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Published on 26/06/2018 4:38:36 PM | Source: Religare Securities Ltd

IPO Note Varroc Engineering Ltd - Religare Sec

About the Company

Incorporated in 1988, Varroc Engineering Limited (VLS) is a global tier-1 (tier-1 companies directly supply to original equipment manufacturers) automotive component group. It designs, manufactures and supplies exterior lighting systems, plastic and polymer components, electricals-electronics components, and precision metallic components to passenger car, commercial vehicle, two-wheeler, three-wheeler and off highway vehicle OEMs directly worldwide. It is the second largest Indian auto component group in terms of revenue (FY17) (Source: CRISIL Research) and a leading tier-1 manufacturer and supplier to Indian two-wheeler and three-wheeler OEMs by consolidated revenue for FY17. The company initially commenced operations in the polymer business in 1990 and grew organically in India by adding new business lines, such as electrical division and metallic division. Subsequently the company diversified its product offerings and expanded production capacity through various investments, joint ventures and acquisitions.

Objects of the Issue

*  To carry out the Offer for Sale by Selling Shareholders

*  To achieve the benefits of listing the Equity Shares on the Stock Exchanges

Valuation

The global auto industry is expected to deliver steady growth in the coming years. During the 2016-2021, Yole expects mature markets such as North America and Europe to grow steadily at a CAGR of 1.6% to 2.0%. According to Yole, the Japanese market will continue to shrink with the development of megacities and the reduced need to have a personal car. South American and African markets to will keep declining until 2021-2022 where Yole expects a new growth cycle to occur. The growth in China will slow down with a CAGR of 3.4%, while Yole expects India, Korea and the rest of Asia to continue growing at a CAGR of 5.3%, 2.4% and 2.5% respectively.

VLS’ fundamental track record has been encouraging over FY14-18 with Revenue/EBITDA/PAT growth of 13.9%/21.7%/81%. As of FY18, the company derived 34.7% of its total revenue from customers in India, whereas rest came from outside India, with Europe’s share being the largest at 41.8% followed by North America at 22.3% and the remaining from Asia Pacific and other geographies. The company has a strong product portfolio and long-standing relationship with OEMs across the globe which would aid growth for the company going forward. VLS plans to increase its focus on high growth markets by entering into South America and North African markets. On the domestic front, since the growth is expected to be steady in 2W & 3W space, the company plans to increase its revenue from existing customers by expanding the array of existing products and by continuing to develop technology solutions aligned with its client needs. We believe the company is well positioned on account of its continued investment into R&D, design and its focus on operational opportunities in specific target markets. At upper price band of Rs. 967 per share, the company is valued at 29x its FY18 EPS.

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