Varroc Engineering - ICICI Directcontent.icicidirect.com/mailimages/IDirect_VarrocEng_IPOReview.pdf · It has broad portfolio of lighting technologies (Head lamps, Rear lamps & Electronics)

June 22, 2018

IPO Review

ICICI Securities Ltd | Retail Equity Research

Well diversified Indian MNC…

Varroc Engineering (VEL) founded in 1988, is second largest Auto component

group with the global footprint. The company primarily has two business

lines 1) Varroc Lighting System (VLS) sixth largest player in the global exterior

Auto lighting catering to the PV OEMs (accounts for 61% of revenues) & 2)

Varroc India business which includes three segments namely - Polymer,

Electrical & Metallic catering to 2W, 3W, PV, CV & OHV (accounts for 32.5% of

its FY18 revenue). It has low cost strategically located global manufacturing

footprint (36 locations) & in-house R&D capabilities. VEL has long standing

relationship with marquee customer and is also well diversified with no single

customer accounting >20% of its revenue. VEL over the years has grown via

organic & inorganic route. Over FY13-18, VEL’s revenue has registered CAGR

of 19.5% while its margin expanded from ~6% in FY13 to ~8.5% in FY18. It

has low net debt to equity (0.2x) & decent return ratio (>14%).

Key Investment rationale

Diversified across categories (Geography + Product + Customer + Segment)

VEL is well diversified company across categories. As of FY18, in terms of

geography – Europe accounts for 42% of revenue while revenue from India

and North America stands at 35% & 22% respectively & balance of 1% is from

rest of the world. In terms of product, lighting accounts for 61% of revenue

while Polymer/Electrical/Metallic/Others represent 16/10/6/7% of revenue

respectively. It has broad portfolio of lighting technologies (Head lamps, Rear

lamps & Electronics) and comprehensive solution with wide range of products

across polymer, electrical & metallic segments to 2-W OEMs in India. In terms

of segment wise- 4W comprises 63% of its revenue while 2W/3W and Others

account for 34% & 3% respectively. Bajaj Auto, first OEM partner of VEL

continues to be its top customer accounting for 19% of its revenue. Its top six

customer account for ~64.5% of its revenue as of FY18.

Key business strategy

VEL has a clear roadmap to sustain growth which is 1) to focus on high

growth markets for Global lighting business; 2) Increase content per vehicle

in India; 3) Invest in R&D & capitalize on future trends; 4) To look for Inorganic

growth expansion and 5) Lastly, to focus on operational efficiency.

Key Risk & Concerns

Some of the major risks are 1) Slowdown or lower than expected demand in

the overall automotive space 2) Failure to identify & understand evolving

industry trends & preference 3) The synergy & Integration of its inorganic

acquisitions remain crucial for growth & 4) Brexit may adversely affect its

business given that Europe accounts for 42% of its revenue; and 5) VEL is

largely B2B player (as ~98% of its revenue is from the OEM segment) hence

its absence in replacement market can affect its long term growth.

Priced at PE of 29x FY18 EPS (at upper price band of |967/share)

VEL is a Tier 1 auto ancillary player which has wide range of product portfolio

spread across customers & geographies. Further pedigree management,

strong growth opportunity & decent return ratio (~16%) remains positive for

the company. The company is undervalued at 29x its FY18 EPS compared to

some of its peers. Thus, we recommend subscribe to the issue from a long

term perspective

Varroc Engineering

Price band | 965-967

Rating matrix

Rating : Subscribe

Issue Details

Issue Details

Issue Opens 26-Jun-18

Issue Closes 28-Jun-18

Price Band (|) 965-967

Bid Multiples (no of shares) 15.0

No. of Shares on Offer (crore) 2.0

Issue Size* (| crore) 1955.0

QIB (%) 50.0

Non-Institutional (%) 15.0

Retail (%) 35.0

*Assuming issue price of |967

Objects of the Issue

The object of the issue is to achieve the benefits of listing of Equity

shares on the stock exchange and to carry out the offer for sale by

selling shareholders

Shareholding Pattern

Pre-Offer Post-Offer

Promoters & Promoter Group 86.3 85.0

Public 13.7 15.0

Financial Summary

| crore FY14 FY15 FY16 FY17 FY18

Total Revenues 6116 6770 7909 9299 10279

EBITDA 400 617 571 582 878

EBITDA Margins % 6.5 9.1 7.2 6.3 8.5

PAT 42 13 369 303 450

EPS (Diluted) 3.1 1.0 27.4 22.5 33.4

Valuation Summary (at |967; upper price band)

