Rating Rationale
May 29, 2020 | 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 healthy business profile marked by better-than-industry growth in India and overseas in past few fiscals and expected to continue over medium term as well as robust financial profile backed by strong liquidity and net debt free balance sheet.

In fiscal 2021, the revenue growth at ETL is expected to be impacted owing to COVID-19 induced demand slowdown in automobile industry in fiscal 2021 and thereby resulting in lower demand for auto components from Auto OEMs (Original equipment manufacturers). At the same time, while the domestic two-wheeler industry is expected to de-grow by ~22% in fiscal 2021, the decline at ETL is expected to be lower than industry owing to the execution of new orders received in fiscal 2019 and 2020.

While the operating profitability is expected be lower, the impact may be moderate owing to lean cost structure with contribution of fixed costs remaining at 8-10% of revenue as well as cost cutting initiatives undertaken by company.

The financial profile remains strong with cash & equivalents estimated at over Rs 700 crore in March 2020 and unutilized limits of over Rs 500 crore. The company remains debt-free at net level. The debt repayments of Rs 170-200 crore per annum over fiscal 2021 & 2022 are expected to be serviced from the cash accrual. Capital expenditure is expected to be lower in fiscal 2021 as compared to earlier fiscal.  While the company may go for inorganic growth, the same will be funded prudently. As a result, ratio of debt to earnings before depreciation, interest, tax, and amortisation (EBITDA) is expected to remain below one time over the medium term in absence of any large debt funded acquisitions.

Earlier, in nine months ended December 31, 2019; the consolidated revenue de-grew by 5% as against Indian two wheeler industry de-growth of 12.8% in the similar period. Indian two wheeler industry constitutes close to 60% of the consolidated revenue of the company. European operations, which contribute ~28% to consolidated revenue, grew by 1.7% in euro terms during nine months of fiscal 2020. Operating margin improved to 17.2% during this period from 14.2% in the similar period last fiscal owing to cost efficiencies as well as incentive received from Government of Maharashtra. During first nine months of fiscal 2020, company received new orders of Rs 463 crore in India and Euro 22.5 million in Europe which will support the revenue in fiscal 2021.  

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 2,300 crore in this product segment in fiscal 2019. 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, 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 Limited (HMSI), , and Hero MotoCorp Ltd ('CRISIL AAA/FAAA/Stable/CRISIL A1+') for all of its product segments. During first nine months of fiscal 2020, company received new orders of Rs 463 crore in India, mainly from Hero MotoCorp, HMSI, TVS Motors, Kia Motors and Royal Enfield. New orders in Europe during this period stood at Euro 22.5 million, contributed mainly by Volkswagen and Fiat-Chrysler. The company is also entering the aluminium forging business which will support the backward integration, thereby improving profitability as well as provide opportunity to diversify into this new business. New businesses will drive the revenue diversity as well as will support better than industry operating performance.   

ETL's overseas business (primarily in Germany and Italy) also benefits from established relationship with leading global OEMs, including Volkswagen AG (Volkswagen, rated 'BBB+/Negative/A-2' by S&P Global Ratings) and its group companies, Opel, and BMW AG, Fiat Chrysler Automobiles NV (Fiat; rated 'BB+/Rating watch with positive implications/B' 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 72% and 28%, respectively, to overall revenue; in terms of products, ADCC contributes around 60% to the company's consolidated revenue, suspension products 25%, braking and transmission products roughly 6% each, and aftermarket sales contributes 4% to the consolidated revenue.

* Improving operating efficiencies
ETL has maintained a healthy adjusted return on capital employed (RoCE), at around 20-25% for over last 6 fiscals through fiscal 2020, through astute cost control, improving asset utilisation, and operating profitability. In spite of revenue de-growth in first nine months of fiscal 2020, the margin improved to 17.2% as against 14.2% y-o-y owing to improving cost efficiencies as well as incentive income from Government of Maharashtra. The company is entitled to incentives from Maharashtra Government amounting to Rs 367 crore over 8-9 fiscals starting from fiscal 2019 of which Rs 94 crore were accrued in fiscal 2020.

