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Published on 22/06/2018 5:07:39 PM | Source: GEPLCapital Ltd

IPO Note Varroc Engineering Ltd - GEPL

Company Background

Incorporated in 1988, Aurangabad based Varroc Engineering Limited is a global tier-1 (tier-1 companies are companies that directly supply to original equipment manufacturers ("OEMs")) automotive component group. It designs, manufactures and supplies exterior lighting systems, plastic and polymer components, electricals-electronics components, and precision metallic components to the passenger car, commercial vehicle, two-wheeler, three-wheeler and off-highway vehicle ("OHV") OEMs directly worldwide. The company is the second largest Indian auto component group (by consolidated revenue for FY2017) (Source: CRISIL Research) and a leading tier-1 manufacturer and supplier to Indian twowheeler and three-wheeler OEMs (by consolidated revenue for FY2017) (Source: CRISIL Research). It is also the sixth-largest global exterior automotive lighting manufacturer and one of the top three independent exterior lighting players (by market share in 2016).

Global Lighting Business

The Global Lighting Business, which focuses on the design, manufacture and supply of exterior lighting for passenger vehicles, is the 6th largest tier-1 automotive exterior lighting manufacturer globally and one of the top 3 independent exterior lighting players (by market share in 2016) (Source: Yole). Globally, the exterior lighting market for passenger vehicles has grown at a CAGR of 4.5% between 2011 and 2016 in terms of revenue, outpacing the CAGR of 3.8% in the overall market for passenger vehicles for the same period. The growth in the market is largely on account of:

* Lighting becoming an increasingly prominent design and aesthetic feature in passenger vehicles,

* Lighting playing a critical role in safety requirements and

* Lighting technologies playing a greater role in energy efficiency and increased functionality, which together have led to higher penetration of more expensive and higher end lamps, such as LEDs, across car segments.

VLS has outperformed the overall passenger vehicle exterior lighting market. Having grown at a CAGR of 13.79% FY2014 (Indian GAAP) to FY2016 (Ind AS) in terms of revenue (including the China JV's 50% share) in terms of revenue, VLS was the fastest-growing among the top 6 global automotive lighting suppliers during the period from 2014 to 2016 (Source: Yole). VLS' growth is the result of growing their share of business with existing customers, winning new customer contracts, geographical expansion and the development of more technologically sophisticated products.

Strong, long-standing customer relationships

Varrock has strong, long-standing relationships with many of their customers. For example, in their Global Lighting Business, Varrock has a relationship with a large British car manufacturer since 2006. In the Indian Business, their longest-standing relationship is with Bajaj, who has been their customer since 1990 and whom they supply a wide variety of components. Their relationships with 7 of their Top 10 customers have lasted longer than 10 years. While Varrock has many key customers who have been with them for a long time, they nevertheless have a diversified customer base and continue to add new customers, such as Renault-Nissan- Mitsubishi, Volvo, a Spanish automobile manufacturer and a German automobile manufacturer. Newly added customers for FY2018 and FY2019 include Dell'Orto S.p.A and Tata Cummins. In FY2018, Varrock had only 3 customers who exceeded 10% of their consolidated revenue from operations individually, with their largest customer contributing 18.6% of their total invoiced amounts. Moreover, both their Global Lighting Business and the India Business are diversified across customers, with their Top 3 customers for their Global Lighting Business accounting for 33.8% of their total invoiced amounts and their Top 3 customers for their India Business accounting for 25.1% of their total invoiced amounts. Total invoiced amounts are different from their consolidated total revenue from operations in respect of accounting treatment..

Comprehensive product portfolio

Varroc has a comprehensive portfolio of products in the markets in which they operates, which allows them to be a one-stop-shop for their customers and to cross-sell their products. Their Global Lighting Business has a broad portfolio of lighting technologies, including Halogen, Xenon/high-intensity discharge, LED, Matrix LED, high definition MEMS and DMD, surface LED and OLED module, Flex LED and LED Pixel headlamp, covering the 5 automotive external lighting product lines. Their India Business offers a diverse range of products catering to 2-wheelers, 3-wheelers, passenger vehicles, commercial vehicles and off-highway vehicles across their business segments of polymers/plastics, electricalelectronics and precision metallic components. In order to increase their share of business with customers, Varroc typically enter into a new customer relationship with one particular product line, seeking to demonstrate the quality and cost efficiency of their products and services and then strengthen their relationship by expanding into other product segments. This allows them to grow their overall business and become their supplier of choice across segments.

Their strength in their product portfolio is shown by the fact that Varroc has significant presence and significant customer relationships in each of their product segments. By way of example, in their Global Lighting Business, Varroc is leaders in the electric vehicles market having the 2nd largest share (Source: Yole). In their India Business, across verticals, Varroc has 56 customers in the Polymer segment, 20 customers in the Electrical segment and 58 customers in the Metallic segment.

Key Risks

* The Pricing pressure from customers may adversely affect gross margin, profitability and ability to increase prices, which in turn may materially adversely affect business, results of operations and financial condition.

* Their business is dependent on certain major customers, with whom they does not have firm commitment agreements. The loss of such customers, a significant reduction in purchases by such customers, or a lack of commercial success of a particular vehicle model of which they are a significant supplier could adversely affect business, results of operations and financial condition.

Valuation & Recommendation

Varroc Engineering Ltd. (VEL) is available at the IPO price band of ‘965 to ’967 which is available at 28.9 P/E multiple. The company has better potential to grow in the upcoming period.

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