VARROC ENGINEERING LIMITED IPO Note (CAUTIOUS) Analyst: Brijesh Bhatia (Head Research) Rohit Rai Menil Savla

Transcription

1 VARROC ENGINEERING LIMITED IPO Note (CAUTIOUS) Analyst: Brijesh Bhatia (Head Research) Rohit Rai Menil Savla 26 June 2018

2 IPO details Key Data Issue Opens 26-Jun-18 Issue Closes 28-Jun-18 Equity Shares Offered (in mn.) QIB Up to 50% NIB Min 15% Retail Min 35% Face Value (`) 1 Price Band (`) Max. Issue Size (` mn) 1,946 Pre Issue Post Issue^ # mn Shares % Holding # mn Shares % Holding Promoters % % Public % % Others % Offer for sale % Total % % Object of the issue To achieve the benefit of listing To enhance its visibility, brand image and provide liquidity Lot Size (Eq. Shares) 15 and multiple thereof 965per 967 per share Market Cap (` mn) 130, ,342 Net Debt (` mn) 6,511 6,511 Enterprise Value (` mn) 136, ,853 EV/ Sales EV/ EBIDTA P/B P/E Recommendation Inspite of being in higher ranks globally, the company has weaker margins compared to its domestic peers. It indicates lack of pricing power and limited margins from its sizable customers. The company needs to improve its return ratio to get a valuation in line with its competitors. The company is setting up 1 manufacturing unit in Brazil and Morroco each and 2 units in India which will commence its production in FY19. On valuation front, at upper issue price of Rs. 967 it is valued at 29x FY18 earnings is priced expensive as compared to its peers and demands a high valuation inspite of low margin and below average return ratios. Therefore, we give CAUTIOUS rating at this IPO, one can subscribe for a long term perspective. Source: Red Herring Prospectus, Dealmoney Research 2 26 June 2018

3 Among Largest Auto component company Leading tier-1 manufacturer and supplier Varroc Engineering Limited (VEL) is the second largest Indian auto component group (tier- 1 companies are companies that directly supply to original equipment manufacturers (OEMs)). The company ranks sixth in global exterior automotive lighting manufacturer and one of the top three independent exterior lighting players by market share in VEL started its polymer business in 1990 and entered new business lines such as electrical division and metallic division. It has 9 manufacturing plants and an additional R&D center in India. It intend to set up one manufacturing facility in Brazil and one manufacturing facility in Morocco, as well as two manufacturing facilities in India. The company has end-to-end capabilities across design, R&D, engineering, testing, manufacturing and supply of various products across the business. Its primary business lines are, namely (i) the design, manufacture and supply of exterior lighting systems to passenger cars OEMs worldwide ("Global Lighting Business"), and (ii) the design, manufacture and supply of a wide range of auto components in India ("India Business"), primarily to two-wheeler and three-wheeler OEMs, including exports. India Business offers a diversified set of products across three product lines, namely polymers/plastics, electrical/electronic and metallic components. The company has a global footprint of 36 manufacturing facilities spread across 7 countries, with 6 facilities for its Global Lighting Business, 25 for India Business and 5 for Other Businesses. Being globally present, the company s revenue stream is diversified geographically and customers wise. VEL 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 (the "VW Group"), Renault-Nissan-Mitsubishi, Groupe PSA, FCA, a European multinational car manufacturer and an American electric car manufacturer. Indian Business Customers include nearly all the major two wheeler and three-wheeler OEMs, Including Bajaj, Royal Enfield, Yamaha, Suzuki, Honda, Hero, Piaggio and Harley Davidson. VEL has a broad portfolio of lighting products, including Halogen, Xenon/high-intensity discharge, LED, Matrix LED, high definition MEMS and DMD, surface LED, OLED module, Flex LED, LED pixel and LED pixel headlamp, catering to the five product segments within external automotive lighting. From FY15 to FY17 revenue grew at a CAGR of 17.57%. The company s revenue for FY17 and 9MFY18 was `96,085.4 million and `73, million, respectively, and EBITDA was`6, million and` million, respectively. For 9MFY18, the annualised RoE stood 17.1% and the annualised RoCE was 15.5%. The net debt to equity ratio as of December 31, 2017 clocked Source: Red Herring Prospectus, Dealmoney research 3 26 June 2018

