Endurance Technologies Limited analyst Q&A

We will now begin the question -and-answer session. The first question is from the line of J inesh Gandhi from Ambit Capital. Please go ahead.

The India business margin has seen a very sharp improvement . What are the drivers for the margins and are these sustainable margins?

India margins have been helped by the increase in our volumes and improvement in the product mix. At the same time, there has been an approximate Rs 200 million positive impact, both on the client as well as on the vendor side, because we have got one-time gain of Rs.200 million. This is in addition to Rs. 203 million PSI incentives. But, l argely improvement has been because of the good volumes and the product mix improving every quarter.

In the European business, new order wins have slowed down considerably in the last nine months. Is t his largely a reflection of slowing EV sales in EU or there's something else which we are seeing there?

In the previous financial year, we won 31-million-euro business, which has been lower as compared to the previous year. But, considering the situation in the market , it is very important to note that we acquired business for the strategic project s of Mercedes and Volkswagen. Total wins reached 251 million euros in the last five years. We are optimistic for the future and we expect increase of volumes in the next financial year, considering business acquired in the last few years.

In European business, margins ar e flat on year -on-year basis despite sharp decline in energy costs. What led to offsetting of this benefit of lower energy cost on margin front?

In the last quarter of the previous financial year, we closed with 17.8 % EBITDA, which is same as the current financial year. In the previous financial year, we received grants from the government for the 45% of the energy cost increase and we also received additional compensation from the customer for the impact of energy cost. If we compare the profitability of the quarter compared to the previous financial year , we are growing more or less 2% points in EBITDA on a normalized basis. From the operating point of view, we are better compared to previous year. In fact, if you analyze our profit & loss, you will see a reduction in the material cost of 12% compared to the previous year, more or less with the same turnover, and increase in other expenses of 26%. The material cost is due to the fact that we are producing a lot of machined parts hence, the RMC cost is lower and profitability is higher . In the Other Expenses , the increase over the previous financial year is linked to the increase of energy cost (net of grants), since in the previous financial year we had benefit from the government and the customers. The profitability in this quarter was very good compared to the previous financial year. For FY24, EBITDA margin was 16.1% as compared to 14.5% in FY23. Despite the energy gross cost reduction, we still continue to pay more or less three times compared to the pre-COVID situation and this has affected our EBITDA more or less 1.8%. And so, if I do have a statement of the EBITDA with pre-covid energy cost levels, we would have more or less 18% of EBITDA.

Will there be any incentive in FY25, like last quarter?

We are looking at the incentive scheme against FY13 to FY19 capex. So, in the last year, we have booked close to Rs. 79 crores as incentive. In FY25, under mega project incentive scheme of 2013 to 20 19, we expect to book Rs. 30 crores approx.

And will it spread equally across quarters?

This incentive is paid by government based on our SGST paid sales in the state of Maharashtra. Therefore, this appetite is normally consumed over 1 or 2 quarters, so we don't expect it to go beyond second quarter. But also, there would be incentive under a new scheme for 2019 to 2024 capex, as and when we apply and get approval, but that is not within the purview of the discussion right now.

The new capacity we’ve announced for the 4-wheeler and non -auto, at AURIC. What kind of order wins we have already won for the plant?

We started evaluating in the beginning of this calendar year. We cannot disclose the order wins at this stage. These are basically for 4 -wheeler parts with an EV focus and a technology focus. This also has non -auto parts, could be for segments of 5G, 6G, ATVs, UTVs, and other industrial areas. These will have special processes. It will have automation, very good surface treatments and there will be self-sufficient cells with minimal handling. Largely, this project will be for exports. We already have order wins for this and that's the reason we have committed to this project, which will start production in Q1 FY26. Building construction has already started. Our strength is in aluminum die casting and machining and we are very well equipped with our own engineering skills, tool room and over 35 years of experience in this line to explore these new opportunities.

We have done Capex of about Rs. 3,833 million in FY24, which was 81% for growth, which included building, plant machinery and dies. Rest was for quality, process efficiencies, routine and R&D Capex. Next year, the figure should be similar to about Rs. 4,000 million, unless there are other new opportunities. Apart from the new plant also coming up at Auric, we have key investments in our growing business of brakes, alloy wheels, as well as suspensions.

What is your revenue growth outlook for disc brake and alloy wheel for FY25?

We have capacity in alloy wheels of 5.5 million per annum and there is not only huge potential but large requests for increasing the alloy wheels’ sales. Brakes is our fastest growing segment. In-fact our Head for B rakes was telling me in April itself that we have crossed the planned run rate. We have a huge requirement to fulfill, we have taken a large number of orders. So brakes is really growing fast.

Slide 8 of the presentation where you talk about EV order wins for India, they seem to have slowed down drastically in FY24. I can understand it is a function of the industrial activity also. So, what are your customers looking at and how are you planning to address this for the medium term?

