Rating Rationale
July 04, 2018 | Mumbai
Endurance Technologies Limited
Rated amount enhanced
 
Rating Action
Total Bank Loan Facilities Rated Rs.918.03 Crore
Long Term Rating CRISIL AA/Positive (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Rs.100 Crore Commercial Paper (Enhanced from Rs.80 Crore) CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
 
Detailed Rationale

CRISIL has reaffirmed its ratings on the bank facilities and commercial paper of Endurance Technologies Limited (ETL) at 'CRISIL AA/Positive/CRISIL A1+'.

On May 24, 2018, CRISIL had revised its outlook on the long-term bank facilities of ETL to 'Positive' from 'Stable' while reaffirming the rating at 'CRISIL AA'.

The outlook revision reflected CRISIL's belief that ETL's revenue profile will improve driven by securing  new orders from various customers including those where penetration was relatively low, thereby improving revenue diversity and leading to better than industry growth. Recently, ETL received large orders from Honda Motorcycle and Scooter India Pvt Ltd (HMSI), Hero MotoCorp Ltd (Hero MotoCorp; rated 'CRISIL AAA/FAAA/Stable/CRISIL A1+'), Getrag (a part of Magna International, rated 'A-/Stable/A-2' by S&P Global [S&P]), KTM AG, and Hyundai Motor India Ltd (rated 'CRISIL A1+'). In addition, increasing content per vehicle, premiumisation of products and larger share of business from existing customers such as with Royal Enfield, Volkswagen AG (Volkswagen; rated 'BBB+/Stable/A-2' by S&P) will further support revenue growth. As a result, ETL is likely to report better than industry growth at 13-14% over the medium term.

ETL is likely to incur capital expenditure (capex) of Rs 450 crore annually to fund the future growth.  Further, ETL may look at small sized acquisitions targeted at adding new proprietary products. CRISIL expects the capex as well as acquisitions to be funded largely through internal cash accruals of Rs 700-900 crore per annum resulting in further strengthening of financial risk profile of the company going forward. ETL's ratio of debt to earnings before depreciation, interest, tax and amortisation (EBITDA) is expected to remain below one time over the medium term.

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, its established relationships with major customers, and its well-diversified revenue streams. The ratings also factor in ETL's large scale of operations and improving operating efficiencies, besides its healthy financial risk profile, marked by steady profitability, and comfortable debt metrics. These rating strengths are partially offset by the moderately high though reducing customer concentration in ETL's revenue profile and the company's exposure to cyclicality in demand in the domestic and global automobile industry.

Analytical Approach

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of ETL and its four 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.

Key Rating Drivers & Detailed Description
Strengths
* Leading position in the market for aluminium die-casting components, established relationships with major customers, and its well-diversified revenue streams
In India, ETL is among the leading suppliers of ADCC, with revenue of over Rs. 2,000 crore in this product segment. ETL's domestic operations also include supply of suspension products, transmission products, and braking systems where ETL is among the three largest suppliers for two and three wheeler segment in India. The company is a key supplier of these components to Bajaj Auto Ltd (BAL; rated 'CRISIL AAA/FAAA/Stable/CRISIL A1+'), with whom ETL has established a long-standing relationship. In the recent past, ETL has been increasing its share of business with HMSI, Royal Enfield, India Yamaha and Hero MotoCorp for all of its product segments. This is translated in healthy revenue growth of 19.6% year on year in domestic revenue in fiscal 2018, over fiscal 2017.

ETL's overseas business (primarily in Germany and Italy) also benefit from established relationships with leading global original equipment manufacturers (OEMs), including Fiat Chrysler Automobiles NV (Fiat; rated 'BB+/Positive/B' by S&P), Daimler AG (Daimler; rated 'A/Stable/A-1' by S&P), Volkswagen and its group companies, Opel, and BMW AG rated ('A+/Stable/A-1' by S&P). Furthermore, ETL enjoys a well-diversified revenue profile in terms of geographical spread and product segments, thereby providing stability to its operations. The domestic and overseas businesses contribute about 70% and 30% to ETL's revenue, respectively; in terms of products, ADCC contributes around 62% to the company's consolidated revenue, suspension products 24%, and the braking and transmission products contributing the balance.

* Improving operating efficiencies
ETL has maintained a healthy adjusted return on capital employed (RoCE), at over 25% for over last 5 fiscals through fiscal 2018, through astute cost control, improving asset utilisation, and operating profitability. Operating profitability improved to 14.5% in fiscal 2018 from 14.0% in fiscal 2017 primarily on account of better capacity utilisation of overseas business, better product mix and integration of plant operations.

Besides its cost control initiatives, ETL has increased sales of proprietary products and aftermarket sales, thereby maintaining growth in realisation and partially offsetting the impact of increasing raw material costs. Furthermore, the company's working capital management is efficient, as reflected by its historically healthy receivables of around 50 days and inventory of around 30 days.

* Healthy financial risk profile
Financial risk profile should remain comfortable over the medium term, given the expected annual cash accrual of over Rs 700 crore, healthy working capital management, and moderate capital spending. Increasing cash accrual and lower dependence on external debt have resulted in adjusted gearing and net debt/EBITDA improving to 0.44 time and 0.28 time (as on March 31, 2018), as against 0.49 time and 0.56 time as on March 31, 2017 respectively. Though ETL will continue to invest in capacity addition for future growth, debt servicing indicators and liquidity are expected to remain healthy, backed by strong cash accrual. Further, ETL's financial flexibility is also strengthened by its option of raising equity in near to medium term by diluting promoter stake to 75% (which is mandatory under SEBI regulations).  Larger than expected debt funded capex/acquisition will remain a key rating sensitivity factor.

