Varroc Engineering Ltd., a supplier of parts to Jaguar Land Rover, Bentley and even Tesla Inc, will launch its initial public offering today as the promoter and two investors sell shares to raise up to Rs 1,950 crore.
Tata Group’s investment arms – Tata Capital and Omega TC – and promoter Tarang Jain will offload 2 crore shares at Rs 965-967 apiece in the three-day offer. The world’s sixth largest exterior automotive lighting maker won’t get any share of the proceeds.
The promoter holding will fall by 130 basis points to 85 percent after the IPO. The Tata Group companies, which had acquired shares at an average price of Rs 162 apiece, will exit with nearly sixfold gains.
Varroc Engineering designs and makes exterior lighting systems and plastic, polymer, electronic and metallic components for automobiles.
The company has 36 manufacturing plants in seven countries—most of them in India—that run at an average utilisation level of close to 70 percent.
It’s also setting up units in Brazil and Morocco to serve South American, southern European and North African markets. These plants are likely to start production in the ongoing financial year. It also plans to set up two new units in India.
The company recently agreed to acquire an exterior automotive lighting maker in Turkey, adding to a series of acquisitions made in the last 11 years. The acquisition is expected to be completed by the end of this month, subject to approval of the Turkish competition authority.
In the global market, Varroc supplies parts to key global clients including electric car maker Tesla, Audi, Jaguar Land Rover, Bentley and Volkswagen. The company derives nearly 65 percent of its revenue from global businesses, which also makes it vulnerable to any unfavourable currency movements.
In India, it supplies components to two- and three-wheeler makers with Bajaj Auto Ltd. alone contributing nearly 18.6 percent to its consolidated revenue. Top five clients contribute 60 percent to its top line.
- The net worth of the company for the year ended March 2018 stood at Rs 2,849 crore, translating into a book value of Rs 211 per share.
- Varroc’s revenue has been clocking a compounded annual growth rate of 19.5 percent in five years through March 2018. The company turned profitable during the period. It reported a net profit of Rs 450 crore in FY18 compared with a loss of Rs 25 crore in FY13.
- Earnings before interest, tax and depreciation and amortisation rose at a CAGR of 28 percent, while the Ebitda margin averaged around 7.3 percent during the period.
- The company has a total debt of close to Rs 980 crore and Rs 332-crore cash. It has consistently generated cash flows and paid dividend in the last six years.
Varroc Engineering doesn’t have a direct peer. Minda Industries Ltd., Lumax Industries Ltd. and Motherson Sumi Systems Ltd. come closest with similar businesses.
Varroc’s total debt-to-equity is similar to that of its peers but has a higher book value compared to Lumax and Motherson.
Varroc’s return ratios improved over the year ended March 2017, according to the data compiled by BloombergQuint. But they are lower than that of Lumax and Minda.
Earnings per share for financial year 2018 stands at Rs 33.4. At the upper end of the price band, the stock will trade at 30 times its earnings, according to BloombergQuint’s calculations.
- Low consolidated top line and bottom line growth in three years through March 18.
- 35 percent revenue comes from India—two- and three-wheeler segments—which are not high growth sectors.
- Recommend ‘Neutral’ rating.
- Price-to-earnings at a discount compared to peer group average.
- Current strategy of diversifying product base, technology up-gradation and M&A opportunity to further enhance position.
- Given this along with decent balance sheet position recommend ‘Subscribe’.
- Pedigree management, strong growth opportunity and decent return ratios are positive for the company.
- Varroc is undervalued compared to some of its peers.
- Recommend subscribe from a long-term perspective.