FY14 FY15 FY16 FY17 FY18

P/E 310.1 999.9 35.3 43.0 29.0

EV/EBITDA 34.2 23.3 25.0 24.1 15.6

P/BV 11.6 11.8 7.3 5.9 4.6

Research Analyst

Nishit Zota

[email protected]

Vidrum Mehta

[email protected]

Page 2 ICICI Securities Ltd | Retail Equity Research

Exhibit 1: Consolidated Key Financials

| crore FY13 FY14 FY15 FY16 FY17 FY18

Total Revenues 4210.2 6116.3 6770.0 7909.2 9298.8 10278.8

EBITDA 252.0 399.5 616.9 570.9 581.8 877.6

EBITDA Margins (%) 6.0 6.5 9.1 7.2 6.3 8.5

PAT -26.0 42.0 13.0 369.3 303.0 450.3

PAT Margins (%) -0.6 0.7 0.2 4.7 3.3 4.4

Diluted EPS -1.9 3.1 1.0 27.4 22.5 33.4

RoE -3.5 3.7 1.2 20.7 13.7 15.8

RoCE 4.9 9.2 18.0 9.4 9.5 13.8

Source: RHP, Presentation, ICICI Direct Research

About the Company

Varroc Engineering (VEL) is a global tier-1 automotive component group. The

company designs, manufacture and supplies exterior lighting systems, plastic

and polymer components, electrical-electronics components, and precision

metallic components across automotive segments. VEL is the 2nd largest

Indian auto component group and a leading tier-1 player catering to 2-W & 3-

W OEMs. It is the 6th largest global exterior automotive lighting manufacturer

and one of the top three independent exterior lighting players.

VEL commenced its operations with polymer business in 1990. The company

initially grew organically in India by adding new business lines, like electrical

and metallic division. Subsequently, the company diversified its product

offerings and expanded the production capacity through various investments,

joint ventures and acquisitions. The most notable acquisition was in 2012,

that of Visteon's global lighting (VGL), which steered VEL as one of the

leading global player in the automotive lighting space. Prior to this acquisition

of VGL business, in 2007 the company acquired I.M.E.S (a manufacturer of

hot steel forged parts for the construction and oil and gas industries) in Italy

and in 2011 acquired Triom (a manufacturer of high end lighting systems for

global motorcycle OEMs) with operations in Italy, Romania & Vietnam. In

2013, the company expanded the global lighting business by acquiring

Visteon's holding in a 50/50 joint venture with Beste Motor Co. Ltd. ("TYC") to

manufacture automotive lighting in China, namely Varroc TYC (which wholly

owns Varroc TYC Auto Lamps, which in turn wholly owns Varroc TYC Auto

Lamps (CQ) (its "China JV"). Recently, on February 13, 2018, it entered into a

joint venture with Dell'Orto S.p.A., one of its customers, in India, for the

development of electronic fuel injection control systems for 2-W & 3-W.

The company has end-to-end capabilities across design, R&D, engineering,

testing, manufacturing and supplies multiple products. The company has two

primary business lines, namely (1) the design, manufacture and supply of

exterior lighting systems to passenger cars OEMs worldwide, which is

undertaken through its subsidiaries forming part of the VLS group & (2) the

design, manufacture and supply of a wide range of auto components in India

(its India Business), primarily to 2-W & 3-W OEMs, including exports. Its India

business offers a diversified set of products across three product lines,

namely polymers/plastics, electrical/electronic & metallic components. In

addition, it has other smaller businesses, which include the design,

manufacture and supply of 2-W lighting to global OEMs, & under carriage

forged machine components for OHVs & drill bits for the oil and gas sector.


Exhibit 2: VEL broad company overview


Exhibit 3: VEL’s business Evolution


The company has a global footprint of 36 manufacturing facilities spread

across seven countries, with 6 facilities for Global Lighting Business, 25 in

India and 5 (outside India) for its other businesses. VEL is well diversified

company across categories. As of FY18, in terms of geography – Europe

accounts for 42% of revenue while revenue from India and North America

stands at 35% & 22% respectively & balance of 1% is from rest of the world.

