Endurance continues to shine despite volume blues for Bajaj Auto

Company is diversifying its customer and product base to reduce risk and improve its market share

Despite its largest customer Bajaj Auto struggling to improve its domestic volumes, automobile components maker Endurance Technologies has been growing its business in India and outside at a brisk pace.

The June quarter (Q1) performance of both companies illustrates the point. While Bajaj Auto’s sales volume fell 11 per cent and revenue was down five per cent, Endurance’s domestic revenue grew 12 per cent over the year-ago period. This is noteworthy given that Bajaj Auto accounts for 47 per cent of Endurance’s standalone revenue and 31 per cent of its consolidated revenue.

The stock performance is indicative of the divergent trend. The Endurance stock has been one of the best-performing stocks in the automobile space (up 51 per cent since listing in October 2016), while Bajaj Auto shareholders have lost five per cent. One of the reasons Endurance has been able to improve its growth is by diversifying its customer concentration over the past few years.

In Q1, for example, Endurance outperformed the two-wheeler sector, on the back of strong growth from Honda Motorcycle and Scooter India, Royal Enfield and Yamaha. The company is setting up a plant in Gujarat to supply suspension, clutch and transmission-related requirements of Hero MotoCorp, and this is expected to become operational by the end of FY18. As more two-wheeler makers become its customers, Endurance’s dependence on Bajaj Auto will decline. Over the past two years, Bajaj Auto’s contribution to standalone sales has come down from 62 per cent to 47 per cent. Standalone sales constitute 70 per cent of consolidated revenue.

Just like in India, Endurance is diversifying its European customer base (currently Fiat Chrysler accounts for most of its revenues). It has signed a contract with Porsche for the supply of electric vehicle components and new projects with Daimler and Volkswagen for engine and transmission components, with a contract period of 7-10 years.

One of the key opportunities for Endurance is in the anti-lock braking systems (ABS) and combined braking systems (CBS) components. While Endurance had developed CBS for vehicles under 125cc engines, it has tied up with US’s BWI to jointly develop ABS. All two-wheelers need to have either of the two systems from FY20. The company will invest up to Rs 60 crore over the next two years in new product development. Braking systems account for five per cent of revenue, while aluminium casting and suspension constitute 70 per cent of the company’s product segment revenue.

Given the rising share of content per two-wheelers as and diversification of client base, Endurance has turned into a preferred auto ancillary pick among most brokerages. However, given the rally in the stock price since listing and target prices ranging Rs 1,000 to Rs 1,100, investors can await any correction before considering it.