4 Strengths Strong competitive position in attractive growing markets: The Global Lighting Business, which focuses on the design, manufacture and supply of exterior lighting for passenger vehicles, 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 passenger vehicles has grown at a CAGR of 4.5% between 2011 and 2016 in terms of revenue, outpacing the CAGR of 3.8% in the overall market for passenger vehicles for the same period. Strong, long-standing customer relationships: The company has strong, long-standing relationships with many customers. For example, it has a relationship with a large British car manufacturer since 2006, the longest-standing relationship is with Bajaj, who has been its customer since It has maintained relationship with seven of the top 10 customers for longer than 10 years. The wide customer base constitutes Renault-Nissan- Mitsubishi, Volvo, a Spanish automobile manufacturer and a German automobile manufacturer while newly added customers include Dell'Orto S.p.A and Tata Cummins. Comprehensive product portfolio: It has comprehensive portfolio of products which allows the company to be a one-stop-shop for its customers and to cross-sell its products. The 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 and India Business offers a diverse range of products catering to two-wheelers, three-wheelers, passenger vehicles, commercial vehicles and off-highway vehicles across its business segments of polymers/plastics, electrical-electronics and precision metallic components. The comprehensive product portfolio is engine agnostic as it is capable of being used across all fuel types. Low cost, strategically located manufacturing and design footprint: The company has a global footprint of 36 manufacturing facilities spread across 7 countries, with 6 facilities for its Global Lighting Business, 25 for India Business and 5 for other businesses. Being globally present, the revenue stream is diversified both geographically as well as across customers. For Global Lighting Business, it has global production, engineering and customer support capabilities, focused on quality, cost and delivery. In order to achieve these goals, the company has located the facilities primarily in low-cost countries near major automotive markets and it has made further investments to expand into new countries such as Brazil and Morocco, which allows to keep costs low while meeting customers' supply needs across geographies. In line with this strategy, the company is in talks to acquire an exterior automotive lighting company in Turkey in FY19. Source: Red Herring Prospectus, Dealmoney research 4 26 June 2018

5 Future road ahead Focus on high growth markets for Global Lighting Business: The company is looking to expand its market share in the global exterior automotive lighting market, including projection systems, signaling functions and electronics. Historically, Visteon, the Global Lighting Business had relationships with customers such as Jaguar Land Rover and a central European car manufacturer. Since its acquisition of Visteon's lighting business in 2012, the company has grown its relationships with existing customers and expanded its customer base to include new OEMs such as the VW Group, Renault-Nissan-Mitsubishi and Volvo Truck. Having cost efficiency and global manufacturing footprint, the company is well-positioned to continue to serve its customers' needs across different car models and geographies. Focus on increasing customer revenue for India Business: IIndia is the second largest two-wheeler manufacturer in the world (after China), and the production of two-wheelers in India grew at a 5% CAGR between FY12 and FY17 primarily driven by the improving affordability and lower cost of ownership, whilst the key growth drivers for two-wheeler industry exports are rising crude oil prices and a focus on other markets. The company also intends to increase the revenue with its existing customers by expanding the array of its existing products that they supply to them and by continuing to develop technology solutions aligned with their needs. The pan-india manufacturing footprint provides the company with the ability to be close to the customers across key automotive manufacturing hubs in India. Continue to invest in R&D, design, engineering and software capabilities in order to capitalize on future trends: The company seeks to expand its capabilities in a cost efficient manner, by focusing on low-cost geographies nearby major automotive markets. For example, in India it has established a R&D facility specifically catering to VEL, which provides support to the core R&D facility in the Czech Republic. Moreover, it has established a new R&D facility in Poland which started operations in Pursue strategic joint ventures and inorganic growth opportunities: The company intends to actively pursue acquisitive opportunities and strategic alliances with targets that are complementary to the business. It mainly focused on growing existing product lines, such as automotive lighting and electronics for the global exterior automotive lighting market. While it will continue to focus on the polymer, electrical and metallic businesses within India, it will also continue to be disciplined in evaluating complementary businesses in India to increase the focus on other segments if necessary. The company will seek to make acquisitions that will provide the access to new technologies, or new customers, or new geographies. Focus on operational efficiency: The company is focused on operational efficiency in order to improve returns in a rapidly changing technological environment. Within each production facility in India and internationally, it has sought to improve efficiencies, streamline capacity, asset utilization and manage capital expenditure. Source: Red Herring Prospectus, Dealmoney research 5 26 June 2018

6 Peer Comparison Revenue (Rs. In mn) EBITDA EBITDA Margin (%) PAT PAT Margin (%) RoE (%) RoCE (%) P/E (x) P/B (x) Varroc Engineering 102, , % 3, % 15.2% 13.7% Peers Motherson Sumi 424, , % 19, % 31.4% 22.5% Sundram Fasteners 32, , % 3, % 31.7% 29.4% Endurance Technologies 55, , % 3, % 20.8% 21.1% Wabco India 20, , % 2, % 18.3% 25.8% Bharat Forge 63, , % 6, % 18.5% 14.9% Source: ACE Equity, Dealmoney Research 6 26 June 2018

7 Financial Performance Financial Metrics Return Ratios % 24% % 18% % % 6% 0 0.0% 0% Revenue (Rs.mn) EBITDA Margin PAT Margin RoE RoCE Debt/Equity Ratio Revenue Geographical Mix Others 0.5% North America 22.3% India 34.7% Europe 41.8% Asia Pacific 0.7% 7 26 June 2018