In terms of products, lighting division accounts ~61% of revenue while

Polymer/Electrical/Metallic/Others represents 16/10/6/7% of revenue

respectively. It has broad portfolio of lighting technologies (Head lamps, Rear

lamps & Electronics) and comprehensive solution with wide range of products

across polymer, electrical & metallic segments to 2-W OEMs in India. In terms

of segment wise- 4W comprises 63% of its revenue while 2W/3W and Others

account for 34% & 3% respectively. VEL had started its operations with Bajaj

Auto which still remains its top customer accounting for 19% of its revenue

however no single customer account >20% of its overall revenue. Its top six

customer account for ~64.5% of its revenue as of FY18.


The following is the description of VEL’s major division/products/customers

and manufacturing facilities.

Exhibit 4: VEL’s business segments


Global Lighting Business

The company’s manufacturing facilities in the Global Lighting Business, are

located in Mexico, the Czech Republic, China (through China JV) and India,

allowing the company to serve the North American, European, Chinese and

Indian markets, respectively. VLS is in the process of setting up a new plant in

Brazil, to serve the South American market & Morocco, to serve the southern

European and north African markets. Company VEL anticipates that its plants

in Brazil & Morocco will commence production in FY19. The company is also

in the discussions to acquire an exterior automotive lighting company in

Turkey in FY19. VLS has a diversified customer base across nearly all major

automotive markets in the world, except Japan and Korea. It has long-term

relationships with marquee auto manufacturers across the premium, mid-

range and mass market pricing spectrum, including Ford, Jaguar Land Rover,

the Volkswagen Group (VW group), Renault-Nissan-Mitsubishi, Groupe PSA,

FCA, a European multinational car manufacturer and an American electric car

manufacturer. VLS has a broad portfolio of lighting products, including

Halogen, Xenon/high-intensity discharge, light-emitting diode (LED), Matrix

LED, high definition Micro- Electro-Mechanical Systems (MEMS) and digital

micro-mirror device (DMD), surface LED, organic light emitting diode (OLED)

module, Flex LED, LED pixel and LED pixel headlamp, catering to the five

product segments within external automotive lighting. VLS has sales offices

in France, Germany & the United Kingdom and is headquartered in Plymouth,

Michigan (United States of America).

India Business

Within its Indian Business, VEL has 25 manufacturing facilities and five R&D

centres spread across India. Its Indian manufacturing and distribution

footprint is strategically located across key Indian automotive hubs, allowing

the company to be closer to its customers and helping to ensure cost

efficiency. The company has a long-standing relationship with Bajaj Auto,

which has been its customer for the past 28 years and to whom the company

has been providing components across its product lines. The other key 2-W

customers in India include Honda, Royal Enfield, Yamaha, Suzuki and Hero.


The company exports to global 2-W manufacturers from its facilities in India,

namely KTM and Volvo. In terms of product wise, the company offers various

products in polymer/Electrical/Metallic segment which account for 16/10/6%

of the total revenue respectively.

Polymer business – VEL is one of the largest polymer solution providers to

the 2-W OEMs with a Pan-India presence. Some of the major products include

Air Filter Assemblies, Mirror assemblies, Seat Assemblies, Trims (Interior &

Exterior) and others. The division has around 15 manufacturing facilities

across India and caters to 2-W, 3-W, PV & CV segment.

Electrical business – Within the Electrical division, the company offers

comprehensive solutions in electrical-electronics components, assemblies for

automotive applications and lighting products. Some of the major products

include Digital Instrument clusters, CDI, Motor (Starter & Wiper), Magneto and

others. The division has 7 existing manufacturing facilities & 2 upcoming

facilities in India, and caters to 2-W, 3-W, PV & CV segment.

Metallic business – Within the Metallic division, the company supplies

precision forged & machined parts for engines and transmissions. It also

supplies engines valves in domestic and international markets. Some of the

major products include Transmission assembly, Crankshaft, Connecting

Road, Engine Valve, Gears and others. The division has around 5

manufacturing facilities across India and caters to 2-W, 3-W, PV, CV & OHV

segment

Others segments include IMES & Triom

IMES – The business is into manufacturing of hot steel forged parts for the

construction and Oil & Gas Industries. Some of the major products include

Undercarriage Links, Drill bit cones & heads and others. The division has 2

manufacturing facilities in Italy, and caters to Earth moving & Oil-drilling

segment.