We follow our customers and their requirements. We ensure that we are connected with all the OEMs, especially in the 2 and 3 -wheeler space and also the 4 -wheeler in terms of aluminum castings. According to our customers’ business plans, we do our best to take orders. Definitely, the withdrawal of FAME II subsidy in India has affected a lot of 2-wheeler EV OEMs who were market leaders. Now we’ll see how it plays out in the future. For all EV OEMs, we focus on bagging orders for our products, even where we are not present on their initial platforms. Lower orders is a function of how the industry is doing. But nowhere are we going to lose any opportunity on the EV front because that is a very large growth area for us. And also, our Maxwell business has a lot to do with EV . Similarly, in Europe, we are highly focused and connected to all the OEMs. And we are really doing our best. We have taken good amount of orders. And of course, sometimes the LOIs show lower volumes. If the volumes increase, the value will increase. But we are not leaving any stone unturned to take orders.

In standalone business if we adjust for incentives, still the gross margin expansion is pretty comfortable, and it seems the raw material has come down for the fir st time from that 66% to 63%. Do you feel structurally you are back in that zone or it's a one-off and hence you still have to work on it to get the gross margins back to the old days?

We are focusing on product technology and ensuring that the product mix is improving in all the areas, and we are looking at new areas, which has helped a lot and in turn it has paid off in Q4. We are 80% in India with two wheelers, which I would say in the last two quarters has done very well and continued to do well in April as well. The product mix and volumes will definitely help us in our EBITDA margins, but I also mentioned there was Rs. 200 million one-time gain, which has come both on the vendor and the client side, and that may or may not come in future. We will continue to do our best on the margins.

On the European side on the EV front, I think there has been a lot of recent noise about slowdown in the EV penetration. So, considering that, how are you looking at your order book wins to be consumed this year? Do you see any opportunity for M&A?

In Europe, starting from September 2023, there has been significant reduction of registration of electrical vehicles due to the fact that a lot of countries stopped the incentive. U nfortunately, without the incentive, it's very difficult to sell an EV car with high prices as compare to the general market. And we await the new election in Europe to understand the situation better. As you know, a lot of OEMs officially stated that they will continue to invest in the internal combustion engine. At Endurance, we are in a strong position considering we have won orders and have already installed production capacity for the electric project s. This financial year, we are ready to reach approx. 50% of the total peak capacity of the business already acquired for the electrical vehicles. In FY24, we booked capex of €62 million of investment in order to install this production capacity. In the coming year, we foresee an increase in ICE and hybrid vehicle sales . In the first month of this financial year, there was an increase of 2% in the diesel technology and 5% in the hybrid technology of gasoline. We can see growth in a range of products where we have production capacity. In our business, we also have ‘take or pay ’ contract with some of our customers which means that we are protected from potential significant slowdown of volume s in some of the applications . In the near future, we hope that the government will invest in infrastructure, electric vehicle which will thereby continue to grow. Unfortunately, there are a lot of companies in bankruptcy due to the fact that the OEM’s strategy in the last few years was to focus only on a few suppliers like us for the electric development. We are considering possible acquisition in order to grow.

Congratulations on the great set of numbers. What is the trend in the aluminum prices and the outlook going ahead in the aluminum die casting?

In India, the aluminum alloy prices are not always dictated by London Metal Exchange (LME). It is dictated by the availability of scrap, which largely imported. We believe that due to increase in sea freights and also the crisis of Israel and Hamas, the rates keep fluctuating. The price trend appears to be downwards.

What are t he price outlook of aluminum right now and the outlook for the entire aluminum die casting segment for our Company.

Aluminum die casting is one of our strongest segment which started in 1985. We are very strong in terms of engineering, our tool room, our plants. That's why we are investing in Auric in Aurangabad to go into 4- wheeler EV and non-automotive businesses. I would say that as far as two wheelers, three wheelers or four wheelers customers are concerned, we are amongst the first or the second choice f or getting new orders. So, the opportunity is huge. Our focus is to do more machining, take orders with machining because value add is much better. We are also getting into structural castings like swing arms and subframes and structural fairings which are complex, which need technology and where pricing is better. We are getting into large motorbikes , key castings like crank cases. So, the outlook is very good, and we are growing. D ie casting requires higher Capex and we are very mindful of the financials. So, we don't wish to lose any good opportunity, but sometimes we have to decline some of the opportunities where we feel that other opportunities are better. We are willing to spend more than the budget if required, if there's a great opportunity, organic or inorganic. Opportunities are huge, because we are one of the leaders in this industry. The growth potential is excellent and fortunately in the EV space because of light weighting, aluminum castings is a material where number of parts are increasing. In ICE vehicles, we have crank cases, covers, cylinder heads and cylinder blocks. In EV vehicle, we have case transmissions, battery housings, motor housings, and different types of plates, modules. So, the number of parts are more in EV and the opportunity is huge.

