Rating Rationale
May 20, 2019 | Mumbai
Endurance Technologies Limited
Ratings Reaffirmed
 
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 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+'.

The reaffirmation continues to reflect ETL's improving business profile driven by increasing share of business with leading two-wheeler original equipment manufacturers (OEMs) in India and better-than-industry growth in the overseas business. This, along with increasing content per vehicle expected due to regulatory push in the braking segment from fiscal 2020 onwards, premiumisation of products, and new customer addition will drive higher-than-industry growth over the medium term. Also, ETL's operating profitability is expected to remain stable over the medium term, supported by increasing proportion of proprietary products, cost rationalisation, and higher proportion of in-house sourcing of components in the overseas business.

In the twelve months ended March 31, 2019, the company posted revenue growth of 18.2% as against the similar period in previous fiscal owing to strong volume growth at Bajaj Auto Ltd ('CRISIL AAA/FAAA/Stable/CRISIL A1+') as well as execution of new orders with other OEMs. Also, earnings before interest, tax, depreciation, and amortisation (EBIDTA) margin improved to 15.3% from 14.9% owing to better operating leverage, improved product mix, consolidation of plants, and sustained improvement in operating margin in the overseas business. The company's outperformance relative to two-wheeler OEM growth has continued in fiscal 2019. ETL also added new customers such as TVS Motor Company Ltd and Kia Motors India Pvt Ltd in fiscal 2019 and also received new orders to cater to all plants of Honda Motorcycles and Scooters India Ltd (HMSI).

However, growth of the two-wheeler automobile industry was impacted in the second-half of fiscal 2019 due to regulatory price hikes, leading to rising cost of ownership as well as liquidity constraints in the system. , which resulted in two-wheeler industry growth reducing to 5% in fiscal 2019, and a decline of 16% in April 2019. Over the next two fiscals, continued headwinds in liquidity as well as expected increase in vehicle costs due to regulatory changes and implementation of BS VI are expected to keep industry growth at 0-4% per annum. CRISIL expects ETL will continue to post higher than industry growth at 10-12% per annum over medium term, driven by increasing share of business with its key customers; increase in realisation for some products due to regulatory push and healthy customer, product and geographic diversity. The impact of the recent decline in the automobile industry sales and sustenance of better than industry growth of ETL will be near-term monitorables.

Financial risk profile is healthy. The company is expected to post strong cash accrual of Rs 800-900 crore per annum over medium term. Besides, ETL is expected to incur moderate capital spending of around Rs 400 - 500 crore annually, which will be met largely from its cash accrual. Prudent funding of capital expenditure (capex) and management of working capital, along with progressive debt repayment, are expected to continue the sustained improvement in key credit metrics. Additionally, the company may also go for inorganic growth, which will be funded prudently. As a result, ratio of debt to earnings before depreciation, interest, tax, and amortisation (EBITDA) will 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, established relationship with major customers, 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 strengths are partially offset by moderately high customer concentration in revenue profile and exposure to cyclicality in demand in the domestic and global automobile segments.

Analytical Approach

For arriving at the ratings, CRISIL 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 - 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 in the market for aluminium die-casting components, established relationship with major customers, and 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. 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, with whom it has established a longstanding relationship. In the recent past, ETL has been increasing its share of business with HMSI, Royal Enfield, India Yamaha, and Hero MotoCorp Ltd ('CRISIL AAA/FAAA/Stable/CRISIL A1+') for all of its product segments. This translated into a healthy growth rate of around 20% per annum in domestic revenue from fiscals 2017 to 2019.

ETL's overseas business (primarily in Germany and Italy) also benefits from established relationship with leading global OEMs, including Fiat Chrysler Automobiles NV (Fiat; rated 'BB+/Positive/B' by S&P Global Ratings), Daimler AG (Daimler; rated 'A/Stable/A-1' by S&P Global Ratings), and Volkswagen AG (Volkswagen, rated 'BBB+/Stable/A-2' by S&P Global Ratings) and its group companies, Opel, and BMW AG (rated 'A+/Stable/A-1' 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 72% and 28%, respectively, to overall revenue; in terms of products, ADCC contributes around 59% to the company's consolidated revenue including the aftermarket sales, suspension products 25%, and the braking and transmission products contribute the balance.

* Improving operating efficiencies
ETL has maintained a healthy adjusted return on capital employed (RoCE), at around 25% for over last 5 fiscals through fiscal 2019, through astute cost control, improving asset utilisation, and operating profitability. EBIDTA margin improved to 15.3% in fiscal 2019 from 14.9% in fiscal 2018 owing to better operating leverage, improved product mix, consolidation of plants as well as sustained improvement in operating margin of overseas business. The operating margin will also be supported by incentives from Maharashtra Government amounting to Rs 367 crore over next 8-9 fiscals.

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, company's working capital management is efficient, as reflected in historically healthy receivables of around 50 days and inventory of around 30 days.

