Gear wheels sit in a rack of an automotive component washing machine in India. (Photographer: Dhiraj Singh/Bloomberg)

Varroc Engineering Rises 6.7% Above IPO Price On Stock Market Debut

Varroc Engineering Ltd. listed at a premium of 6.7 percent at Rs 1,032 per share on the BSE Ltd., compared to its issue price of Rs 967.

The auto-part maker’s Rs. 1,950-crore initial public offering was subscribed 3.57 times on the final day of bidding on June 28. The portion from qualified institutional buyers as shares reserved for this segment was subscribed 9.16 times. The non-institutional investor category and the retail investors category was subscribed 2.45 times and 0.89 times respectively. The category for employees was subscribed 0.64 times.

Business

Varroc Engineering designs and makes exterior lighting systems and plastic, polymer, electronic and metallic components for automobiles. The company supplies components for Jaguar Land Rover, Bentley and Tesla.

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.

Financial Highlights

  • 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.

Peer Comparison

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.

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.

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