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ICICI Securities
CMP: ₹446
Target: ₹555
We initiate coverage on Varroc Engineering (VEL) with a ‘buy’ rating and a target price of ₹555, valuing the company on SoTP basis. Our analysis of Varroc Engineering’s business indicates: a) lighting business (VLS) remains well dominated by global peers with capability (capital being one of the factor for success); b) FY21 and FY22 are likely to be inflexion points for VEL as new customers’ programs ramp up (global/BS-VI) while operating costs stabilise; c) incremental LED penetration opportunity is highest amongst US OEMs; and d) BS-VI opportunity has potential to boost revenues by about 4-5 per cent.
Varroc Engineering’s profitability is expected to improve (at about 7 per cent CAGR FY19-FY22E) driven by normalisation of VLS profitability as its new plants stabilise. However, we believe VLS would require sustained investments in R&D and capacity if it strives to gain market share, which could inhibit peak RoCE. Nevertheless, we find the current FCF yield attractive at about 5 per cent on FY21E.
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