Endurance Technologies Limited (ENDURANCE) Earnings Call Transcript & Summary

Welcome to the Q3 FY '20 result conference call of Endurance Technologies. From the management, we have with us Mr. Anurang Jain, Managing Director; Mr. Ramesh Gehaney, our Director and COO; Mr. Massimo Venuti, Director and CEO, Endurance Overseas; Mr. Satrajit Ray, Director and Group CFO; and Mr. Raj Mundra, Treasurer and Head, Investor Relations. I'll now hand over the call to Mr. Jain for his opening remarks, post which we can have Q&A. Over to you, Mr. Jain.

Thank you very much and good morning to everybody. I would like to share the details of how Endurance has done in both the third quarter and the first 9 months of 2019/'20. The first 9 months of 2019/'20 have been tough for the 2-wheeler industry, which is 78% of the Endurance sales in India. As for the CM data, the 2-wheeler sales industry -- the 2-wheel industry sales degrew by 12.8% as compared to the first 9 months of the previous financial year. In 2-wheelers, scooters degrew by 15.7%, and motorcycles degrew by 10.9%. On the financials, I will briefly talk to you about the third quarter of 2019/'20 first and later about the first 9 months of 2019. During quarter 3, as compared to previous year same quarter, our consolidated total income degrew by 9.3% from INR 18,223 million to INR 16,525 million. Consolidated EBITDA grew by 3.9% from INR 2,623 million to INR 2,724 million. Consolidated EBITDA margin percentage was 16.5%. Profit after tax grew by 28.5% from INR 966 million to INR 1,240 million. The profit after tax percentage increased from 5.3% in quarter 3 of previous year to 7.5% in quarter 3 of this year. During quarter 3, our stand-alone total income degrew by 12% from INR 13,307 million to INR 11,709 million. This included a 4% degrowth due to metal price decrease, mainly in steel and aluminum. Therefore, the net sales degrowth is 8% in quarter 3. Stand-alone EBITDA grew from INR 1,646 million in quarter 3 of previous year to INR 1,737 million. EBITDA margin percentage improved from 12.4% in quarter 3 of the previous year to 14.8% in quarter 3 of this financial year. The stand-alone profit after tax grew from INR 629 million in quarter 3 of previous year to INR 902 million in quarter 3 of this year. The profit after tax percentage increased from 4.7% in quarter 3 of previous year to 7.7% in quarter 3 of this year. I would like to mention that quarter 3 includes a megaproject incentive of only INR 12.59 million. I will now brief you on the financials of the first 9 months of 2019/'20. During the first 9 months of this financial year as compared to the previous year, our consolidated total income degrew by 5% from INR 56,316 million to INR 53,511 million. Consolidated EBITDA grew by 11.8% from INR 8,256 million to INR 9,231 million. Consolidated EBITDA margin percentage improved from 14.7% to 17.2%. Profit after tax increased from INR 3,464 million in the previous year to INR 4,587 million. The profit after tax margin percentage improved from 6.2% to 8.6%. This includes the megaproject incentive of INR 944.7 million. The consolidated ROCE was at 23.5%, and ROE was at 21.3%. The consolidated net debt was at INR 881 million and the net debt-to-equity ratio was 0.03:1. The asset turnover was 2.06x. During the first 9 months of 2019/'20, our stand-alone total income degrew by 6.2% from INR 40,887 million to INR 38,358 million. This includes a 2.2% degrowth due to metal price decrease. Therefore, the net degrowth is 4% in the first 9 months. Stand-alone EBITDA was at INR 6,276 million. The EBITDA margin percentage improved to 16.4% as compared to 13.1% in the previous year. Stand-alone profit after tax increased from INR 2,476 million in the previous year to INR 3,558 million, with the profit after tax percentage increasing from 6.1% in the previous year to 9.3%. This includes the megaproject incentive of INR 944.7 million. The stand-alone ROCE was at 25.7% and ROE was at 20.4%. The stand-alone net debt was at INR 572 million and the net debt-to-equity was at 0.02:1. The asset turnover was 2.14x. In the last 9 months, the low level of debt and tight control on fixed costs and raw material costs had enabled us at Endurance to maintain our strategic focus on long-term value creation, even in these times of prolonged degrowth. The detailed financials are available with the stock exchanges and on the Endurance website. I would also like to share certain key points in the first 9 months of 2019/'20. 72% of our consolidated total net income, including other income, came from Indian operations and the balance 28% came from our European operations. In India, there was a sizable growth in business, mainly with Hero MotoCorp by 22%. It is important to note that in the first 9 months of 2019/'20 in spite of the Indian 2-wheeler industry degrowth of 12.8% and the total auto industry also degrowing by the same 12.8%, Endurance stand-alone business degrew by 6%. In Europe, in the first 9 months of the year, we acquired EUR 22.5 million of new business with Volkswagen, Fiat Chrysler and Maserati. In Europe in the first 9 months of 2019/'20, our European operations have posted a total income growth of 1.7% in euro terms, and we mainly grew 48% in euro terms with the Volkswagen Group, which included Porsche. Our top 5 clients in Europe are, of course, the Volkswagen Group, including Porsche and Audi, which has become the highest share of business for us; then is the Fiat Chrysler Group; is Daimler; BMW; and