Weaknesses
* Moderately high though reducing customer concentration and exposure to cyclicality in demand in automobile industry
While ETL's revenue profile benefits from good geographic and product diversity, the company remains exposed to risks related to customer concentration at each of the geographies it operates in. While BAL contributes about 49% to ETL's domestic revenue and 35% of overall revenue, the top two customers (Fiat and Daimler) in the company's overseas business contribute close to 70% of the overseas business revenue. However, on overall basis, these three customers contribute about 55% of total revenues in fiscal 2018 reduced from 66% in fiscal 2014. High focus on research and development, wide product portfolio and faster adoption of new technologies are expected to result in increase in share of business with its customers in the medium term.

Although, customer concentration in the domestic business is reducing, it still remains significant and closely aligned to the performance of key customers.  Though, the company increased its focus on aftermarket segment which has high growth potential, dependence on OEM continues to remain 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.
Outlook: Positive

CRISIL believes ETL will continue to benefit from its established market position, revenue diversity, and healthy operating efficiencies. The company's financial risk profile is expected to improve supported by steady cash flows from operations, moderate capital spending, and progressive debt repayment.

Upside scenario
* Sustained and significant improvement in  scale, diversity and profitability, most likely on account of improved demand, addition of new customers or increase in share of business with existing customers or
* Continued improvement in key financial metrics such as gearing and debt/EBITDA, including through equity infusion

Downside sccenario
* Weaker than expected operating performance,
* Large debt-funded capex/acquisitions, leading to net debt/EBITDA of over 1 time on sustained basis.

About the Company

Established in 1985 at 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 to two- and three-wheeler OEMs; ETL's domestic operations account for around 70% of its revenue. The company's overseas operations are primarily 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. ETL has 24 plants across India, Germany, and Italy.

ETL is promoted by Mr. Anurang Jain, who, along with his family members/trusts, owns 82.5% of the company's equity capital and the balance is held by public.

Key Financial Indicators
Particulars Unit 2018 2017
Revenue Rs crore 6539 5591
Profit After Tax (PAT) Rs crore 391 330
PAT margins % 6.0 5.9
Adjusted debt/adjusted networth Times 0.44 0.49
Interest coverage Times 39.4 24.56

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)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size (Rs Cr) Rating Assigned with Outlook
NA Cash Credit* NA NA NA 130.0 CRISIL AA/Positive
NA Cash Credit** NA NA NA 447.49 CRISIL AA/Positive
NA Letter of credit & Bank Guarantee@ NA NA NA 245.0 CRISIL A1+
NA Bill Discounting^ NA NA NA 80.0 CRISIL AA/Positive
NA Long Term Loan NA NA 31-Jul-18 8.36 CRISIL AA/Positive
NA Long Term Loan^^ NA NA NA 7.18 CRISIL AA/Positive
NA Commercial Paper NA NA 7-365 days 100.0 CRISIL A1+
*Interchangeable with non-fund based limits and other fund based facilities
**Interchangeable with non-fund based limits and interchangeable with 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
^^Not outstanding: CRISIL is awaiting independent confirmation of redemption before withdrawing ratings on these instruments
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  100.00  CRISIL A1+  24-05-18  CRISIL A1+  23-06-17  CRISIL A1+  25-08-16  CRISIL A1+  15-07-15  CRISIL A1+  -- 
            31-03-17  CRISIL A1+      24-04-15  CRISIL A1+   
Fund-based Bank Facilities  LT/ST  673.03  CRISIL AA/Positive  24-05-18  CRISIL AA/Positive  23-06-17  CRISIL AA/Stable/ CRISIL A1+  25-08-16  CRISIL AA-/Positive/ CRISIL A1+  15-07-15  CRISIL AA-/Stable  Suspended/ Suspended 
            31-03-17  CRISIL AA-/Positive/ CRISIL A1+      24-04-15  CRISIL AA-/Stable   
                    05-02-15  CRISIL AA-/Stable   
Non Fund-based Bank Facilities  LT/ST  245.00  CRISIL A1+  24-05-18  CRISIL A1+  23-06-17  CRISIL A1+  25-08-16  CRISIL A1+  15-07-15  CRISIL A1+  Suspended 
            31-03-17  CRISIL A1+      24-04-15  CRISIL A1+   
                    05-02-15  CRISIL A1+   
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bill Discounting^ 80 CRISIL AA/Positive Bill Discounting^ 80 CRISIL AA/Positive
Cash Credit* 130 CRISIL AA/Positive Cash Credit* 130 CRISIL AA/Positive
Cash Credit** 447.49 CRISIL AA/Positive Cash Credit** 447.49 CRISIL AA/Positive
Letter of credit & Bank Guarantee@ 245 CRISIL A1+ Letter of credit & Bank Guarantee@ 245 CRISIL A1+
Long Term Loan 15.54 CRISIL AA/Positive Long Term Loan 15.54 CRISIL AA/Positive
Total 918.03 -- Total 918.03 --
*Interchangeable with non-fund based limits and other fund based facilities
**Interchangeable with non-fund based limits and interchangeable with 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
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Auto Component Suppliers
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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