PL Stock Report: Endurance Technologies (ENDU IN) - Q2FY24 Result Update – Start of new businesses to aid performance - Accumulate

Endurance Technologies (ENDU IN) - Himanshu K Singh - Research Analyst, Prabhudas Lilladher Pvt Ltd.

Rating: ACCUMULATE | CMP: Rs1,624 | TP: Rs1,755

Q2FY24 Result Update – Start of new businesses to aid performance

Quick Pointers:

♦ New order momentum slows down in EVs and Europe.

♦ Signs of rural demand recovery; premium and EVs continue to grow faster.

We reduce our FY24/FY25/FY26E EPS estimate by 9%/4%/4% to factor in lower than expected performance and 2Q commentary. Endurance Technologies’ (ENDU) 2QFY24 consolidated EBITDA margin came in at 12.5% (-c60bps QoQ) lower than PLe (13.8%). ENDU sees signs of rural demand recovering for 2W segment, besides faster growth for premium and EVs continuing. The company will see multiple SOPs (both ICE and EV) going ahead in remainder of FY24, which should help growth. While sentiment in Europe remains weak given inflation and high interest rates, ENDU expects to maintain the growth momentum in 2HFY24 as well. Order momentum for EVs in general have slowed post cut in FAME-II subsidies, as OEMs assess strategy.

We believe that ENDU will continue to outperform the industry’s volume growth given (1) 2W demand improvement from 2HFY24, (2) addition of new and value added products (ABS ramp-up over FY24-25, driveshaft’s, non-automotive castings etc.), (3) ramp-up in EV offering and (4) increasing share of after-markets and exports. Maintain ‘Accumulate’ rating with revised TP of Rs 1,755 (Rs 1,820 earlier) at 25x Sep-25E EPS.

Miss on revenue and margins: (1) Consolidated: Revenue grew by c8% YoY and missed PLe by 4.4% and Bloomberg consensus estimates (BBGe) by 2.2%. EBITDA margins at 12.5% were lower than PLe (13.8%) and BBGe (13.5%) and contracted by ~60bps QoQ despite increase in revenues by ~4%. Standalone: ENDU’s standalone revenue in Q2FY24 was at Rs 19.8bn with 3.8% YoY growth against backdrop of industry and 2W sales de-growth of 2.4%. Other Subsidiary: Revenue from Europe at Rs 5.7bn has grown by 23.4% YoY; grew 10.1% in EUR terms, while EU car production grew by 3.7%.

Key takeaways: (1) Rural demand for 2W is expected to improve, while 3Ws are having a good year. ENDU is expecting 2W sales to reach 20.5-21mn in FY24 (19.5mn in FY23) and sees the premium motorcycles (150cc+), EV 2W and 3Ws reaping good growth. Start of new orders should help ENDU grow faster than the industry going ahead. (2) Order win in 2QFY24 was ~Rs4.6bn (excl Bajaj) with total orders reaching ~Rs37bn in India; it is expected to peak in FY26. EV order momentum has slowed down in FY24 due to reduced FAME-II subsidy. (3) ABS annual capacity increased to 0.64mn units and expects to increase alloy wheel capacity from 4.5 to 5.5 mn by Apr-24. ENDU is adding capacity for EV castings as well. (3) Europe: Despite modest increase in production of c3.7% YoY, revenue increased by 10% due to new projects and ENDU is cautiously optimistic for managing the next two quarters, though forecast is not positive. Margins improved due to lower electricity and gas prices and also higher volumes.

Out of the new order wins of EUR20mn in 1HFY24, 90% is for EVs, however, there is slowdown in the momentum for both EV and ICE orders. Some OEMs have cut their production schedules as well. (4) Maxwell will likely see sharp ramp-up from 4QFY24 onwards, as multiple orders are expected start production. ENDU is working on lowering the bought-out components along with fixed and variable costs as it ramps-up the revenues with an aim to become profitable from 4QFY24 onwards. (5) Aftermarket is a large focus area for ENDU and it is targeting good growth in FY24. Machine castings (semi-finished or finished) is at ~70% in India, which it aims to increase to 100% with higher margins. (6) ENDU assured its active focus on gaining access to new technologies; is focusing on new products besides organic & inorganic growth.

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