TRIOM – It is into high end lighting system for the global 2-W industry. Some

of the major products includes Tail and Blinker, Head and Tail light and

others. The division has around 3 manufacturing facilities in Italy, Romania &

Vietnam and caters to the 2-W segment

Exhibit 5: VEL’s diverse portfolio with end to end capabilities across segments



Investment Rationale

Strong competitive position in attractive growing markets

VEL’s Global Lighting Business is the sixth-largest tier-1 automotive exterior

lighting manufacturer globally and one of the top three independent exterior

lighting players. Globally, the exterior lighting market for PV is growing as (1)

lighting has become an increasingly prominent design & aesthetic feature in

PVs, 2) lighting is playing a critical role in safety requirements and 3) lighting

technologies playing a greater role in energy efficiency & increased

functionality, which together have led to higher penetration of more

expensive and higher end lamps, such as LEDs, across car segments. Over

CY14-16, VLS reported revenue CAGR of 27.5% as against the average

growth of ~7% reported by the top 5 players which account for ~80% of

industry revenue during the same period. VLS was the fastest-growing

among the top six global automotive lighting suppliers during the period 2014

to 2016 mainly due to 1) rising share of business with its existing customers;

2) winning new customer contracts; 3) geographical expansion &

development of more technologically sophisticated products. VLS' global

footprint covers nearly all major PV markets globally, including high growth

markets such as China (through JV) and India. It expects its new plants in

Morocco & Brazil to be completed in FY19, following which VLS will be in a

position to target 85% of the global automotive market.

With respect to India business, VEL is the 2nd

largest Indian auto component

group and a leading tier-1 manufacturer and supplier to Indian two-wheeler

and three-wheeler OEMs. It has strong & long-lasting relationships with key 2-

W manufacturers such as Bajaj, Royal Enfield, Honda, Yamaha and Suzuki and

a growing portfolio of products which are supplied. It has positioned itself to

capture further business from these customers, in addition to generating

additional business in the Indian 2-W & 3-W markets.

Exhibit 6: VEL’s is the 6th largest Exterior Auto lighting supplier


Diversified product portfolio

VEL has comprehensive portfolio of products, which allows the company to

be a one stop-shop for its customers and also helps them to cross-sell its

other products. Its Global Lighting Business has a broad portfolio of lighting

technologies, including Halogen, Xenon/high-intensity discharge, LED, Matrix

LED, high definition MEMS and DMD, surface LED and OLED module, Flex

LED and LED Pixel headlamp, covering the five automotive external lighting

product lines. Its India Business offers a diverse range of products in the


polymers/plastics, electrical-electronics and precision metallic components

and is catered across automotive segments. Further the comprehensive

product portfolio is engine agnostic as it is capable of being used across all

fuel types. VEL strength in its product portfolio is shown by the fact that it has

significant presence & customer relationships in each of its product segments.

For instance, in its Global Lighting Business, the company are one of the

biggest players in the electric vehicles market enjoying the second largest

market share. With respect to India Business, across verticals, the company

has 56 customers in Polymer segment, 20 customers in Electrical and 58

customers in Metallic segment.

VEL is well diversified company across categories. As of FY18, in terms of

geography – Europe accounts for 42% of revenue while revenue from India

and North America stands at 35% & 22% respectively & balance of 1% is from

rest of the world. In terms of product, lighting accounts for 61% of revenue

while Polymer/Electrical/Metallic/Others derives 16/10/6/7% respectively. It

has broad portfolio of lighting technologies (Head lamps, Rear lamps &

Electronics) and comprehensive solution with wide range of products across

polymer, electrical & metallic segments to 2-W OEMs in India. In terms of

segment wise- 4W comprises 63% of its revenue while 2W/3W and Others

account for 34% & 3% respectively. VEL had started its operations with Bajaj

Auto which still remains its top customer accounting for 19% of its revenue.

Its top six customer account for ~64.5% of its revenue as of FY18

Low cost, strategically located manufacturing and design footprint

For its Lighting Business, the company has global production, engineering

and customer support capabilities with focus on quality, cost and delivery. In

order to achieve these goals, its facilities are primarily located in low-cost

countries near major automotive markets. The new investments are also

made in newer countries such as Brazil and Morocco, which further allow VEL

to keep its costs low while meeting its customer’s requirement across

geographies. In line with this strategy, the company is in discussions to

acquire an exterior automotive lighting company in Turkey in FY19. For its

India Business, VEL’s facilities are spread across the key Indian automotive

hubs, covering the polymer, electrical/electronic & metallic divisions. The

company accordingly locates its facilities to be in close proximity to major

OEMs in India, which leads to greater cost effectiveness, quicker product

launches, and faster turn-around times, allowing them to serve its customers'

needs in a timely manner.

