Varroc Engineering IPO Review

Varroc Engineering IPO

Auto component manufacturer Varroc Engineering IPO consists of entirely an OFS (offer for sale) of 2.02 crore shares by promoters and existing investors. At the upper price band of Rs. 967, the total size of the issue stands at Rs 1,955 crore. Varroc Engineering IPO will result in exit by Singapore-based Omega TC Holdings Pte Ltd, a fund managed by Tata Opportunities, and Tata Capital Finance Services as well as by  Tata Capital Finance . Promoter Tarang Jain is selling a small %  of  his shares.

Varroc Engineering IPO: Details
Issue Period Tue June 26- Thu, June 28, 2018
Issue Details Offer for Sale of 202,21,730 Equity Shares
Issue Size (Rs. Cr)  1,954.9 Cr
Price Band Rs.965 – 967
Employee Discount Rs.48/- per Equity Share
Bid Lot 15 Equity Shares 
Issue Structure :  
QIB 50% of the Net offer 
NIB 15% of the Net offer 
Retail 35% of the Net offer- 70,42,606 Equity Shares- 681.02 Cr.
Appls. for 1x retail 4,69,507
BRLMs Kotak Mahindra Capital, Citigroup Global, Credit Suisse Sec, IIFL Holdings
Registrar Link Intime India Pvt. Ltd.
About Varroc Engineering 
  • Varroc Engineering  is a leading Indian auto component manufacturer with a large global presence. Varroc Engineering is a tier-1 automotive component group. Tier-1 companies directly supply to OEMS.
  • Varroc Engineering designs, manufactures and supplies exterior lighting systems, plastic & polymer components, electrical, electronics components and precision metallic components to passenger cars, commercial vehicles, two-wheeler, three-wheeler and off highway vehicle.
  • These supplies are made to OEMs worldwide. It has a 36 manufacturing facilities around the globe.
  • As per Crisil, Varroc is the 2nd largest Indian auto component group (by consolidated revenue for FY2017)  and a leading Tier-1 manufacturer and supplier to Indian 2-wheeler and 3-wheeler OEMs.
  • Varroc is the 6th largest global exterior automotive lighting manufacturer and one of the top 3 independent exterior lighting players (by market share in 2016)
Varroc Engineering : Financials
 (Rs. In Cr)
Particulars 9m FY18 FY 17 FY 16 FY 15 FY14
Revenue from Operations 10,378.46 9,608.54 8,218.90 6,950.77 6,116.35
Revenue Growth (%) 16.91% 18.24% 13.64%
EBITDA as stated 916.18 675.48 591.57 704.57 422.51
EBITDA (%) 8.83% 7.03% 7.20% 10.14% 6.91%
Profit Before Tax 512.57 327.19 391.8 63.35 84.22
Net Profit 450.78 303.39 369.82 16.81 42.9
NPM 4.34% 3.16% 4.50% 0.24% 0.70%
Share Capital 13.48 13.48 26.24 9.61
Reserves 2,610.70 2,168.34 1,560.92 1,074.12
Net worth 2,826.84 2,183.36 1,746.25 1,082.49
Long Term Borrowings 636.15 755.27 557.35 433.67
Short Term Borrowing 343.93 599.19 641.87 383.05
EPS (Rs.) 33.4 27.74 38.42 1.35
RONW(%) 15.93% 13.88% 21.15% 1.20%
NAV (Rs.) 209.69 193.4 156.66 97.22
Face Value 1
Post Issue Equity 13.48
EPS (FY17) 22.51
EPS Ann (FY18) 44.59
IPO Price 967
PE (Annualized FY18) 28.95
PE – (FY17) 42.97
CAGR Sales 3 Yrs 16.25%
CAGR Net Profit 3 Yrs 91.95%
Market Cap 13035.16
Market cap / Sales 1.36
Fine Organic Industries IPO: Pros
  • Varroc Engineering is a  well diversified global auto component business across multiple geographies, vast product portfolio and large customer base.
  • Company has good presence in the fast-growing India 2W and Global Passenger Vehicle lighting segment.
  • Varroc Engineering derives around 35% of the revenues  from India and rest from international markets with North America (22%), Asia Pacific (1%) and rest of the world ( 42%).
  • Company has marque customers spread over all geographies. Varroc Engineering customers include Ford, Jaguar Land Rover, FCA, Groupe PSA, the VW Group, Bajaj, Royal Enfield, Yamaha, Suzuki, Honda, Hero, Piaggio and Harley Davidson.
  • Bajaj accounts for 18.6% of the revenues followed by Honda at  4% at the end of March 2018.
  • Varroc Engineering has low cost, strategically located manufacturing and design footprint with  in-house technology, innovation and R&D capabilities
Varroc EngineeringIPO: Risks
  • Risk of pricing pressures from OEMs
  • Exchange Rate Risks
  • Varroc Engineering is heavily dependent on the performance of the global  passenger vehicle market and the 2/3 wheeler  markets in India. 
Varroc Engineering IPO: Comparison with Peers
Rs. In Crore (FY18 Figures)
 Company Varroc (ann fy18) Endurence Motherson Sumi
Income 13838 6,537.48 56,086.04
Net Profit 601.04 390.75 2,259.98
NPM 4.34% 5.98% 4.03%
Equity 13.48 140.66 210.53
FV 1 10 1
EPS 44.6 27.8 10.7
CMP 967 1304.2 291.95
P/E 29.0 46.9 27.2
Note : for Varroc engg,   9mFY18 figures  have been annualized
Varroc Engineering IPO : Assessment
  • Varroc Engineering is a company with global foot print as well as operations in India.  It tremendous growth has been propelled by growing its market share of both with existing customers&   new customer, geographical acquisitions and expansion and the development of technologically sophisticated products.
  • According to Crisil, the market size of the two- and three-wheeler electrical segment is expected to grow at a compound annual growth rate (CAGR) of 16-18 per cent between FY2017 and FY2020.
  • This estimate for 2/3 Wheeler Polymer segment  is at a  CAGR of 18-20 per cent. 
  • This estimate for Lighting is at a  CAGR of 16-17 per cent. This indicates good demand for company’s products.
  • Varroc Engineering has strong balance sheet with Net debt-equity stood at 0.3 as on end FY 2018.  The company has a consistent track record of operational & financial efficiency
  •  At the IPO price band of ₹965-967, the PE (price-to-earnings) ratio is about 29 times the company’s annualized consolidated earnings for the year-ended March 2018.
  • At post issue P/E of around 29, the Varroc Engineering IPO valuations are reasonable looking to its performance in past and prospects.  The Varroc Engineering IPO looks OK for medium to long term and company has strong product  base, geographical reach and technological prowess even as these +ves are priced in the high price being demanded.  I am +ve on Varroc Engineering IPO, but given the fact that it is not cheap, I intend to apply in the IPO provided there is a good response by institutional investors to theVarroc Engineering IPO. 
Standard disclaimer:  I am not a SEBI registered analyst and above analysis is for educational purpose only. I may have vested interest in every stock I discuss and my views may be biased. Please do your own due diligence as stock market investments have high degree of inherent risk. 

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