Opel, which includes Peugeot. In the first 9 months of 2019/'20, our aftermarket sales in India grew 9.6% from INR 1,958 million to INR 2,147 million. This included both the domestic and the export sales. Since April 2019, INR 4,633 million value of business has been awarded in India, and we have INR 13,160 million of requests for quotes of new businesses in hand, which does not include the Bajaj Auto new business. This new business is really from Kia Motors, from HMSI, from Hero MotoCorp, Royal Enfield, TVS and Tata Motors. This includes new product platforms and replacement business. The status of our new plants are as follows: our Kolar plant in Karnataka was supplying the scooter front fork and shock absorbers to HMSI, has started in September 2019 and has reached from this month onwards, 4,000 sets of scooter front forks and shock absorbers per day in this month. In our Sanand plant in Gujarat plant, we have also reached 4,200 sets of scooter front forks, shock absorbers for HMSI from this month. Both these plants include the replacement of the scooter shock absorbers to front forks. As I mentioned earlier, this total business is approximately INR 3,000 million per annum. So we have already reached the peak from this month onwards. In Chennai, our second die casting and machining plant at Vallam will start from next month in March 2020. The customers to start with will be Royal Enfield, Kia Motors and Hyundai. As our inverted front fork orders are almost doubling in the next 2 years, as I mentioned earlier, we are entering the aluminum forging business to start making axle clamps required for the inverted front forks plus other aluminum projects in-house. We have signed a technical collaboration with FGM in Italy. This project will help increase our profit margins also on the inverted front forks and give a huge opportunity to Endurance to grow this aluminum forging proprietary business for not only other 2- and 4-wheeler aluminum forging requirements, but this will also include the electric vehicle requirements. These supplies and the production will start from July 2020. As far as the brakes is concerned -- as far as the ABS brakes is concerned, it is getting late. We are doing our best to get the EBA test clearance from our first OEM in the first quarter now of the next financial year. So as I mentioned, the additional capacity will be 250,000 ABS brakes, which we can easily be in a few months going to 400,000. So the business is anywhere between INR 750 million to INR 1,200 million for us to start with. As far as the ABS is concerned, we have taken new disc brake assembly as well as front fork and shock absorber orders. As I'd mentioned, the front forks for motorcycles have already started. And from this month, we will be starting the disc brake assemblies to TVS. As we speak, we are in the process of getting further orders on brakes and suspension products, both for 2-wheelers and 3-wheelers from TVS. I'm also happy to inform you that our 29-acre test track in Aurangabad is completed and all testings have started for our 2- and 3-wheeler products. The testing association, ARAI, and the OEMs have already started to use our test track for the tests also. I'd like to invite all of you to come and see it. This track is one of the best test tracks for 2- and 3-wheelers in India. And as mentioned earlier, it will help us give first-time and right products to our OEM clients. Going forward, we see a large increase in our business volume by way of entering new product areas of aluminum forgings, increasing our supply of technology-upgraded products, including paper-based clutch assemblies, combined braking system up to 125 cc motorcycles, rear disc brakes, ABS in 150 cc and above 2-wheelers, inverted front forks and advanced rear shock absorbers in high cc bikes with the help of KTM and fully machined castings for 2-wheelers, 3-wheelers and 4-wheelers. We are also increasing our business with Hyundai and Kia Motors. And as mentioned earlier, we have already received INR 2,790 million per annum business, which will peak -- the peak sales will be in 2021/'22. Our next year's plan is to reach INR 1,500 million per annum of this business. Also at HMSI, as I mentioned earlier, the 2.76 million scooter front forks and shock absorbers have now come into effect from this month, and this will be at a rate of INR 250 million a month or INR 3,000 million per annum. We are also going to be increasing our business, as mentioned, with TVS for 2- and 3-wheeler brake assemblies, front fork and shock absorbers, and we also have RFQs for clutch assemblies. So this will also be a growth path for the future. Our strengthening partnership with KTM Components will help us substantially increase our front fork and shock absorbers exports with KTM's Europe and China plants with the latest technologies, including electronic suspensions and supplying suspensions for e-bikes and electric 2-wheelers. These projects are already in talks, and we are going to start it very soon. We at Endurance are continuing to focus to grow higher than industry by increasing our share of business with existing clients, adding new clients, adding and upgrading to latest technologies required in our product areas through collaborations and our in-house R&Ds, focusing on growth in new product areas, increasing aftermarket and export business and looking at inorganic opportunities, both in India and Europe. So with these opening remarks, I would like to invite questions from all of you.

