1
Please refer to important disclosures at the end of this report
1
1
Varroc Engineering Ltd (VEL) is a tier-1 automotive component group. It designs,
manufactures and supplies exterior lighting systems, plastic & polymer components,
electricals-electronics components and precision metallic components to passenger
cars, commercial vehicles, 2W, 3W and off highway vehicle OEMs directly
worldwide. VEL has a global footprint of 36 manufacturing facilities spread across
seven countries, with six facilities for its Global Lighting business, 25 for India
business and five for Other businesses. Currently, VEL’s ~34.7% of revenue comes
from india and balance from Europe (41.8%), North America (22.3%), Asian
pacific (0.7%) and others (0.5%).
Positives: (a) Focus on high growth markets for global lighting business, (b) Focus
on increasing customer revenue for India business, (c) Continuous investment in
R&D, design, engineering and software capabilities in order to capitalize on future
trends.
Investment concerns: (a) VEL reported low consolidated top-line and bottom-line
CAGR of ~12% & ~10% respectively over FY2016-18, (b) The company’s ~35%
revenue comes from India i.e. from 2W/3W sector (which are not high growth
sectors).
Outlook & Valuation: In terms of valuations, the pre-issue P/E works out to 28.9x
FY2018 earnings (at the upper end of the issue price band), which is high
considering VEL’s historical two year CAGR top-line & bottom-line growth. Further
the company’s return ratios are also low compare to its other peers. Thus, we
recommend NEUTRAL rating on the issue.
Key Financials
FY2015
FY2016
FY2017
FY2018
6,951
8,219
9,609
10,378
-
18.2
16.9
8.0
17
370
303
451
-
2,100.1
(18.0)
48.6
8.9
6.9
6.1
8.5
1.2
27.4
22.5
33.4
775.6
35.3
43.0
28.9
11.8
7.3
5.9
4.6
1.5
20.7
13.8
15.8
14.5
8.7
6.9
12.8
2.0
1.7
1.4
1.3
22.9
24.5
23.6
15.2
Angel Research; Note: Valuation ratios based on pre-issue outstanding shares and at upper end
of the price band
NEUTRAL
Issue Open: June 26, 2018
Issue Close: June 28, 2018
Amarjeet S Maurya
+022 39357600, Extn: 6831
[email protected]
QIBs 50% of issue
Non-Institutional 15% of issue
Retail 35% of issue
Promoters 85.0%
Others 15.0%
Fresh issue: Nil
Issu e Details
Face Value: `1
Present Eq. Paid up Capital: `13.5cr
Post Issu e Shareh olding Pattern
Post Eq. Paid up Capital: `13.5cr
Issue size (amount): *`1951-**1955cr
Price Band: `965-967
Lot Size: 15 shares and in multiple
thereafter
Post-issue implied mkt. cap:
*`13036cr - **`13009cr
Promoters holding Pre-Issue: 86.3%
Promoters holding Post-Issue: 85.0%
*Calculated on lower price band
** Calculated on upper price band
Book Building
Varroc Engineering Ltd.
f
IPO Note | Auto ancillary
June 25, 2018
2
June
25,
201
Varroc Engineering | IPO Note
June 25, 2018
2
Company background
Varroc Engineering is a tier-1 automotive component group. It designs,
manufactures and supplies exterior lighting systems, plastic & polymer
components, electricals-electronics components, and precision metallic
components to passenger cars, commercial vehicles, two-wheelers, three-wheelers,
and off highway vehicle OEMs directly worldwide. It is the second largest Indian
auto component group (by consolidated revenue for FY2017) and a leading tier-1
manufacturer and supplier to Indian two-wheeler and three-wheeler OEMs.
The company initially grew organically in India by adding new business lines such
as electrical division and metallic division. In 2012, it acquired Visteon's global
lighting business, now known as Varroc Lighting Systems. Prior to the acquisition of
Visteon's global lighting business, in 2007 Varroc had acquired I.M.E.S (a
manufacturer of hot steel forged parts for construction and oil and gas industries)
in Italy, and in 2011, it acquired Triom (a manufacturer of high end lighting
systems for global motorcycle OEMs) with operations in Italy, Romania and
Vietnam.
Varroc has a global footprint of 36 manufacturing facilities spread across seven
countries, with six facilities for its Global Lighting Business, 25 for India Business
and five for Other Businesses.