Robust in-house technology, innovation and R&D capabilities

Its R&D team is focuses on quick adoption of technology, which enables the

company to grow its product portfolio in line with customer expectations and

industry developments. The company’s R&D focus has allowed them to

establish a presence in key emerging technologies (such as LED) as well as a

broad portfolio of headlamp technologies (such as matrix LED and laser), and

to supply products for electric vehicles. Its R&D efforts at India Business, seek

to capitalize on emerging trends such as the increased use of electronics,

stricter environmental regulations, emission reduction & light-weighting of

vehicles, as well as the emergence of new technologies such as multi-point

fuel injection. The company has ~1,414 R&D engineers & 185 patent globally.

In FY18, R&D cost stood at |461.5 crore which is ~4.5% of its revenue.

Consistent track record of growth

VEL initially grew organically in India by adding new business lines, such as

electrical & metallic division. Subsequently, the company diversified its

product offerings & expanded its production capacity through various

investments, joint ventures and acquisitions. VEL over the years has grown

via organic & inorganic route. Over FY13-18, VEL’s revenue has registered


CAGR of 19.5% while its margin expanded from ~6% in FY13 to ~8.5% in

FY18. It has lower net debt to equity (0.2x) & decent return ratio (~16%).

Exhibit 7: Revenue trend

4210.2

6116.36770.0

7909.2

9298.8

10278.8

0

2000

4000

6000

8000

10000

12000

FY13 FY14 FY15 FY16 FY17 FY18

| crore

Total Revenues


Exhibit 8: Profitability trend

-26.0

42.0

13.0

369.3

303.0

450.3

-100

0

100

200

300

400

500


| crore

PAT


Exhibit 9: EBITDA & PAT margins (%)

6.06.5

9.1

7.2

6.3

8.5

-0.6

0.70.2

4.7

3.3

4.4

-2

0

2

4

6

8

10

12

14


%

EBITDA Margins (%) PAT Margins (%)


Exhibit 10: Return ratios (RoE & RoCE)

-3.5

3.7

1.2

20.7

13.7

15.8

4.9

9.2

18.0

9.49.5

13.8

-6

-2

2

6

10

14

18

22


%

RoE RoCE


Exhibit 11: Net debt/ equity

1.2

0.5

1.2

0.7

0.5

0.2

0.0

0.5

1.0

1.5

2.0


| crore

Net Debt/Equity


Exhibit 12: Free cash flow

59.3

185.0

-222.5

-308.7

52.1

496.7

-400

-300

-200

-100

0

100

200

300

400

500

600


| crore

FCF



Exhibit 13: Segment wise revenue mix – FY18

4433 48206124 6312

2119

3081

31683641

399

319

316426

1067

1224

15341229

0

2000

4000

6000

8000

10000

12000

14000

FY15 FY16 FY17 FY18

| crore

Global Lighting India Others China JV


Exhibit 14: Segment wise EBITDA margin (%) – FY18

9.66.5 6.2 7.8

11.0

8.8 8.810.6

11.3

1.55.5

9.4

11.5

13.4

15.3

15.7

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

FY15 FY16 FY17 FY18

%

Global Lighting India Others China JV


Exhibit 15: Revenue split by geography (%) – FY18

-

Europe,

41.8

India, 34.7

North

America,

22.3

Asia

Pacific, 0.7

Others,

0.5


Exhibit 16: Revenue split by products (%) – FY18

Lighting,

61%

Polymer,

16%

Electrical,

10%

Metallic,

6%

Others, 7%


Exhibit 17: Revenue split by Segment (%) – FY18

4-W, 63%

2/3-W,

34%

Others, 3%


Exhibit 18: Revenue split by Customer (%) – FY18

Bajaj Auto,

19%

Customer A,

14%

Customer

B, 11%

Customer C,

9%

Honda, 4%

Others



Key Business Strategy

VEL has a clear roadmap to sustain growth and has laid down its business

strategy which are as following -

Focus on high growth markets for its Global Lighting Business

The next leg of growth in the global exterior automotive lighting will come

from trends like autonomous driving & connectivity between cars, with

lighting becoming an increasingly prominent design and aesthetic feature, as

well as playing a critical role in safety requirements and lighting technologies

playing a greater role in energy efficiency and design flexibility. Its aim is to

become a globally preferred lighting systems provider to automotive OEMs.