[Operator Instructions] The first question is from the line of Aditya Jhawar from Investec.

Anurang, if you can explain, this was one of the first quarter where our growth was either broadly in line or -- with the 2-wheeler industry. This is despite our key customer, Bajaj, doing relatively better as well as new orders getting commissioned. And similarly, in case of Europe, again, our OEM production was relatively better, but the growth was quite muted. If you can explain these 2 disconnects?

Yes, sure, sure. So see, as far as the industry degrowth is concerned, as far as if you take both the 2-wheelers -- let's talk about -- I mean, 2-wheelers. The degrowth was about -- say about 11%, what I can see here, with scooters, I think, had degrown by 8.4% around and motorcycles -- sorry, the total degrowth of 2-wheelers was about 12.8%, but that's for 9 months, okay? And I don't have the figures for -- but I think it's about 11.9%...

11.1%.

11.1% is what I see. Now what has happened is the impact on Endurance has come mainly because of material prices. Like I mentioned, in this quarter, third quarter, 4% is because of aluminum and steel. Aluminum is 60% of our purchases because apart from aluminum die casting, which is about 38% -- or let's say, approximately 38% to 40% of our India sales, we also use aluminum for proprietary parts. A lot of aluminum is used whether it's clutch assembly castings, inverted front forks, bottom case castings, shock absorber canister castings. So there's a lot of aluminum which goes into it. Now this aluminum has degrown by almost INR 15 a kg or about 10%. And we have seen similarly steel, I mean, all this steel tubes, spring steels, sheet metal parts, which are about 20%, this has also degrown by about INR 7.5 a kg. Now quarter 3, we have not seen such a big decrease in metal prices, which we saw -- I mean it is -- the third quarter was not like the first 2 quarters. Third quarter was maximum. So though we are showing a 12% degrowth, 4% was largely because of material. So the way I would put it is that we've degrown 8% versus 11% of the industry.

And industry production...

And that is sales, sales volume. Now the production, if you see, the -- because our suppliers depend on that, the production, it has basically decreased by 13.2%. I think it's 13.2%. It's 13.2%. So against 11.1% in sales, it's 13.2%. And ultimately, the customers buy based on that. So I think this has been the impact. The 2% difference in production and sales and the raw material decrease. I think these are the reasons why you see, I mean, a degrowth of 12% for Endurance in quarter 3.

[Technical Difficulty]

I'm not able to hear you.

Sorry to interrupt, sir. We're not able to hear you. Mr. Jhawar?

