Endurance Technologies IPO Review: Endearing valuations?

When Endurance Technologies IPO opens next month, investors will be faced with a crucial question if it makes sense to even apply in IPOs anymore as some of the last offers such as L&T Technology and ICICI Prudential performed poorly. Investors’ jitters are justified and it doesn’t take long for sentiments to change in the primary market. In this review of the Endurance IPO, we try to find out of the public offer can sail through the challenging market conditions. Here are some basic details of Endurance Technologies IPO:

The issue is priced in the range of INR467 – 472 per share which means the share sale will raise INR1,161.7 crore (INR11.6 billion) at the upper price band. Endurance Technologies IPO will be managed by Axis Capital and Citi Group Markets India while Link Intime India is the registrar to the public offer.

No new shares, Actis to exit

All the shares sold in the IPO will be offered by existing shareholders. As a result, the company will not get any proceeds from the public offer.

UK’s private equity (PE) investor Actis holds 19,295,968 shares or 13.72% equity in the company and plans to use the IPO to completely exit this position. Actis invested in Endurance in December 2011 at an average price of INR190.82 per share. Actis bought out Standard Chartered PE in Endurance Technologies in a deal worth USD71 million (INR372.5 crore). As its investment has swelled nearly 2.5 times in the last 5 years, Actis is now looking to exit the Aurangabad-based company. We don’t like complete exits by PE firms, although 5 years is the typical timeframe during which private investors seek to exit.

Apart from Actis, Endurance founder and promoter Anurang Jain will also offload 5,317,056 shares in Endurance IPO. Anurang Jain directly owns 59,266,320 shares or 42.13% equity in the company.

Endurance Technologies’ business background

Established in 1985, Endurance is involved in manufacturing and sale of aluminium die castings, suspensions, transmissions and brake components to OEMs like Bajaj Auto, Mahindra & Mahindra (M&M), Eicher, Royal Enfield, Harley Davidson and Tata Motors. The company’s business in India is largely focused on two and three wheelers and it derived 67.5% of revenues in FY2016 from India. In recent years, Endurance Technologies has also ventured into Europe where it supplies to Fiat Chrysler and Daimler. The European business accounted for 30.6% of Endurance Technologies’ annual revenues in FY2016. We like the fact that the company is diversifying into other geographies. For a more detailed description of its business, head to this page.

Jain family is not new to the automotive industry as it has close ties with the Bajaj Auto’s Rahul Bajaj (Anurang Jain’s mother is Rahul Bajaj’s sister). Anurang father Naresh Chandra Jain headed a Bajaj group company Kaycee Industries for a long time and these ties played a key role in the subsequent establishment of components business in 1985 through Endurance. Naresh Chandra Jain serves as the chairman of Endurance Technologies as well as of several Varroc Group companies which are headed by Anurang’s brother Tarang (read more about Varroc here). Under a family settlement in 2002, the two brothers parted ways and transferred their shares in each other’s companies.

Endurance IPO – Financial performance

Endurance Technologies is a steady performer with revenues and profits growing in each of the last three years. The company earned a profit of INR2.89 billion (INR289.8 crore) in FY2016. Endurance Technologies’ top line also grew 6.5% in FY 2016 to INR52.4 billion (INR5,240 crore). More importantly, its margins have been going up consistently.

Source: Endurance Technologies’ Red Herring Prospectus 

Trivia – For FY 2016, Anurang Jain was paid an aggregate compensation of INR3.66 crore while the remuneration paid to Massimo Venuti – CEO of Endurance Overseas Srl – stood at EUR1.08 million (INR INR8.09 crore).

Should you invest in Endurance IPO?

There are several positives we see with Endurance IPO. As mentioned earlier, it has close relationships with Bajaj Auto but Endurance management has done a great job of reducing this dependence on a single OEM. According to Endurance Technologies’ red herring prospectus, Bajaj Auto accounted for 40.8% of its revenue in FY 2016. This figure is down from a high of 48% in FY 2014.

At the same time, it has grown business with Fiat Chrysler and Royal Enfield in the last three years while the contribution of the next 5 biggest clients has also gone up.

On the margins front, we have noted that profitability has improved in recent years and the success of Endurance’s European and aftermarket business is to be thanked for this. In revenue terms, the aftermarket business faster than our other product segments from FY2014 to FY2016, experiencing a 17.6% CAGR. Typically, margins in components business are better in aftermarket as OEM customers tend to squeeze margins when awarding contracts.

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As it grows its business in the four-wheeler segment, Endurance has lot of headroom to improve margins from the current levels. For the next 2-3 years, the outlook for the local automotive industry is positive and this has been reinforced by better monsoon and implementation of latest pay commission. At the end of FY 2016, it had a comfortable debt equity ratio of 0.4 which is down from 0.6 in FY 2014. Return on net worth (RONW) is at 20% which is better than some of its peers such as Bharat Forge (18.2%), Munjal Showa (13.5%) and Rico Auto (6.3%).

At the upper end of INR472 per share, Endurance’s consolidated earnings per share (EPS) of INR20.7, the IPO values the business at a PE ratio of 22.8. This is less than the PE ratio of Bharat Forge and Motherson Sumi which trade at 30.8 and 32.8 respectively. Among its smaller peers, Munjal Showa and Gabriel India trade at PE ratios of 13.5 and 22.3 respectively. This means that Endurance’s valuations are in line with the market.

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As we have explained, the quality of earnings and margins at Endurance Technologies is better than its smaller competitors and in some cases, is even better than bigger players like Bharat Forge and Motherson Sumi. As a result, there is a case for listing gains in Endurance IPO.

At the same time, Endurance IPO is not offered at compelling valuations at which the recently concluded GNA Axles IPO was sold. Despite the solid fundamentals and attractive pricing, volatility in the secondary markets has caused GNA Axles’ price to keep moving down since listing. This puts Endurance IPO in a grey area where listing gains look possible but anything more than that is clouded.