Exhibit 1: Transformation into an auto component group with global presence
Source: Company, Angel Research
3
June
25,
201
Varroc Engineering | IPO Note
June 25, 2018
3
Issue details
Varroc Engineering is raising `1,951-1,955cr through offer for sale of equity
shares in the price band of `965-967. Public offer of up to 2.0cr equity shares of
face value `1 each through an offer for sale of up to 1.8cr equity shares by
Omega TC Holdings Pte. Ltd. and Tata Capital Financial Services Ltd (combined)
and up to 0.2cr equity shares by Tarang Jain (Promoter Selling Shareholder).
Exhibit 2: Pre and Post IPO shareholding pattern
No of shares (Pre-issue)
%
No of shares (Post-issue)
%
Promoters
116,342,360
86.3%
114,589,800
85.0%
Others
18,469,170
13.7%
20,221,730 15.0%
134,811,530
100.0%
134,811,530
100.0%
Source: Source: RHP, Note: Calculated on upper price band
Objectives of the Offer
The objects of the Offer are to achieve the benefits of listing the Equity Shares on
the Stock Exchanges and to carry out the Offer for Sale by Selling Shareholders.
Outlook & Valuation
In terms of valuations, the pre-issue P/E works out to 28.9x FY2018 earnings
(at the upper end of the issue price band), which is high considering VEL’s
historical two year CAGR top-line & bottom-line growth. Further the company’s
return ratios are also low compare to its other peers. Thus, we recommend
NEUTRAL rating on the issue.
Key Risks
Slowdown in 2W/3W/PV industries could impact the overall sales volume
of the company
Company's ~65% revenue comes from global business, hence, any
unfavorable currency volatility could impact the company’s profitability
Increase in competition from other players can impact the company’s
business
4
June
25,
201
Varroc Engineering | IPO Note
June 25, 2018
4
Consolidated Profit & Loss Statement
Y/E March (` cr)
FY2015
FY2016
FY2017
FY2018
Total operating income
6,951
8,219
9,609
10,378
% chg
18.2
16.9
8.0
Total Expenditure
6,334
7,648
9,027
9,501
Raw Material
4,193
5,049
6,037
6,383
Personnel
902
1,040
1,204
1,314
Others Expenses
1,239
1,559
1,786
1,805
EBITDA
617
571
582
878
% chg
-
(7.4)
1.9
50.8
(% of Net Sales)
8.9
6.9
6.1
8.5
Depreciation& Amortisation
254
292
337
386
EBIT
363
279
245
491
% chg
(23.2)
(12.2)
100.7
(% of Net Sales)
5.2
3.4
2.5
4.7
Interest & other Charges
475
(43)
90
86
Other Income
88
21
94
39
(% of PBT)
138.4
5.3
28.6
7.5
Share of PAT of invest acc. for using the equ. method
36
50
79
69
Exceptional Items
52
-
-
Recurring PBT
63
392
327
513
% chg
-
518.5
(16.5)
56.7
Tax
47
22
24
62
(% of PBT)
73.5
5.6
7.3
12.1
PAT (reported)
17
370
303
451
% chg
2,100.1
(18.0)
48.6
(% of Net Sales)
0.2%
4.5%
3.2%
4.3%
Basic EPS & Fully Diluted (`)
1.2
27.4
22.5
33.4
% chg
-
2,100.1
(18.0)
48.6
Source: Company, Angel Research
5
June
25,
201
Varroc Engineering | IPO Note
June 25, 2018
5
Consolidated Balance Sheet
Y/E March (` cr)
FY2015
FY2016
FY2017
FY2018
SOURCES OF FUNDS
Equity Share Capital
10
26
13
13
Reserves& Surplus
1,094
1,757
2,192
2,835
Shareholders Funds
1,104
1,783
2,206
2,849
Total Loans
1,406
1,405
1,354
980
Deferred Tax Liability
64
61
31
59
Total Liabilities
2,574
3,250
3,591
3,888
APPLICATION OF FUNDS
Net Block
1,721
1,975
2,251
2,586
Capital Work-in-Progress
149
264
246
244
Investments
234
291
307
374
Goodwill
151
188
176
304
Current Assets
2,160
2,499
2,851
3,229
Inventories
586
683
753
864
Sundry Debtors
1,071
1,185
1,138
1,403
Cash
69
177
354
329
Loans & Advances
10
10
12
15
Other Assets
424
443
593
619
Current liabilities
1,855
1,996
2,269
2,965
Net Current Assets
305
502
582
265
Deferred Tax Asset
14
29
28
115
Total Assets
2,574
3,250
3,591
3,888
Source: Company, Angel Research
6
June
25,
201
Varroc Engineering | IPO Note
June 25, 2018
6
Consolidated Cash Flow Statement
Y/E March (` cr)
FY2015
FY2016
FY2017
FY2018
Profit before tax
63
392
327
513
Depreciation
254
292
337
386
Change in Working Capital
(506)
(252)
70
296
Interest / Dividend (Net)
94
81
83
85
Direct taxes paid
(57)
(40)
(51)
(124)
Others
281
(183)
(89)
(81)