On the US market how's the demand and supply situation there in terms of aluminum casting segment only?

From India we are not exporting anything to the US yet. But I will ask Mr. Venuti to answer regarding this question as far as Europe is concerned.

At present, we are indirectly exporting to Mercedes and BMW. US market has seen an important reduction in the last 3-4 months. So, we are careful about potential growth in the United States. At the moment, we are following the growth of the European market in the electrification process, and this is the focus of the company.

Some clarification on this Rs 200 million one-time gain which you're talking about. This is over and above the incentives of 200 million or is it one and the same?

Yes, it is separate from the incentive.

With respect to Capex for European business, we were investing quite materially for the orders on hand. Given that some of these orders were for EVs and we are seeing some slowdown in the EV side, is there any change in our Capex plans for the European business? How much do we plan to invest over and above the €51 million which we invested in FY24? Also, can you share the revenue, EBITDA, PAT in euro terms for FY24 year?

In FY24, we booked capex of €62 million, of which €8 million for V olkswagen, €33 million for Stellantis, and €10 million for Mercedes. For Stellantis, almost 100% of the investment is in hybrid segment. For Volkswagen and Mercedes, 100% for the electric project. Speaking about FY 25, the budget is to implement the total production capacity with an effort of approx. 40 million euro as gross amount. In FY24, €263.3 million turnover as compare to € 245.6 million with an increase of 7.2% as compare to FY23. EBITDA €42.3 million compared to € 35.6 million, an increase of 18.9% compare to the previous financial year, EBITDA margin for FY24 16.1% as compared to 14.5% in FY23.PAT was €14 million with 5.3% margin in FY24 as compared to €12.1 million. with 4.9% margin in FY23. The increase of net profit was 15.4%.

On the ABS side, we are expanding our capacity in a meaningful way, given the opportunity size. What are you seeing there on the ABS new order wins and the revenues?

We have a run rate of 400,000 per annum, which is the single channel ABS. We have added a capacity of 240,000 per annum further for the dual channel which is starting in July 24. It is starting from the 2 existing OEMs we are supplying to. We are engaged with other 2-wheeler OEMs also to get new orders and that ’s why our plan in the second half of FY26 is to reach 1.2 million of ABS. But definitely, we are going step by step, looking at how the market is also growing. And we are also hoping that ABSs are used in 125cc and lower cc bikes also in future.

On the domestic 4-wheeler side, how much it would be contributing to y our revenues? I would assume that Hyundai would be the largest customer here and what kind of components are you supplying?

In FY24, our 4W India business share was 6.5% and we are focusing on increasing it by FY30. Our India 4-wheeler business is mainly for aluminum die casting components to Hyundai, Kia, Mahindra, and Tata Motors, and of course some exports to Europe. O ur focus is to capitalize opportunities in the alumin um casting space, even in the aluminum forging space, where we have won an order of Rs.250 million from Jaguar Land Rover, which we’ll be starting in this financial year. We will also be looking at getting more OEMs on the aluminum forging and of course we are looking at proprietary products by way of acquisitions, or by way of Technology Agreements.

What kind of capacity do you already have for aluminum castings? Is Aluminum forging is a new business area in India? So, any other domestic OEM also where you have started getting orders on the aluminum forging side?

Aluminum forging was a backward integration mainly for the KTM and Bajaj inverted front forks. But we found other opportunities with new customers and have won orders from customers like Jaguar Land Rover. We have also got orders from Harley-Davidson, and we are talking to other OEMs. We learn from Jaguar Land Rover that aluminum forgings will be a very important part in 4 wheelers. We are looking at new opportunities now also in aluminum forgings. We have a technical collaboration with FGM in Italy, for both process as well as on the product technology areas. And we have a really good plant in Waluj, Aurangabad which we are planning to expand in the future.

When we are winning orders for hybrid vehicles, what are the kind of components we will be supplying to those vehicles? Will it be too different from the components that we supply in ICE, or it is largely similar?

In high pressure die-cast machines, we need important automation and machining investment compared to the previous technology, due to the fact that we have to respect quality requests whi ch are very tough compared to the previous ICE powertrain, engine and transmission. The quality requirements of the customers in EV components are strict since electrical components are linked to the battery. And for this reason, the investment in terms of automation is higher compared to the past , manufacturing process is absolutely the same.

Any plans to get into aluminum forgings in Europe as well or you will just focus on aluminum forgings in India?

At present, we are producing only high-pressure die-casting components in Europe. We sell some gravity components, but we buy from the market. The strategy is to focus on high pressure die-casting of aluminum.

What will be our final capacity in the aluminum die casting segment after the new plant in Aurangabad?

We had more than 100,000 metric tons per annum excluding alloy wheels. ,900 metric tons per month is what we are putting up.

Thank you. On behalf of Axis Capital Limited, that concludes this conference. Thank you for joining us.