Endurance Tech: scarcity premium lifts stock on listing


Auto component manufacturer Endurance Technologies Ltd (ETL) had a stellar debut on the stock market. The stock listed at Rs570 on Wednesday, 21% higher than the price at which shares were offered for sale. And it rose further to close 37% higher at Rs647 apiece. The Street seemed to ignore its expensive valuation of 23 times fiscal year 2017 earnings, significantly higher than its peers.

What made the stock tick? And, will it sustain the steep valuation?

Given that the initial public offering was subscribed 43.7 times, there could have been a rush to buy shares by those who missed the bus. This may be the reason for the euphoria on listing.

Another reason and more fundamental is that ETL is the No. 1 aluminium die-casting firm, with a stronghold in shock absorbers and transmission systems. About 18 of its 25 plants cater to the domestic two- and three-wheeler market, where it accounts for nearly a third of the pie. With barely a handful of firms in this space like Ricoh Auto Ltd and Gabriel Ltd, the company’s shares command a scarcity premium in the market.

Moreover, ETL’s public issue was perfectly timed. With its revenue largely dependent on the two-wheeler segment, earnings growth is assured. A report by PhillipCapital (India) Research says that the two-wheeler industry will see a strong double-digit CAGR (compound annual growth rate) until FY20 after a sluggish 5% CAGR between FY13 and FY16.

The rest of its plants are in Europe. Business from this region accounts for about 30% of ETL’s consolidated revenue. Analysts say the international business enjoys higher profitability. The company’s consolidated operating margin in FY16 was about 14%, among the best in the industry.

But then, there are concerns too. For one, the firm’s main client is Bajaj Auto Ltd, which comprises two-thirds of its stand-alone revenue. And all is not well at Bajaj Auto for now, as exports are likely to remain subdued and domestic growth is also seeing challenges. Of course, ETL’s efforts are on to diversify its client base as it grows in the coming years, with others like Royal Enfield and Hero MotoCorp also moving up the revenue mix.

Further, the European region could see problems both by way of business and foreign exchange volatility as the Brexit impact pans out.

Also, ETL is mainly an original equipment supplier. Any contraction in volumes due to a cyclical downturn will hurt revenue, capacity utilization and hence profitability. Also, analysts believe that there is not much scope for margin improvement from current levels.

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As the listing euphoria subsides, lower demand on the Street and profit-taking could see a less euphoric view of the stock. That said, it is likely to enjoy robust valuation given that there are only a handful of premium firms with strong management and scalable business models in the auto components industry.