In order to capture global growth in the exterior lighting segment, it aims to

expand its international footprint through the development of new plants in

Brazil and Morocco, in order to open up the South American, southern

European and north African markets. These markets, in addition to the Indian

and Chinese markets, will help VLS to target 85% of the global automotive

market. Also through its China JV, the company currently has two plants and

two R&D centres in China.

Focus on increasing customer revenue for India Business

The overall domestic two-wheeler production is expected to grow at a robust

pace of 8-10% CAGR in the next three years to reach around 26.3 million

units by FY20. In addition to benefiting from the overall growth in the Indian

2-W & 3-W markets, VEL also intends to increase its revenue by expanding

the array of its existing products to the existing customers and by continuing

to develop technology solutions aligned with their needs. For instance, in the

past, VEL used to supply painted parts and plastic parts to HMCL however

after 2017 the company also started supplying crank pins, head lamps, tail

lamps and lighting parts. In addition, the company is witnessing a growing

revenue in the PV & CV segments in India for both its lighting and polymer

businesses.

Invest in R&D & capitalize on future trends

VEL plans to continue expanding its R&D, engineering & software

development capabilities in order to capture future growth trends. It seeks to

expand its capabilities in a cost efficient manner, by focusing on low-cost

geographies nearby major automotive markets, in order to expand the

capabilities in a cost-efficient manner. For example, in India the company

established a R&D facility specifically catering to VLS, which provides support

to its core R&D facility in the Czech Republic. By focusing on technology, VEL

seek to benefit from key trends in the automotive industry, including electric

vehicles, emission reduction and shared mobility. For India Business

company, seeks to capitalize on the migration to BSVI emission standards

through its continuing development of emission reduction and light-weighting

technologies.

To look for Inorganic growth expansion

The company intends to actively pursue acquisitive opportunities and

strategic alliances with targets that are complementary their business. VEL in

particular, seeks to make acquisitions that provide them access to new

technologies, new customers & new geographies. For instance, it has recently

acquired Team Concepts, a manufacturer of auto accessories in Bangalore

with Japanese OEMs as key customers, and are in discussions to acquire an

exterior automotive lighting company in Turkey in FY19. Further it has good

track record of successfully completing & integrating acquisitions and has

benefitted from the same. Its low leverage in particular provides VEL the

ability to quickly react to inorganic opportunities.


To focus on operational efficiency

VEL focuses on operational efficiency in order to improve returns in a rapidly

changing technological environment. For instance, they have implemented

various initiatives to lower costs, such as purchasing raw materials in bulk to

take advantage of promotions and economies of scale. The company apply a

lean manufacturing standard in the Global Lighting Business and has

implemented total preventive maintenance (TPM) in the India business.


Key Risk & Concerns

Slowdown in the overall demand environment (Automotive space)

VEL performance is largely dependent on the automotive space; and any

slowdown or lower than expected demand in the space could directly impact

its performance. In the event of a decline in auto demand, or any other

developments that make the sale of components market less economically

beneficial, the same can adversely affect its business, results of operations

and prospects.

Failure to identify and understand evolving industry trends & preference

Any change in regulatory/industry requirement or in competitive technologies

may render certain of its product obsolete or less attractive. The ability to

anticipate changes in technology and regulatory standards and to

successfully develop and introduce new and enhanced products on a timely

basis is a significant risk factor to the company.

Synergy & Integration of its inorganic acquisitions remain crucial for growth

VEL has ~20 subsidiaries & ~4 JVs. Over the years the company has grown

through inorganic route which we expect to continue going ahead. We

believe if the acquired company fails to provide synergy to its existing

business its integration might not be smooth thereby impacting its overall

performance.

High concentration risk

Though company has presence across segments; it has higher dependence

on the global 4-W segment which account for ~61% of its revenue as of

FY18. The overall growth in the global PV space is relatively moderate thus a

lower than expected growth might also impact its performance. As of FY18,

42% of the revenue is from European market and Brexit may adversely affect

its business, results of operations, and prospects. Also it has higher

dependency on the OEM segment (~98% of revenue) & has relatively lesser

exposure in the replacement segment. In terms of customer concentration,

revenue from top six customer account for ~64.5% of its revenue as of FY18.

