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ICICI Securities Report
Varroc Engineering Ltd. is poised to witness a strong earnings rebound in H2 FY21 (driven by improving demand outlook, strong cost reduction initiatives) after having struggled with numerous challenges in FY20 (e.g. plant fire, Greenfield start-up costs).
Varroc Engineering remains an attractive play due to:
a. Varroc Lighting Systems set to capitalise on higher LED penetration amongst its customers (Ford, Volkswagen, Daimler) for various new vehicle programs (e.g. internal combustion engine SUVs, electric vehicles);
b. production ramp-ups in greenfield facilities along with cost reductions is likely to drive profitability increase from H2 FY21;
c. strong rebound in China joint venture profitability;
d. domestic two-wheeler market growth outperformance coupled with content increase due to BS-VI and
e. strong free cash flow generation (approximately Rs 9 billion in FY22) as large capex phase is over.
Global peers (Koito, Stanley Electric Co Ltd., Valeo, Huayu Automotive Systems Co Ltd.) have also witnessed valuations improve (approximately 5-6 times enterprise value/Ebitda FY22).
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