[Technical Difficulty ] was the same reason for Europe business as well?

Okay. As far as Europe business is concerned, I will request Massimo Venuti to speak.

Before -- Aditya, this is Satrajit Ray here. Before we hand over to Massimo, Massimo would be giving you the growth numbers in euro terms. The fundamental change between Q2 and Q3 is that rupee appreciated vis-à-vis euro. So in rupee terms, you see a very small degrowth, but in euro terms, there's a growth. So Massimo will explain the euro term growth.

Yes, sure. So in the third quarter 2019/2020, sales for new passenger vehicles in European Union jumped by 11.5% compared to the same quarter of the previous year. The sales jumped in December by 21.7%, benefiting by the announced significant changes to the CO2-based taxation for 2020. In terms of major market, sales were up in Germany plus 13.7%, France 12.2%, Italy 7.2%, Spain 5.1%. At Endurance Overseas, we closed the quarter with 4.3% in terms of growth compared to the previous year, but considering the same level of aluminum with 7%. Also, in this case, also in Europe, there was an important destocking for all the OEM. And in order to reinforce this concept, I can give you some info regarding the major market in Europe that is Portugal and Germany. Despite an increase in 2019 compared to 2018 of 5% in terms of registration, in Germany, we have a reduction in terms of production of 9% and a reduction in terms of export of 13%. This is the total year '19 compared to 2018. But in the month of December, even if there was an increase of 20% in the registration, there was a reduction of 14% in terms of export and 7% in terms of production. And so all the customers are reducing the stock. And yesterday morning, we received the official number for the month of January. And in January, there was a reduction of 5.9% in Italy, 13.4% in France, 7.6% in Spain and 7.3% in Germany, and also the production in the month of January was negative for 9.3% in Germany. So this is only an effect of reduction of stock compared to the previous year.

Yes. That was quite helpful, Massimo. One question for Mr. Ray. This quarter there was a lower recognition of the incentive program of Government of Maharashtra. What could be the reason for that?

Because you go by mercantile business, Aditya, it will be transitive of sales. Remember, we had explained this, it is based on the sales and the GST you pay. So we had pretty much consumed the appetite for '19/'20 in the first 2 quarters itself.

Okay. Okay. So what would be the expectation for Q4?

Q4, there's nothing relating to '19/'20 to be done. It's all over now.

Now it's all over. So we'll not get any more megaproject incentive in this financial year nor it will come up in the next financial year.

Perfect. And in terms of new order wins, did you mention that in the total new order wins, there is 1 order other than, which is of Bajaj, which is not included in the new order wins?

Yes, yes. Bajaj increase in orders is -- it is not included, whether it is additional new products, it's KTM, are not included in that.

Okay. And sir, braking, with the ABS order of 250,000, this is for which OEM you mentioned?

This will start with Bajaj Auto.

The next question is from the line of Pramod Kumar from Goldman Sachs.

Congrats on a good performance, Anurang. My first question is on the wallet share, sir. I think, historically, we've been fairly highly skewed towards Bajaj, and we've made massive diversification with other brands. So if you can just share for your parts or the components you supply, where would be your wallet share with each -- different manufacturers, if you can share that? And where would you aspire to be with especially newer customers, like, say, TVS or even Honda? So if you can help us with that.

See, as far as Bajaj Auto and Royal Enfield are concerned, our wallet share is almost 50% to, I would say, 80%, 50% to 80% because they're very old OEM clients of us. As far as the -- as far as HMSI, Hero, Yamaha and TVS are concerned, see, this depends upon product to product. Some with -- volumes are lower, we had even -- we're also at 100%. But if you see today, this new INR 3,000 million order we got from Honda, which I've been talking last 18 months, and in fact, it's the peak from this month actually. Now here, my share of business is 70% of both scooter front fork and shock absorbers. So it depends product to product. Now for example, TVS. TVS, we are starting with brakes. We've already started brakes from this month for Apache, and we already started scooter front forks from last September, October. The share of businesses, say 1/3, is 30%, 33%. So it'll more depend product to product. See, our view is to continuously upgrade products, technologies and try and get -- start with a certain share of business, could be 1/3 and then increase it based on your quality, your cost, your performance in terms of new product introduction and time. So our focus will be to just take more business. And that's the reason I said that we have already taken INR 4,632 million of business, which will start from next year. And we have got INR 13,000 million of business in RFQs, which are under this thing -- I mean, being finalized.