Also loss of any of its key customers or a significant reduction in demand

from its customers could have an adverse effect on their business.


Key Management Team

Mr. Naresh Chandra - is the Chairman & Non-Executive Director of VEL. He

holds a bachelor’s degree in economics and a master’s degree in history from

the University of Delhi. He also holds a diploma in business administration

from the City of Birmingham College of Commerce, United Kingdom. He has

over 50 years of work experience, with over 35 years’ experience in the

automobile industry & has previously been associated with Kaycee Industries.

He has been associated with VEL since incorporation & became the Chairman

in 1997.

Mr. Tarang Jain - is the Co-founder & currently the Managing Director of VEL.

He holds a bachelor’s degree in commerce from Sydenham College of

Commerce and Economics, University of Bombay and a diploma in business

administration from University of Laussane, Switzerland. He has around 30

years of experience in the automotive industry. He has been associated with

the company since incorporation & was appointed as the Managing Director

in 2001.

Ashwani Maheshwari - is a Whole-time Director & Chief Executive Officer of

VEL. He is also president of the metallic division of the Company. He holds a

bachelor’s degree in engineering (mechanical engineering) from the Indian

Institute of Technology, Roorkee and a master of science degree in leadership

and strategy from the London Business School, London, United Kingdom. He

has also successfully completed the executive development program from

the Wharton School, University of Pennsylvania, USA. He has previously

worked with The Tata Iron and Steel Company as a graduate trainee, as a

senior vice president – India business division in ITC Infotech India and as the

president – Birla tyres at Kesoram Industries. He has been on the Board since

March 2016.

Stephane Vedie - is the President & Chief Executive Officer of Varroc Lighting

Systems. He holds a diploma in purchasing management function from the

Academy of Grenoble, France and a degree from Amiens Business School,

France. He has previously been associated with Magneti Marelli. He has 13

years of experience in automotive lighting. He joined the Subsidiary, Varroc

Lighting Systems Inc. on December 12, 2016.

T.R. Srinivasan - is the Chief Financial Officer of VEL. He holds a bachelor’s

degree in commerce from Bharathidasan University, Tamil Nadu. He has

obtained a post graduate diploma in management from Indian Institute of

Management, Calcutta. He is a member of the Institute of Cost and Works

Accountant of India. He has previously been associated with Hindustan Lever

Limited, Philips Electronics India, Reliance Digital Retail, Siro Clinpharm

Private, ATC Tires Private. He has approximately 29 years of work experience.

He joined VEL on October 3, 2017 and was appointed as a Chief Financial

Officer on February 6, 2018.


Objects of issue

The object of the issue is to achieve the benefits of listing of Equity shares on

the stock exchange and to carry out the offer for sale by selling shareholders.

The company is offering 2.02 crore equity share which is 15% of paid up

capital; of which 1.3% stake sale will be done by promoter, 12.55% by

Omega TC Holding and 1.15% by Tata Capital financial services. Thus, the

overall offer size stands at ~|1,955 crore (at the upper price band of

|967/share).

