IPO Note | Endurance Technologies Limited (ETL)
Reco : SUBSCRIBE
Incorporated in 2000, Endurance Technology Ltd (ETL) is the largest two-wheeler and three-wheeler automotive component manufacturer in India in term of aggregate revenue of FY15. Company drives its business broadly from five segments a) raw & machined aluminium castings and machining b) suspension c) transmission (clutch assemblies and CVT) d) braking system e) after market. ETL’s 25 plant are spread across India (18 plants), Germany (2 plants) and Italy (5 plants). Company owns four patents with another 41 patents pending approvals. The company’s revenue has grown at 8% CAGR in FY12-16 period, while its PAT grew at 12.4% CAGR in the same period. Considering the moderate capacity utilization levels at ETL’s plants, the company will not require large capex to support next leg of growth, implying high free cash flow generation. The IPO also seem attractive as compared to other listed peers and hence we recommend investors to SUBSCRIBE to the issue.
Investment Rationale & Business Strategy
- Global tie-ups (e.g. with WP Performance Systems GmbH and Adler SPA) have allowed them to gain access to technology for each of its segments.
- Proximity of its plants to the OEM has helped them lower logistical and operating cost. Additionally, it has allowed them to keep very low receivable days
- Focus on Honda, as it becomes third largest customer for ETL in Q1FY17 after Bajaj and FCA Italy S.p.A. ETL has also made inroads into Harley Davidson Motors as well.
- Excellent CFO / EBITDA ratio historically owing to well managed working capital cycle
- Utilization at most of its plants, especially Pantnagar (dedicated for Bajaj), is moderate and does not need capacity addition in case demand pickup, implying high free cash flow generation.
- High ROE / ROCE profile
- Marquee clientele
Risk & Concerns
- 40.8% of the business in FY16 came from Bajaj while 15.3% was from FCA Italy S.p.A, such dependence on a few OEMs is although common among auto ancillaries but it’s a risk nevertheless. Bajaj contributed ~48% of sales in FY14. Bajaj’s H2FY17 sales volumes are down 2% YoY, although recent pickup in domestic volumes is heartening.
- Geographic concentration of its plants is a potential risk as bulk of the manufacturing is done in India in Aurangabad, Pantnagar and Pune and in Europe in Massenbachhausen (Germany) and Turin (Italy).
- The products are exposed to the risk of becoming obsolete owing to change in consumer preference, regulatory and industry requirement
- Considering the non-promoter holding at 17.5% post issue, there will be another 7.5% dilution in the next three years to comply with SEBI’s minimum 25% public holding norms.
Issue Details
- ETL is offering 24,613,024 shares (i.e. 17.5% of the outstanding shares of which 13.7% is by Actis Components and System Investments while 3.8% are by the promoter Mr. Anurang Jain) at the price band of Rs. 467-472. Actis is making a full exit from ETL through this IPO. This values the company at Rs. 66,393 mn at the upper band through the IPO. There are no fresh shares being issued in the IPO. No money will come to the company.
Valuation
- ETL’s net worth has grown at 25% CAGR in the past 4 years with FY16 ROE at 22.4% and ROCE at 23.7%, which is exceptional considering the rather subdued two wheeler growth of its key customer (Bajaj). The company has witnessed sustained gross margin improvement from 35.6% in FY11 to 41.2% in FY16. The IPO seeks EV/EBITDA multiple of 10.3x FY16 and P/E of 22.8x FY16 which is cheaper than its comparable peers. Considering the low capacity utilization levels at ETL’s plants, the company will not require large capex to support next leg of growth, implying high free cash flow generation. The IPO also seem cheaper than other listed peers and hence we recommend investors to SUBSCRIBE to the issue.
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