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Focus on wallet share and profitability improvement
Varroc Engineering Ltd, in its international automotive lighting business is aiming to improve wallet share with large OEM groups such as VW and Renault-NissanMitsubishi among others. Its new plants in Brazil, Morocco and Poland have won orders which will translate into higher revenues from the current fiscal. While the utilization in the current year will be in the range of 15-20%, profitability of these new plants will improve considerably from FY21 by when the utilization levels are expected to rise to 40-45% and further to 60-65% by FY22. Varroc is aiming a significant improvement in EBIDTA margins through 1) raw material cost savings by driving in purchasing efficiencies, 2) substitution of part-purchase of electronics for LEDs with in-house manufacturing under a JV, 3) optimizing employee costs and 4) controlling launch costs. In the China JV operations, while the industry continues to be weak, VLS JV has won contracts from the local players in China such as Geely, SAIC and FAW. These orders are expected to fructify into significant revenues from FY22. US-China trade war truce is critical for the revival of industry growth in China.
In India operations, while the industry is expected to grow in the range of 6-7% over the next couple of years, Varroc is expected to outperform industry growth with 1) increasing wallet share with existing customers, 2) scaling up revenues from new customers such as TVS Motors and Hero Motocorp and 3) new products such as electronic fuel injection and catalytic converter contributing meaningfully from next fiscal under BS VI regime.
Varroc is aiming for a 100bps improvement in EBIDTA margins during FY20 for its VLS operations. The company has lined up a capital expenditure plan of Rs8bn for the current fiscal of which Rs5bn will be spent on VLS and Rs3bn on India operations (considering pruning it to Rs2bn).
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