Besides its cost control initiatives, proportion of revenue from proprietary products and aftermarket sales in the overall revenue has been increasing, thereby supporting the margin profile. 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 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 and net debt/EBITDA standing at 0.31 times and 0.15 times respectively as on March 31, 2019. The company has become debt free at net level in fiscal 2020. While the company may go for inorganic growth, the same will be funded prudently and debt-servicing indicators & liquidity are expected to remain healthy. 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. Bajaj Auto Limited ('CRISIL AAA/FAAA/Stable/CRISIL A1+') contributed about 54% to ETL's domestic revenue and 39% to overall revenue. In Europe, the contribution from Volkswagen group increased in fiscal 2020, the top three customers in Europe contribute ~70% to the revenue from European operations.  However, on overall basis, the top three customers contribute about 55% to total revenue, 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.

Customer concentration in the domestic business 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 Strong

Liquidity is marked with sufficient accruals as against maturing repayments, sizable liquidity and sufficient availability of bank limits. The cash accrual are expected to be sufficient against yearly debt repayment of around Rs 170-200 crore in fiscal 2021 and 2022. The utilisation of sanctioned fund-based working capital limit of Rs 786 crore in India was low at around 25-30% over the twelve months ended March 2020. Liquidity is further aided by cash and equivalents of over Rs 700 crore in March 2020. The capex spending of the company is expected to be moderate and to be funded through internal accrual and existing liquidity. Healthy capital structure enables the company to grow inorganically via acquisitions, which are expected to be funded prudently.

Outlook: Positive

CRISIL believes despite challenging business environment due to COVID induced slowdown 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 robust liquidity, steady cash flow from operations, moderate capital expenditure, and healthy capital structure.

Rating Sensitivity factors
Upward Factors
* 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 sustenance of debt/EBITDA below one time.

Downward Factors
* Significant impact of COVID on operating performance and debt metrics of the company
* 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. Recently, the Company has acquired controlling stakes in  two Italian companies to strengthen its technology base in proprietary two wheelers components  ETL has 27 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 first nine months of fiscal 2020, at the consolidated level, the company posted revenue of Rs 5,351 crore, 5% lower than similar period in previous fiscal, while EBIDTA stood at Rs 923 crore as against Rs 826 crore in similar period in previous fiscal.

Key Financial Indicators (CRISIL adjusted numbers)
Particulars Unit 2019 2018
Revenue Rs crore 7458 6527
Profit After Tax (PAT) Rs crore 495 391
PAT Margins % 6.6 6.0
Adjusted debt/adjusted networth Times 0.31 0.41
Interest coverage Times 44.8 40.5

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 341.0 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 100.00 CRISIL A1+
NA Packing Credit in Foreign Currency NA NA NA 50.00 CRISIL A1+
NA Proposed Short Term Bank Loan Facility NA NA NA 132.03 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 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 Rationale
Endurance Overseas SrL, Italy Full consolidation Subsidiary
Endurance  SpA, Italy Full consolidation Subsidiary
Endurance Castings SpA, Italy Full consolidation Subsidiary
Endurance Engineering SrL, Italy Full consolidation Subsidiary
Endurance Amann GmbH, Germany Full consolidation Subsidiary
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  100.00  CRISIL A1+      20-05-19  CRISIL A1+  04-07-18  CRISIL A1+  23-06-17  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+      20-05-19  CRISIL AA/Positive/ CRISIL A1+  04-07-18  CRISIL AA/Positive  23-06-17  CRISIL AA/Stable/ CRISIL A1+  CRISIL AA-/Positive/ CRISIL A1+ 
                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+      20-05-19  CRISIL A1+  04-07-18  CRISIL A1+  23-06-17  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^ 50 CRISIL AA/Positive
Cash Credit* 341 CRISIL AA/Positive Cash Credit* 130 CRISIL AA/Positive
Letter of credit & Bank Guarantee@ 245 CRISIL A1+ Cash Credit** 336 CRISIL AA/Positive
Packing Credit in Foreign Currency# 100 CRISIL A1+ Letter of credit & Bank Guarantee@ 245 CRISIL A1+
Packing Credit in Foreign Currency 50 CRISIL A1+ Packing Credit in Foreign Currency# 100 CRISIL A1+
Proposed Short Term Bank Loan Facility 132.03 CRISIL A1+ Proposed Short Term Bank Loan Facility 57.03 CRISIL A1+
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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