Cash Flow from Operations
128
290
677
1075
(Inc.)/ Dec. in Fixed Assets
(596)
(629)
(606)
(353)
(Inc.)/ Dec. in Investments
350
50
41
(249)
Cash Flow from Investing
(245)
(579)
(565)
(601)
Issue of Equity
Inc./(Dec.) in loans
168
471
179
(437)
Dividend Paid (Incl. Tax)
(4)
(4)
(5)
(7)
Interest / Dividend (Net)
(98)
(85)
(86)
(86)
Cash Flow from Financing
70
386
94
(523)
Inc./(Dec.) in Cash
(47)
98
205
(50)
Effect of exch diff on translation of foreign
(40)
3
(11)
56
Opening Cash balances
98
11
112
305
Closing Cash balances
11
112
305
312
Source: Company, Angel Research
7
June
25,
201
Varroc Engineering | IPO Note
June 25, 2018
7
Key Ratios
Y/E March
FY2015
FY2016
FY2017
FY2018
Valuation Ratio (x)
P/E (on FDEPS)
775.6
35.3
43.0
28.9
P/CEPS
48.1
19.7
20.4
15.6
P/BV
11.8
7.3
5.9
4.6
Dividend yield (%)
0.0
0.0
0.0
0.0
EV/Sales
2.0
1.7
1.4
1.3
EV/EBITDA
22.9
24.5
23.6
15.2
EV / Total Assets
5.5
4.3
3.8
3.4
Per Share Data (`)
EPS (Basic)
1.2
27.4
22.5
33.4
EPS (fully diluted)
1.2
27.4
22.5
33.4
Cash EPS
20.1
49.1
47.5
62.1
Book Value
81.9
132.3
163.6
211.3
Returns (%)
ROCE
14.5
8.7
6.9
12.8
Angel ROIC (Pre-tax)
16.4
10.2
8.4
15.7
ROE
1.5
20.7
13.8
15.8
Turnover ratios (x)
Inventory / Sales (days)
31
30
29
30
Receivables (days)
52
54
57
70
Payables (days)
52
54
57
70
Working capital cycle (ex-cash) (days)
31
30
29
30
Source: Company, Angel Research
8
June
25,
201
Varroc Engineering | IPO Note
June 25, 2018
8
Research Team Tel: 022 - 39357800 E-mail: [email protected] Website: www.angelbroking.com
DISCLAIMER
Angel Broking Private Limited (hereinafter referred to as “Angel”) is a registered Member of National Stock Exchange of India Limited,
Bombay Stock Exchange Limited and Metropolitan Stock Exchange Limited. It is also registered as a Depository Participant with CDSL
and Portfolio Manager and investment advisor with SEBI. It also has registration with AMFI as a Mutual Fund Distributor. Angel Broking
Private Limited is a registered entity with SEBI for Research Analyst in terms of SEBI (Research Analyst) Regulations, 2014 vide
registration number INH000000164. Angel or its associates has not been debarred/ suspended by SEBI or any other regulatory
authority for accessing /dealing in securities Market. Angel or its associates/analyst has not received any compensation / managed or
co-managed public offering of securities of the company covered by Analyst during the past twelve months.
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment
decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should
make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the
companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine
the merits and risks of such an investment.
Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and
trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's
fundamentals. Investors are advised to refer the Fundamental and Technical Research Reports available on our website to evaluate the
contrary view, if any.
The information in this document has been printed on the basis of publicly available information, internal data and other reliable
sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this
document is for general guidance only. Angel Broking Pvt. Limited or any of its affiliates/ group companies shall not be in any way
responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report.
Angel Broking Pvt. Limited has not independently verified all the information contained within this document. Accordingly, we cannot
testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document.
While Angel Broking Pvt. Limited endeavors to update on a reasonable basis the information discussed in this material, there may be
regulatory, compliance, or other reasons that prevent us from doing so.
This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced,
redistributed or passed on, directly or indirectly.
Neither Angel Broking Pvt. Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from
or in connection with the use of this information.