MOSL: ENDURANCE TECHNOLOGIES (Buy)- Operating performance in-line-higher tax restricts PAT growth

Endurance Technologies: Operating performance in-line; higher tax restricts PAT growth

(endu IN, Mkt Cap USD2.5b, CMP INR1152, TP INR1334, 16% Upside, Buy)

• Revenue growth in-line: Consolidated net sales grew 11.9% YoY to INR16.2b (in-line), led by EU. EBITDA margin expanded 30bp YoY (40bp QoQ) to 14.1% (our estimate: 13.9%). However, higher tax rate restricted PAT growth – up 11.6% YoY to ~INR997m (our estimate: ~INR1.08b).
  
• India business: Ramp-up with HMSI, RE and Yamaha drives growth: S/A revenue grew 10.4% YoY (v/s 12.5% growth in2W production), led by strong growth with HMSI, HMLC, Royal Enfield and Yamaha. However, moderation in aftermarket sales due to GST restricted growth. EBITDA margin expanded 20bp YoY to 12.8% (our estimate: 13.1%), led by lower other expenses even as RM cost inflation led to gross margin contraction of ~80bp YoY. Higher tax restricted PAT growth – up 10.2% YoY to INR731m (our estimate: INR848m).
  
• EU business: Better mix drives margins: EU revenue grew 15.9% in INR terms to INR4.4b (our estimate: INR4.2b), supported by tooling sales. Margins improved 20bp YoY (130bp QoQ) to 17.7% (our estimate: 16%), driven by better mix. PAT was INR266m against our estimate of INR234m.
  
• Key highlights from earnings call: (a) Management has guided 8-10% revenue growth over the next 2-3 years. (b) ENDU is setting up an initial capacity of 0.5m per annum for ABS products under its tie-up with BWI Group for which it intends to send sample for testing by October 2018 and commence supplies from 1QFY20. (c) Received direct export order from KTM for mono shock absorbers, inverted front forks for 20k-25k bikes for which supply has already commenced. (d) It has won an order for EUR45m from Volkswagen for a casting product that is to be used across all VW brands. (e) It would start supplying clutch and CVT to HMCL in 1HFY19.​