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MOSL: ENDURANCE TECHNOLOGIES (Buy)-Outperformance continues-Withdraws plans of foray into 2W tyres

ENDURANCE TECHNOLOGIES: Outperformance continues; Withdraws plans of foray into 2W tyres

(ENDU IN, Mkt Cap USD1.5b, CMP INR743, TP INR1000, 35% Upside, Buy)

 

• net revenues were flat YoY to INR18.6b (v/s est. of INR19.7b). PAT grew 8% to INR1.3b (v/s est. of INR1.2b). Performance was boosted by incentives of ~INR229m in India business.
• India business: S/A revenues were flat YoY to INR13.1b (v/s est. of INR13.9b). EBITDA margins came in at 15.1% (v/s est. of 14%), an expansion of 160bp YoY (-40bp QoQ). Beat on margins was driven by INR229m (or 170bp) incentive, adjusted for which, margins would be below our estimates. EBITDA grew 11.5% to INR2b (v/s est. of INR1.8b). S/A PAT grew 9% YoY to INR981m (v/s est. of INR892m).
• EU business revenues were flat YoY to INR5.5b (v/s est. INR5.8b). In EUR terms, revenues grew ~3%. EBITDA margins expanded 40bp YoY (-340bp QoQ) to 17.5% (v/s est. of 18.4%). EBITDA grew just 2% YoY to INR958m (v/s est. of INR1.1b). Lower depreciation boosted adj. PAT growth to 6% YoY at INR365m (v/s est. of INR307m).
• Withdraws plans to foray into 2W tyre business: ENDU's board had given an in-principle approval for investment of ~INR1.8b for setting-up ~10,000 units/day 2W tyre capacity. However, later based on feedback from the investing community, it withdrew this plan.
• Key highlights from earnings call: (a) Entering aluminum forging business with capex of ~INR350m to manufacture components for inverted front forks (currently imported). At a later stage, it also plans to make components for EVs. Manufacturing would start by Jun'20 and is projected to have peak revenues of ~INR1.3b in three years. (b) Entered into tie-up with KTM for transfer of latest and advanced technology for suspensions. ENDU would invest EUR4m over two years as equity stake in KTM Industries and KTM would transfer technology free of cost to ENDU. (c) Won new business worth ~INR1.9b from HMSI, Kia, HMCL, TVS & Getrag, with SOP from 3QFY20. TVS has given orders for 2W front forks and 3W brakes (initial order for disc brakes). (d) Hyundai & Kia are currently contributing ~INR1b to revenues, which should ramp up to ~INR3b by FY21.
• Valuation and view: We have lowered our EPS estimates by ~7%/4% for FY20/FY21 to factor in weaker 2W volumes, EU PV volumes and adverse EUR-INR. ENDU offers strong growth potential driven by newer products and technology. We believe it is the best proxy play on India's 2W industry growth, as it should continue to outperform 2W volume growth through sustained increase in content and cross-selling. Even the EU business is expected to outperform underlying industry growth due to increasing wallet share of customers. We are lowering our P/E multiple from 27x to 24x to factor in the increasing risk from EVs to its aluminum die-casting business. Maintain Buy, with a TP of IN1,100/share.