Regulatory changes, strong volumes give Endurance an edge

Tie-up with BWI North America, higher share of new clients will help auto part maker lift profit

The stock of India’s largest automobile component maker for two-wheelers, Endurance Technologies, has gained 16 per cent over the last month on expectations of improved volumes, regulatory changes, premiumisation of two-wheelers, and strong March quarter performance. The immediate trigger is the regulatory changes by FY19. The ministry has made it mandatory for all motorcycles and scooters to have combined braking system (CBS) and anti-lock braking system (ABS) by FY19. While all new launches will have to have ABS from April 2018, existing models will need to be upgraded to this safety feature by FY19.

Sneha Prashant and Abhishek Kumar Jain of HDFC Securities say that if implemented at current prices, it will lead to a realisation increase of three times for CBS and seven times in case of ABS. This would translate into an annual growth rate of 24 per cent in the two-wheeler space till FY20. Even if the realisation increase on braking systems may not be as high, given that large volumes will bring in scale and this in turn will mean cost reduction, revenues from supply of braking systems will be significant. It is in this context that the company entered into a new licence and technical agreement with US-based brake and suspension maker, BWI North America, for manufacturing ABS.

The other near-term trigger is March quarter performance, which, on the back of a sequential growth in domestic volumes as well as its plant in Germany coming on stream, should result in higher revenues. Thus, while sales in the quarter are expected to go up 13 per cent to cross Rs 1,000-crore mark, margins should improve by 100 basis points to 12.7 per cent, on a sequential basis. The Street will look out for higher volumes for Endurance, especially from Hero MotoCorp and Honda Motorcycle and Scooter India as the auto component maker starts supplies to the new Gujarat plants of the two companies. This will help the company reduce its dependence on Bajaj Auto, which accounts for 41 per cent of its consolidated revenues currently. Though Hero MotoCorp and Honda account for over 60 per cent of the two-wheeler market, they contribute only about 10 per cent to the company’s revenues, and should add Rs 300-400 crore to Endurance’s top line, says analysts. 

Given the growth in domestic as well as overseas operations and reduction in debt, analysts at Ambit believe the company will be able to grow its net profits by 25 per cent annually over FY17-19. At the current level, the stock is trading at 22 times its FY19 estimated earnings. Investors should await some correction.