Varroc Engineering IPO Rating: Automatic Buy – JainMatrix

Overview

Varroc Engineering is a global tier-1 auto component firm. They design, make and supply exterior lighting systems, plastic and polymer, electricals-electronics and precision metallic components to passenger car, CV, 2W, 3W and off highway vehicle OEMs directly worldwide.

India and global revenues are split 35:65 so they have good international presence.

Read Also: Varroc Engineering IPO Review: Endurance Encore?

Varroc’s FY18 revenue, EBITDA and PAT were Rs. 10,417 cr., Rs. 985 cr. and Rs. 451 cr. resp.

Their revenues, EBITDA and PAT grew at 13.1%, 12.9% and 18.2% CAGR in 4 years.

At a FY18 PE of 28.9x, valuations appear fair. It has a healthy balance sheet with conservative financials. It has good Indian and global presence.

Key Risks: 1) High Competition 2) Currency Risks 3) Downturn in macro-economic environment.

Opinion: Investors can SUBSCRIBE to this IPO with a 2 year perspective.

Varroc Engineering IPO highlights

The IPO opens: 26-28th June 2018 with the Price band: Rs. 965-967 per share.

Shares offered to public number 2.01 cr. The FV of each is Re. 1 and market lot is 15 numbers.

The IPO will raise Rs. 1,955 cr. while selling 15% of equity. The offer will be completed via an Offer for Sale (OFS) by existing shareholders of Rs. 1,955 cr. and there is no fresh issue of shares.

The promoter (Tarang Jain) owns 86.3% of Varroc which will fall to 85% post-IPO. The other investors 1) Omega TC Holdings (a PE firm) and 2) Tata Capital Fin. Serv. are fully exiting their 13.7%.

The selling shareholders are both Tata group firms that invested in Varroc in Mar 2014. The cost of acquisition was Rs. 162.4/share, so they are getting ~5x returns in 3+ years.

The IPO share quotas for QIB, Non Institutional Buyer (NIB) and Retail are in ratio of 50:15:35.

The unofficial/ grey market premium for this IPO is Rs. 55-60/share. This is a positive.

Positives for Varroc Engineering IPO

IPO pricing and valuations are fair and at lower end of the peers.

Varroc has shown good financial performance with operating efficiency in recent times.

The MD appears to be hiring professionals at the next level / reporting to him, which should strengthen the firm and enable it to grow to the next level.

Varroc has a consistent track record of organic and inorganic growth. It has strong customer relationships with high quality OEMs in India, North America and Europe.

Varroc has a proven business model and strategy, as seen with the success of Motherson Sumi Systems. There is ample room to grow for Varroc in the sector globally.

Strong competitive position in attractive growing markets for VLS.

Low cost, strategically located mfg. and design footprint. Varroc has located its facilities primarily in low-cost countries but near major auto markets. They are making investments to expand into Brazil and Morocco, which would keep costs low yet deliver easily to their customers.

Robust in-house technology, innovation and R&D capabilities. The VLS business has 964 engineers located in 9 R&D centers, which are located in the Czech Republic, India, China, Mexico, Germany, the USA and Poland. Their R&D teams are focused on quick adoption of technology, enabling them to grow their product portfolio in line with customer expectations and industry developments.

Focus on expansion in auto electronics, an important trend in the industry.

The Varroc teams including the MD have good experience in the auto component sector.

Here is JainMatrix Investments’ full note on Varroc Engineering IPO Rating:

Download the PDF file .

Varroc Engineering IPO Rating: Automatic Buy – JainMatrix
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