Broker's call: Varroc Engineering (Buy)

CMP: ₹465

Target: ₹766

We interacted with Tarang Jain, Managing Director of Varroc Engineering. Varroc Engineering, in its international automotive lighting business is aiming to improve wallet share with large OEM groups such as VW and Renault-Nissan-Mitsubishi, among others. Order wins at new plants will translate into higher revenues from the current fiscal. Varroc is aiming a significant improvement in EBIDTA margins through 1) raw material cost savings by driving in purchasing efficiencies; 2) substitution of part-purchase of electronics for LEDs with in-house manufacturing under a JV; 3) optimising employee costs; and 4) controlling launch costs.

In the China JV operations, while the industry continues to be weak, VLS JV has won contracts from the local players in China such as Geely, SAIC and FAW. These orders are expected to fructify into significant revenues from FY22. US-China trade war truce is critical for the revival of industry growth in China. In India operations, while the industry is expected to grow in the range of 6-7 per cent over the next couple of years, Varroc is expected to outperform industry growth with 1) increasing wallet share with existing customers; 2) scaling up revenues from new customers such as TVS Motors and Hero MotoCorp; and 3) new products such as electronic fuel injection and catalytic converter contributing meaningfully from next fiscal under BS VI regime.

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