The headlight of the Mazda Motor Corp. Kai concept vehicle is seen during the 2018 New York International Auto Show. (Photographer: Michael Noble Jr./Bloomberg)

Citi Gives Varroc Engineering Its First ‘Buy’ Rating

Varroc Engineering Ltd. received its first brokerage rating nearly two months after it made its stock market debut.

Citi Research initiated coverage on the stock with a ‘Buy’ rating and a price target of Rs 1,370—an upside potential of nearly 19 percent from current levels. The stock has gained over 10 percent since its July listing.

Citi Gives Varroc Engineering Its First ‘Buy’ Rating

The brokerage said the company, which supplies parts to Jaguar Land Rover, Bentley and even Tesla Inc, is a good play on structural growth in the LED lighting segment. The company’s footprint covers nearly all major passenger vehicle markets globally, including high-growth markets like China and India, Citi said.

Both the global lighting business and the domestic India business are expected to outpace market growth on the back of gains in customer market share in both the overseas markets and in India.

Besides, the brokerage said Varroc’s relatively stable capital structure with an appropriate debt/equity mix aiding its bullish call. “It is the best play in our coverage on global lighting mega-trends.”

It 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, the company said in a presentation.

Key risks

  • Sensitivity to global economic and regulatory trends.
  • Competitive intensity.
  • Lower pricing power during negotiations with OEMs.
  • Concentrated customer base and no unit-based firm commitments.
  • Risk of technology changes.
  • Expansion plan execution risks.