e t eo t e N o t t e N o Varroc Engineering Ltd. t E N o e U E N N t S ... آ  lighting...

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Transcript of e t eo t e N o t t e N o Varroc Engineering Ltd. t E N o e U E N N t S ... آ  lighting...

  • 1 | P a g e

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    Varroc Engineering Ltd.

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    Recommendation Subscribe BACKGROUND

    Price Band Rs.965– Rs.967

    Varroc Engineering Ltd (Varroc) is a global tier-1 automotive component company. It designs, manufactures and supplies exterior lighting systems, plastic and polymer components, electricals-electronics components, and precision metallic components majorly to passenger car, two-wheeler and three-wheeler OEMs directly worldwide. Varroc is the 6

    th largest global Passenger Vehicle

    lighting manufacturer and the 2 nd

    largest in Electric Vehicle lighting.

    Details and Objects of the Issue

    The entire public issue consists of offer for sale of Rs. 1955 Cr. Of the 15.0% being offloaded, 13.7% stake is being offered by the PE investor (Tata Capital) while the balance 1.3% is being offered by the promoter, Mr. Tarang Jain.

    Investment Rationale

     Being the No.2 company globally in automotive LED lighting, Varroc is well positioned to capture the industry’s migration from halogen / xenon to LED.

     Although Varroc is the 6 th

    largest automotive lighting company globally, it is also the fastest growing company among the top 8 companies.

     Manufacturing units in low cost countries provides an edge over competitors.

     Strong track record of (i) long-standing customer relationships, (ii) adding new customers in lighting and (iii) expansion into newer geographies.

     Deeper penetration into existing clients to drive growth in domestic 2/3 Wheeler business.

     Well diversified customer base ensures reduced dependence on success of any particular customer.

     Varroc could tap the domestic lighting opportunity in the long term.

    Valuation and Recommendation

    Varroc is the 6 th

    largest global automotive lighting company and the 2 nd

    largest in EV lighting. Thus it is ideally placed to capture the migration within the automotive lighting industry from halogen/xenon to LED. Over 2014-16, Varroc Lighting Systems has grown three times faster at 27.5% CAGR v/s an average of 8.6% for its competitors (Top 8). Domestic business will be aided by deeper penetration into existing clients by supplying more products. Varroc is being offered at a PE of 28.9x FY18 (vs. domestic peer average of 41.6x) and EV/EBITDA of 15.9x FY18 (vs. domestic peer average of 17.6x). Thus based on the business capabilities, industry growth prospects and valuations, we recommend subscribing to the issue.

    (Rs Cr) Financial Snapshot FY15 FY16 FY17 FY18

    Net Revenues 6,770 7,909 9,299 10,279

    Growth

    17% 18% 11%

    EBIDTA 617 571 582 878

    EBITDA Margins 9.1% 7.2% 6.3% 8.5%

    PAT 17 370 303 451

    Growth

    2100% -18% 49%

    ROCE 5.8% 14.1% 11.1% 14.8%

    ROE 1.5% 20.7% 13.8% 15.8%

    EV/EBIDTA

    28.9

    P/E

    15.9

    Source: Company data, NB Research

    Bidding Date 26 - 28 June

    BRLM Kotak, Citi,

    Credit Suisse, IIFL

    Registrar LINK Intime

    Sector Auto Ancillary

    Minimum Retail Application

    Number of Shares 15

    Min. Application Money Rs. 14,505

    Discount to retail NIL

    Payment Mode ASBA

    Cons. Financials (Rs Cr) FY17 FY18

    Total Income 9299 10279

    EBITDA 852 878

    PAT 303 451

    Valuations Lower Band

    Upper Band

    Market Cap (Rs Cr) 13,009 13,036

    EPS* 33.4 33.4

    P/E Ratio* 28.9 28.9

    EV/ EBITDA* 15.8 15.9

    Enterprise Value (Rs Cr) 13,891 13,918

    *calculated on FY18

    Post Issue Shareholding Pattern

    Promoters 85.0%

    Institutions 7.5%

    Public 7.5%

    Offer structure for different categories

    QIB (Including Mutual Fund) 50%

    Non-Institutional Investors 15%

    Retail 35%

    Post Issue Equity (Rs. in Cr) 13.48

    Issue Size (Rs in Cr) 1,951 – 1955

    Face Value (Rs) 1

    Jehan Bhadha

    Assistant Vice President (+91 22 6273 8174)

    jehankersi.bhadha@nirmalbang.com

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    Varroc Engineering Ltd.

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    Company Background Varroc Engineering Ltd (Varroc) is a global tier-1 automotive component company. It designs, manufactures and supplies exterior lighting systems, plastic and polymer components, electricals-electronics components, and precision metallic components majorly to passenger car, commercial vehicle, two-wheeler and three-wheeler OEMs directly worldwide. Varroc is the 6

    th largest global Passenger Vehicle lighting manufacturer and the 2

    nd largest in Electric Vehicle lighting.

    Varroc has two primary business lines:

    1. Varroc Lighting Systems: Where it supplies exterior lighting systems to passenger car OEMs globally. 2. Varroc India Business: Where it supplies a diverse range of auto components primarily to 2W and 3W OEMs

    domestically. Varroc has a global footprint of 36 manufacturing facilities spread across seven countries, with six facilities for Global Lighting Business, 25 for the Indian Business and five for other businesses.

    Exhibit 1: Product Mix (FY18) Exhibit 2: Geographical Mix (FY18)

    Source: Company data, NBRR Source: Company data, NBRR

    Exhibit 3: Customer Mix (FY18) Exhibit 4: Segmental mix (FY18)

    Source: Company data, NBRR Source: Company data, NBRR

    Lighting (Global)

    61%

    Polymer (India) 16%

    Electrical (India) 10%

    Metallic (India)

    6%

    Others (India)

    7%

    Europe 42%

    India 35%

    North America

    22%

    Others 1%

    Bajaj (India) 19%

    Customer A

    14%

    Cust. B 11% Cust. C

    9%

    Cust. D 6%

    Cust. E 6%

    Honda 4%

    Others 32%

    4W (Global)

    63%

    2/3W (India) 34%

    Others 3%

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    Investment Rationale

    Varroc – World No. 2 in global EV lighting, is well positioned to capture the industry’s migration from halogen/xenon to LED The global automotive lighting industry stood at $ 17.5 Bn in 2016 and is slated to grow at a CAGR of 4.3% over 2016-2022. However, there are stark dichotomies within the industry wherein older technology based lighting like Halogen and Xenon would decline at a CAGR of 5% and 10% respectively until 2022 and LED lighting would capture two-thirds of the market by 2022 from just one-third share in 2016 by growing at a CAGR of 17%. Exhibit 5: Technology wise Global Automotive Lighting Market (in $ Bn)

    Source: Company, NBRR

    Exhibit 6: Global automotive lighting industry mix by technology

    Source: Company, NBRR

    7.4

    4.2 3.3

    7.2

    4.3 5.9

    5.2

    2.4

    14.9

    0.0

    2.0

    4.0

    6.0

    8.0

    10.0

    12.0

    14.0

    16.0

    Halogen Xenon LED

    2012 2016 2022E

    50%

    28%

    22%

    2012

    Halogen Xenon LED

    41%

    25%

    34%

    2016

    Halogen Xenon LED

    23%

    11% 66%

    2022

    Halogen Xenon LED

    With the advent of EVs (electric vehicles), the pace of migration to LED lighting shall increase in coming years