And this is with all these manufacturers combined, right, the RFQ number what you talked about?

Yes. So the RFQ number is with most of them. In fact, RFQ will be even with, of course, the Royal Enfield, but TVS, of course, is there. We have Yamaha, HMSI, Hero, Tata Motors, we have Peugeot, Suzuki. We're also talking -- okay, I'll not name, I've also got some exports to some big OEMs also, some European OEMs for aluminum castings fully machined. That's also in this [ INR 1,300 crores and -- INR 1,300 crores and INR 16,000 crores ]. So there's a lot of activity happening in our business because see, we, at Endurance, I've been saying last year, we have no control on external factors. We're going after business, and business where our profits grow higher than our savings. And you can imagine with the megaproject incentive being hardly INR 12 million in the third quarter, okay, I mean, the margins have -- in fact, my EBITDA and PAT amount margin -- amount is more than the previous year. The amount, forget the percentage. The amount is more. We focus on our operational efficiencies and focusing on the material costs. And like I've always said, Endurance Vendor Association, which we started 7, 8 years ago, is a big strength. Our supplier base is a very big strength for us. So we believe in only profit growth. That's what creates value. So I have no control on external factors, no company can have it. So we are focusing on making more money and going after new business. I mean, that's our focus in Endurance.

And Anurang, related to that, we understand, in 4Q, some of the 2-wheeler companies have already highlighted that they're facing production constraint on the BS-VI ramp-up related to some offtakes of parts or something like that. So it seems to have started -- would impact your dispatches as well, so which could kind of make 4Q more of a flux quarter where the production numbers ideally would be -- should have been higher, but will be curtailed by it?

You will be surprised to know that -- okay, forget the new business we are starting with TVS and at our HMSI side, the scooter front fork is a big business for INR 250 million extra per month. But you won't believe that in this month, Bajaj has given us one of their highest schedules. And then, yes, BS-VI, they are almost fully at BS-VI now. And see, Bajaj, I'll tell you, is a big strength for us because 45% of their sales is exports and exports are really doing well, 2-wheelers and 3-wheelers, both. So for us, it's a big strength to be with Bajaj. To be on now -- I've always said that. I know they've got a big share of our business, slightly more than 1/3, but they are a huge strength, financially very strong, and I mean, like I've always said, huge strength for us. And their schedules are amongst the best in February what we have got.

Very good. And sir, on the ABS side, I know we've got a bit delayed. But does it put us at a disadvantage because ABS has already been a norm for the premium motorcycles since September?

See what has happened is the existing supplier after clearance had had issues of field -- in the fields. Initial testing standards, which was set, were further tightened with much more stringent controls on the type of test tracks in which the ABS has to pass. That's taking a bit more time between us and our collaborator, BWI, to set the calibration and tuning so that we can pass the test. The tests have become much more stringent than what we started, I would say, a year ago. So it's taking more time. But I'll tell you one thing. This is a technology. It's going to -- there will be not many players in this. Advantage with Endurance will be our cost. We have to give the performance and quality. So maybe we'll enter late. We've always entered late and slowly step by step, we want to capture the highest share of business. I mean, that's our strategy. So I know we are late. We are late by almost 8 to 9 months. But there were things which happened which were not expected. So if I talk about, say, 250,000, I mean, the business is about INR 750 million. If I go to 400,000, the business can be about INR 1,250 million per year. So it's not that business is that big, but it's important to be in this segment. It's important. And like I said, our rear brakes coming in have compensated for this loss, which we had, which came in about 18 months ago. So this compensated for this loss of ABS, but of course, we are fully focused to get this ABS clearance first quarter of next year, we have to. It's taking a long time. So we are putting our best efforts to that. So we have to be present in all the higher technology products, like we've inverted front forks, front forks, and rearly adjustable mono shocks and all. Similarly in brakes, we have to get into this, get into ABS.

