp, HMSI, TVS Motors, Hyundai, Kia Motors and Royal Enfield. New orders in Europe during this period stood at Euro 10.83 million, contributed mainly by Volkswagen and Fiat-Chrysler. The company is also entering the aluminium forging business, which will support backward integration, thereby improving profitability as well as providing the opportunity to diversify into this new business. New businesses will drive the revenue diversity as well as support better-than-industry operating performance.
ETL's overseas business (primarily in Germany and Italy) also benefits from its healthy relationship with leading global OEMs, including Volkswagen AG (Volkswagen; rated 'BBB+/Negative/A-2' by S&P Global Ratings), Fiat Chrysler Automobiles NV (Fiat; rated 'BBB-/Stable/A-3' by S&P Global Ratings) and Daimler AG (Daimler; rated 'BBB+/Negative/A-2' by S&P Global Ratings). Furthermore, ETL enjoys a well-diversified revenue profile in terms of geographical spread and product segments, thereby providing operational stability. The domestic and overseas businesses contribute about 71% and 29%, respectively, to the overall revenue; in terms of products, ADCC contributes around 56% to the company's consolidated revenue, suspension products 26%, braking and transmission products roughly 7% each and aftermarket sales 4%.
ETL has maintained healthy adjusted RoCE at 20-25% over the six fiscals through 2020 through astute cost control, improving asset utilisation and operating profitability. In spite of revenue de-growth in first six months of fiscal 2021, the margin remained at 15-16% owing to improving cost efficiency as well as incentive income from the Government of Maharashtra. The company is entitled to incentives from the Government of Maharashtra amounting to Rs 466 crore over 8-9 fiscals starting from fiscal 2019, of which Rs 54 crore was accrued in the first half of fiscal 2021.
Besides its cost control initiatives, the proportion of revenue from proprietary products and aftermarket sales in the overall revenue has been increasing, thereby supporting the margin profile. Furthermore, the company's efficient working capital management is reflected in historically healthy receivables of around 50 days and inventory of around 30 days.
Financial risk profile remains comfortable given the healthy cash accrual, disciplined working capital management and controlled capital spending. Increasing cash accrual and lower dependence on external debt have resulted in adjusted gearing of 0.27 time as on March 31, 2020, expected at below 0.2 time as on March 2021. The gearing is expected to remain below 0.2 time over medium term. The company became net debt-free in fiscal 2020 and is expected to remain so over the medium term. While the company may go for inorganic growth, it will be funded prudently, and debt-servicing indicators and liquidity are expected to remain healthy. Larger-than-expected debt-funded capex/acquisitions will remain a key rating sensitivity factor.
Weakness:
While ETL's revenue profile benefits from healthy geographical and product diversity, the company remains exposed to risks related to customer concentration for each of the geographies it operates in. Bajaj Auto Ltd ('CRISIL AAA/Stable/CRISIL A1+') contributed about 54% to ETL's domestic revenue and 39% to the overall revenue in fiscal 2020. In Europe, contribution from the Volkswagen group increased in fiscal 2020, with the top three customers in Europe contributing around 70% to the revenue from European operations. High focus on research and development, wide product portfolio and faster adoption of new technologies are expected to result in increase in the share of business with customers over the medium term.
Customer concentration in the domestic business remains significant and closely aligned with the performance of key customers. Though the company has increased its focus on the aftermarket segment, which has high growth potential, dependence on OEMs remains high at over 90% of the consolidated revenue. ETL's business prospects, therefore, are 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 Cash accrual, expected at Rs 900-1,000 crore per annum, will sufficiently cover debt obligation of Rs 150-170 crore in fiscals 2021 and 2022 each. Utilisation of sanctioned fund-based working capital limit of Rs 746 crore in India was low at 25-30% over the 12 months through October 2020. Liquidity is further aided by cash and equivalents of Rs 910 crore in September 2020. Capex is expected to be moderate and be funded through internal accrual and liquidity. Healthy capital structure enables the company to grow inorganically via acquisitions, which are expected to be funded 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
Downward factors
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About the Company Incorporated in 1985 in Aurangabad, Maharashtra, ETL is a leading manufacturer and supplier of ADCC for automobiles. In India, where the company also manufactures suspension, transmission and braking products, ETL supplies primarily to two- and three-wheeler OEMs; domestic operations account for around 71% of the revenue. The company's overseas operations are through its two direct subsidiaries: Endurance Amann GmbH (Germany) and Endurance Overseas Srl (Italy). The overseas operations supply casting and machining products to leading four-wheeler OEMs in Europe. Recently, the company has acquired controlling stakes in two Italian companies to strengthen its technology base in proprietary two-wheeler components. ETL has 26 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 2021, at a consolidated level, revenue was Rs 2,373 crore and EBIDTA was Rs 356 crore against Rs 3,680 crore and Rs 632 crore, respectively, in the corresponding period of the previous fiscal. |
Key financial indicators (CRISIL Ratings-adjusted numbers)
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
*Interchangeable with non-fund-based limit and other fund-based facilities ^Interchangeable with other non-fund-based facilities up to Rs 50 crore @Interchangeable with other non-fund-based facilities up to Rs 245 crore #Interchangeable with short-term loan |
Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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