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ICICI Securities: Improving Outlook To Raise Varroc Engineering’s Investor Confidence

Varroc Engineering is poised for earnings rebound in H2 FY21 after multiple challenges in FY20, ICICI Securities says.

Gear wheels sit in a rack of an automotive component washing machine at the Mahindra & Mahindra  manufacturing plant in Chakan, Maharashtra, India. (Photographer: Dhiraj Singh/Bloomberg)
Gear wheels sit in a rack of an automotive component washing machine at the Mahindra & Mahindra manufacturing plant in Chakan, Maharashtra, India. (Photographer: Dhiraj Singh/Bloomberg)

BQ Blue’s special research section collates quality and in-depth equity and economy research reports from across India’s top brokerages. These reports offer BloombergQuint’s subscribers an opportunity to expand their understanding of companies, sectors and the economy.

ICICI Securities Report

Varroc Engineering Ltd. is poised to witness a strong earnings rebound in H2 FY21 (driven by improving demand outlook, strong cost reduction initiatives) after having struggled with numerous challenges in FY20 (e.g. plant fire, Greenfield start-up costs).

Varroc Engineering remains an attractive play due to:

a. Varroc Lighting Systems set to capitalise on higher LED penetration amongst its customers (Ford, Volkswagen, Daimler) for various new vehicle programs (e.g. internal combustion engine SUVs, electric vehicles);

b. production ramp-ups in greenfield facilities along with cost reductions is likely to drive profitability increase from H2 FY21;

c. strong rebound in China joint venture profitability;

d. domestic two-wheeler market growth outperformance coupled with content increase due to BS-VI and

e. strong free cash flow generation (approximately Rs 9 billion in FY22) as large capex phase is over.

Global peers (Koito, Stanley Electric Co Ltd., Valeo, Huayu Automotive Systems Co Ltd.) have also witnessed valuations improve (approximately 5-6 times enterprise value/Ebitda FY22).

Click on the attachment to read the full report:

ICICI Securities Varroc Update.pdf

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