Sounds great, Anurang. And if I have more questions, I'll touch with Raj separately. But congratulations and wish you all the best, sir.

Thank you.

[Operator Instructions] The next question is from the line of Hitesh Goel from Kotak Securities.

Anurang, just wanted to understand that first I missed this, the outstanding order book, you had given the outstanding orders. Can you repeat that also for me? I think last quarter, it was around INR 1,200 crores. And also, can you give some more granularity on the new business wins. So for example, when we're modeling, basically, what we want to understand is that in FY '21 and FY '22, if the industry is flat, what are the kind of new orders we can expect annually? Just an estimate so that we have some sense on -- because these order books would run over many years, right, so...

Yes, yes. See, if you remember, we had taken about INR 9,300 million of orders in '18/'19, which I had said the peak will be in '21, '22 -- '20, '21, and '21, '22 will be the peak. Now this year, in the 9 months, we have taken orders of about INR 4,633 million, okay? Now these orders will start from next year. But again, peak will be '21, '22. So if you ask me, the peak sales value of INR 13,000 million will be reached in '21, '22. Out of which, Honda has already started from February itself. Okay? That has already started now. So this quarter, we'll see a good sales growth. And my view is, I mean, don't hold me to it, my view is that the degrowth stops from February '20 for Endurance because the kind of new orders which have come in, TVS brakes, Honda, Bajaj doing very well, good sales growth, and then you have the Honda, Kia coming in, KTM has increased its sales. So according to me, the feeling I have is that February '20, the degrowth stops for Endurance in terms of value. So that only time will tell. But apart from this, we also have requests for quotes of INR 13,100 million, which still we have to get the LOIs, which are still being talked to the customers. So we are very aggressively going after new orders. So like I said earlier, I cannot control the industry, what goes up, down, I've no idea. We are focusing on profitable growth. So just to repeat, 930 -- I think, it was INR 9,300 million what I remember plus 9 months, INR 4,632 million, this INR 13,000 million peak will be reached in '21, '22, okay? And -- so that is the, I mean, the picture what is there right now.

So basically, if I understand it right, that INR 1,300 crores as per you, if the industry is also flat, these are the new orders you'll get over and above the industry growth? That is INR 1,300 crores by FY '22?

That is what we expect. Now if there's a degrowth, I don't know. But if it's flat. I'm saying if it -- as of what was there 9 months.

Yes, yes. So if the industry is flat for 2 years, basically FY '22, we will get INR 1,300 crores...

By FY '22. And apart from that, our another INR 13,138 million of RFQs, which have been given to us, which we are trying to convert into business.

And FY '21, any idea how much we should build in from this INR 1,300 crores? How much will come in this -- like you said, INR 460 crores in 9 months.

See, I could give you a flavor immediately that now this Honda, it is INR 250 million -- INR 25 crores a month, which has reached peak from this month onwards, which...

That is INR 300 crores more, right?

See, practically, out of this INR 250 million, it would have been INR 30 million, INR 40 million maximum. But it's just suddenly gone up from January 50%, and this month is 100%. So this quarter, we'll see a very good growth just Honda apart from TVS and others, which I've said. And like I said, surprisingly, Bajaj schedules are very good in February.

Yes. So basically, the -- in FY '21 versus FY '22, big order that is coming in is Honda basically of INR 300 crores?

It's Honda, it's TVS reaching its peak. It's Honda, Kia, Honda, Kia were INR 2,790 million, out of which INR 1,500 million or INR 150 crores comes in next year with the new plant at Vallam. And then we have -- see, there are many orders, Tata Motors, there is Suzuki. See, there's a lot coming in. There are a lot of new platforms. There are many. See, like I told you, the 13 -- INR 9,300 million, INR 930 crores, and now this INR 4,600 million, that's INR 460 crores, will kick in next year and peak in '21, '22. Plus I have got RFQs of another INR 13,000-odd million, which have to be converted into LOIs. We'll try our best how to get those orders because...

And those INR 13,000 million is over what period? Say that the additional INR 1,300 crores that you've won -- you are bidding actually?