* Strong financial risk profile
Financial risk profile should remain comfortable over the medium term, given the expected annual cash accrual of over Rs 800-900 crore, healthy working capital management, and disciplined capital spending. Increasing cash accrual and lower dependence on external debt have resulted in adjusted gearing and net debt/EBITDA improving to below 0.40 times and below 0.20 times (as on March 31, 2019); against 0.49 times and 0.56 times, respectively, as on March 31, 2017. 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. 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 the automobile industry
While ETL's revenue profile benefits from good geographical and product diversity, the company remains exposed to risks related to customer concentration at each of the geographies it operates in. While BAL contributed about 53% to ETL's domestic revenue and 39% to overall revenue, the top two customers (Fiat and Daimler) in the company's overseas business contributed close to 59% of the overseas revenue in fiscal 2019. However, on overall basis, these three customers contributed about 55% to total revenue in fiscal 2019, down 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 the 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 has increased its focus on the aftermarket segment that has high growth potential, but dependence on OEM 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

Liquidity is marked with sufficient accruals as against maturing repayments, sizable liquidity and sufficient availability of bank limits. The Cash accrual is estimated at Rs 800-900 crore annually against yearly debt repayment of around Rs 100-200 crore, over the medium term. The utilisation of sanctioned fund-based working capital limit of Rs 715 crore in India was low at around 30% over the eight months ended January 2019. Liquidity is further aided by cash and equivalents of over Rs 550 crore as on March 31, 2019. The company has moderate capex plan over medium term which is expected to be funded through internal accrual and existing liquidity. Healthy capital structure enables the company to grow inorganically via small acquisitions, which are expected to be funded prudently.

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 continue to be healthy, supported by steady cash flow from operations, moderate capital spending, and healthy capital structure.

Upside scenario
* Sustained and significant improvement in scale, diversity, and profitability, reflecting better than industry performance on account of addition of new customers or increase in the share of business with existing customers
* Continued improvement in key financial metrics such as gearing and debt/EBITDA

Downside scenario
* 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 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 72% of 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. ETL has 25 plants across India, Germany, and Italy.

ETL is promoted by Mr Anurang Jain who, along with his family members/trusts, owns 75% of the company's equity capital; while the balance is held by public.

In fiscal 2019, at the consolidated level, the company posted revenue of Rs 7,538 crore, a year-on-year growth of 18%, while EBIDTA stood at Rs 1,156 crore.

Key Financial Indicators (CRISIL adjusted numbers)
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 336.0 CRISIL AA/Positive
NA Letter of credit & Bank Guarantee@ NA NA NA 245.0 CRISIL A1+
NA Bill Discounting^ NA NA NA 50.0 CRISIL AA/Positive
NA Packing Credit in Foreign Currency# NA NA NA 100.0 CRISIL A1+
NA Proposed Short Term Bank Loan Facility NA NA NA 57.03 CRISIL A1+
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
#Interchangeable with short term loan

Annexure - List of Entities Consolidated
Names of Entities Consolidated Extent of Consolidation
Endurance Overseas SrL, Italy Full consolidation
Endurance  SpA, Italy Full consolidation
Endurance Castings SpA, Italy Full consolidation with effect from January 1, 2019
Endurance Engineering SrL, Italy Full consolidation
Endurance Amann GmbH, Germany Full consolidation
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  100.00  CRISIL A1+      04-07-18  CRISIL A1+  23-06-17  CRISIL A1+  25-08-16  CRISIL A1+  CRISIL A1+ 
            24-05-18  CRISIL A1+  31-03-17  CRISIL A1+       
Fund-based Bank Facilities  LT/ST  673.03  CRISIL AA/Positive/ CRISIL A1+      04-07-18  CRISIL AA/Positive  23-06-17  CRISIL AA/Stable/ CRISIL A1+  25-08-16  CRISIL AA-/Positive/ CRISIL A1+  CRISIL AA-/Stable 
            24-05-18  CRISIL AA/Positive  31-03-17  CRISIL AA-/Positive/ CRISIL A1+       
Non Fund-based Bank Facilities  LT/ST  245.00  CRISIL A1+      04-07-18  CRISIL A1+  23-06-17  CRISIL A1+  25-08-16  CRISIL A1+  CRISIL A1+ 
            24-05-18  CRISIL A1+  31-03-17  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^ 50 CRISIL AA/Positive Bill Discounting^ 80 CRISIL AA/Positive
Cash Credit* 130 CRISIL AA/Positive Cash Credit* 130 CRISIL AA/Positive
Cash Credit** 336 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+
Packing Credit in Foreign Currency# 100 CRISIL A1+ Long Term Loan 15.54 CRISIL AA/Positive
Proposed Short Term Bank Loan Facility 57.03 CRISIL A1+  -  0  -
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
#Interchangeable with short term loan
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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