Endurance Technology IPO: Strong fundamentals, some room for listing gains

Rising share markets are giving an opportunity for private equity players to exit their holdings. Another IPO is hitting the market with the sole purpose of giving the private equity investor and the promoter a chance to exit.

Endurance Technology is tapping the market with an offer for sale for the sole purpose of getting listed. The company will not get any money from the issue but can enjoy listing benefits.

Another way of looking at the same issue is that there will be no equity dilution and new shareholders will benefit from the strong fundamentals of the company. What ultimately matters for the investors is at what valuation are they being offered the shares and is there any gains left on the table for them.

Here are 10 things to consider in Endurance Technology IPO:

  1. Endurance Technologies is the largest aluminium die casting manufacturer in India and one of the leading automotive component manufacturers in aluminium die casting (including alloy wheels), suspension, transmission and brake systems.

  2. The company supplies its products to 2/3-wheeler manufacturer in the country and 4 wheelers in Europe. In its product segment, the company is the largest supplier to 2-wheelers and 3-wheelers in India.

  3. The company operates 25 plants, with 18 of these manufacturing plants are in India. Its units are located in the major automotive manufacturing belts of the country. Endurance Technologies also has two manufacturing plants in Massenbachhausen, Germany with its subsidiary Endurance Amann GmbH (Endurance Amann), and five in and around Torino, Italy, at its indirect subsidiaries, namely, Endurance Fondalmec SpA, (Endurance Fondalmec), Endurance FOA SpA (Endurance FOA) and Endurance Engineering Srl (Endurance Engineering). The company is expected to commission a new machining plant in Massenbachhausen, Germany, in FY2017 and is in the initial stages of planning an automotive proving ground (test track) in Aurangabad, Maharashtra, India, which can be operational by the end of 2018.

  4. In FY16 India accounted for 70% of the company’s consolidated revenue. Italy the fastest growing segment was at 23% while Germany was at 7%.

  5. The current offer for sale is for 17.5% of the company’s equity. Actis Private Equity is offering 13.7% of the company’s stake, while its promoter and managing director Anurag Jain is offering 3.8% share.

  6. In terms of products, castings and alloys accounts for 46% of the sales followed by suspensions at 33%, transmission is 8%, while brakes is 6% and after- market sales contribute 7% of the sales.

  7. In terms of operating margins castings and alloys have the lowest operating profit margin of around 10%, while others are in the range of 14-17%. After-market sales are the highest margin segment earning around 18-20%.

  8. Endurance Technologies is a dominant player in most of the segments it operates. As of FY16 its market share in dies segment was 22%, brakes was 14%, transmission segment was 14% and in suspension the company has a 33% market share.

  9. Contribution of higher margin products of the company is steadily increasing, with low margin casting’s segment share falling from 52% in FY13 to 46% in FY16. As a result while revenue has grown at a compounded annual growth rate (CAGR) of 11% over five years, its profits have grown by 18%. Among the peers in the auto component category, Endurance Technologies has the highest operating margin.

  10. Endurance Technologies growth moved in tandem with that of Bajaj Auto, which was its main contributor to sales. However, its contribution has now fallen to 41% of consolidated revenues. Its second largest client FCA Italy accounts for 15% while Royal Enfield, the third largest accounts for 6% of revenue.

Despite the strong fundamentals and leadership position, what matters to the ordinary investor is whether they will make money in the short run. At a price to earnings (P/E) valuation of 22 as compared to around 30 levels for companies in the similar product range, there is some room for upside on listing gains. But the fundamental of the company suggests it’s one of those that can be kept for the long haul.

-Shishir Asthana

This article was published in Business Standard. Click here

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