Valuations

VEL is a Tier 1 auto ancillary player which has wide range of product portfolio

spread across customers & geographies. Further pedigree management,

strong growth opportunity & decent return ratio (~16%) remains positive for

the company. The company is undervalued at 29x its FY18 EPS compared to

some of its peers. Thus, we recommend subscribe to the issue from a long

term perspective


Exhibit 19: Profit & Loss statement

Income statement (| crore) FY13 FY14 FY15 FY16 FY17 FY18

Gross Revenue 4,210.2 6,116.3 6,950.8 8,218.9 9,608.5 10,378.5

Less Excise duty 180.8 309.7 309.8 99.6

Total Income 4,210.2 6,116.3 6,770.0 7,909.2 9,298.8 10,278.8

Raw Material expenses 2,547.5 3,599.4 4,193.1 5,049.2 6,036.8 6,382.7

Employee benefits 580.3 937.0 902.2 1,039.9 1,203.8 1,313.5

Other expenses 830.4 1,180.4 1,057.8 1,249.1 1,476.5 1,705.1

Total Expenditure 3,958.2 5,716.8 6,153.1 7,338.3 8,717.0 9,401.3

EBITDA 252.0 399.5 616.9 570.9 581.8 877.6

Other Income 15.1 23.0 87.7 20.6 93.7 38.6

Financial charges 83.7 100.3 475.4 (42.6) 90.4 86.2

Depreciation 179.0 238.0 254.0 292.2 337.1 386.5

PBT 4.4 84.2 (24.8) 341.9 248.0 443.5

Extraordinary items - - 51.8 - - -

Taxation 30.5 41.3 46.5 22.0 23.8 61.8

Reported PAT (26.1) 42.9 16.9 369.8 303.4 450.8

Share of Minority Interest (0.1) 0.9 3.9 0.5 0.4 0.5

PAT (26.0) 42.0 13.0 369.3 303.0 450.3


Exhibit 20: Balance Sheet

Balance Sheet (| crore) FY13 FY14 FY15 FY16 FY17 FY18

Equity Share Capital 10.5 40.5 9.6 26.2 13.5 13.5

Reserves & Surplus 700.2 1,054.5 1,072.9 1,736.6 2,171.9 2,814.5

Share application money - - - - - -

Minority Interest 23.2 30.5 21.4 20.3 20.2 20.8

Total Shareholders fund 733.8 1,125.5 1,103.9 1,783.2 2,205.5 2,848.8

Long term borrowings 877.8 636.8 1,023.1 763.4 755.3 636.1

Deferred tax liability (net) 53.9 50.0 62.2 47.3 13.0 50.9

Other long term liability 19.1 18.8 22.2 15.4 17.4 43.3

Long term provisions 53.6 56.4 75.5 76.5 74.0 100.2

Total Non-current liabilities 1,004.3 762.0 1,183.0 902.6 859.7 830.6

Short term borrowings 203.7 234.7 383.0 641.9 599.2 343.9

Trade Payables 939.9 1,139.7 1,029.3 1,269.1 1,549.7 2,565.7

Other current liabilities 457.9 649.7 715.2 623.3 586.5 218.5

Short term provisions 56.8 54.3 14.0 25.8 59.7 44.8

Total current liabilities 1,658.3 2,078.4 2,141.5 2,560.1 2,795.1 3,173.0

Total Liabilities 3,396.5 3,965.8 4,428.5 5,245.9 5,860.4 6,852.4

Fixed Assets

Tangible assets 1,182.0 1,338.9 1,932.5 2,254.4 2,558.5 2,956.9

Intangible assets 69.7 143.0 106.8 121.0 114.6 170.1

Capital work-in-progress 376.3 318.7 177.5 315.3 292.5 344.0

Total 1,628.1 1,800.7 2,216.8 2,690.6 2,965.7 3,471.0

Goodwill 25.0 27.5 15.1 15.1 15.1 33.5

Deferred tax assets - - 14.4 29.4 28.3 115.4

Long term loans & advances 30.5 59.2 5.9 6.4 8.3 10.7

Non-current Investments 1.2 50.0 0.0 0.0 0.0 0.0

Other non-current assets 1.5 6.7 159.0 145.7 124.5 161.3

Total non-current assets 1,686.4 1,944.0 2,411.2 2,887.2 3,141.9 3,791.9

Current Investment 1.7 53.7 22.3 11.9 - 3.0

Inventories 534.0 777.8 586.1 682.9 753.5 864.1

Trade receivables 818.7 773.2 1,071.4 1,185.2 1,138.3 1,402.7

Cash and bank balances 186.3 256.0 69.0 177.1 354.0 328.9

Short-term loans and advances 145.4 135.6 3.7 4.0 4.2 4.0

Other current assets 24.1 25.5 264.7 297.6 468.4 457.6

Total Current assets 1,710.1 2,021.8 2,017.3 2,358.7 2,718.5 3,060.4

Total Assets 3,396.5 3,965.8 4,428.5 5,245.9 5,860.4 6,852.4



RATING RATIONALE

ICICI direct endeavours to provide objective opinions and recommendations. ICICI direct assigns ratings to its

stocks according to their notional target price vs. current market price and then categorises them as Strong

Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is

defined as the analysts' valuation for a stock.

Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;

Buy: >10%/15% for large caps/midcaps, respectively;

Hold: Up to +/-10%;

Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICI Direct Research Desk,

ICICI Securities Limited,

1st Floor, Akruti Trade Centre,

Road No 7, MIDC,

Andheri (East)

Mumbai – 400 093

[email protected]


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Documents

Varroc Engineering - ICICI Directcontent.icicidirect.com/mailimages/IDirect_VarrocEng_IPOReview.pdf · It has broad portfolio of lighting technologies (Head lamps, Rear lamps & Electronics)