8 Consolidated Summary Financials Income Statement ` mn FY18 FY17 FY16 FY15 Total Income 102,788 92,988 79,092 67,700 Operating Expense 94,013 87,170 73,383 61,531 EBIDTA 8,776 5,818 5,709 6,169 Depreciation 3,865 3,371 2,922 2,540 Other Income , Finance Costs ,755 PBT 4,435 2,480 3,420 (249) Exceptional items Profit before tax 4,435 3,272 3, Current tax (including MAT) Deferred tax (including MAT credit entitlement) Profit for the year 3,818 3,034 3, ` mn FY18 FY17 FY16 FY15 EBIDTA Margin 8.9% 7.3% 9.1% 10.4% Net Margin 3.7% 3.3% 4.7% 0.2% ROE 13.5% 13.9% 21.0% 1.6% ROCE 14.8% 11.1% 16.0% 19.7% EBIT Balance Sheet ` mn FY18 FY17 FY16 FY15 Liabilities Share capital Reserves and surplus 28,145 21,719 17,366 10,729 Non-controlling interest Long-Term Borrowings 6,361 7,553 7,634 10,231 Deferred tax liabilities(net) (521) (0) Other Long Term Liabilities Long term provisions 1, Other non-current liabilities Short term borrowings 3,439 5,992 6,419 3,830 Trade payables 20,004 15,497 12,691 10,293 Other current liabilities 7,757 5,686 6,095 7,136 Other financial liabilities Income tax liabilities Other current liabilities Total Liabilities 67,494 58,474 52,326 44,285 Assets Net Block 27,899 23,809 21,109 18,427 Intangible assets 1, Capital work in progress 2,440 2,465 2,636 1,488 Non current Investments 3,706 3,074 2,795 2,117 Other financial assets Deferred tax asset Other non-current assets ,213 Income tax asset Inventories 8,641 7,535 6,829 5,861 Current Investments Trade receivables 14,027 11,383 11,852 10,714 Cash and cash equi. 3,289 3,541 1, Other financial assets 1,518 1,373 1,323 1,873 Other current assets 3,099 3,354 1, Total Assets 67,494 58,474 52,326 44,285 Source: Red Herring Prospectus, Dealmoney research 8 26 June 2018

9 Key Risks The company can face hit on margins due to lack in pricing power and intense competition The company has to look after cost cutting measures while maintaining quality standard under control Lack of firm commitment can adversely affect the business and financial condition. Majority of the company s business comes from global business which can lead to unfavourable currency risk. The company receives bulk order, any delay in receiving payment can affect its financial health. Source: Red Herring Prospectus, Dealmoney research 9 26 June 2018

10 Dealmoney Securities Private Limited Plot No. A356/357, Road No.26,Wagle Industrial Estate, Thane (West), Maharashtra Disclaimer: Dealmoney Securities Private Limited (hereinafter referred to as Dealmoney ) is a registered Member of National Stock Exchange of India Limited, Bombay Stock Exchange Limited and MCX Stock Exchange Limited. Dealmoney is also registered as a Depository Participant with CDSL. Dealmoney is in the process of making an application with SEBI for registering it as a Research Entity in terms of SEBI (Research Analyst) Regulations, Dealmoney or its associates has not been debarred/ suspended by SEBI or any other regulatory authority for accessing /dealing in securities Market and no material disciplinary action has been taken by SEBI/other regulatory authorities impacting Dealmoney s Equity Research Analysis. Dealmoney or its associates/analyst including its relatives do not hold any actual/beneficial ownership of more than 1% in the company/ies covered by Analyst (hereinafter referred to as Subject Company/ies ). Dealmoney or its associates/analyst including its relatives may hold financial interest in the company/ies covered by Analyst (hereinafter referred to as Subject Company/ies ). Dealmoney or its associates/analysts or his/her relative does not receive any compensation or other benefits from the subject company/ies mentioned in this research report (hereinafter referred to as Report ) or from a third party in connection with preparation of the report. Accordingly, Dealmoney or its associates/analyst or his/her relative does not have any other material conflict of interest at the time of publication of the Report. Research analyst/s engaged in preparation of the Report, has not received any compensation / managed or co-managed public offering of securities of the subject company/ies / has not received compensation for investment banking or merchant banking or brokerage services from the subject company/ies / has not received compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company/ies / has not received compensation or other benefits from the subject company/ies or third party in connection with the Report of the subject company/ies during the past twelve months / has not served as an officer, director or employee of subject Company/ies and is not engaged in market making activity of the subject Company/ies. Dealmoney or its associates are engaged in various financial services business, thus, it might have, received any compensation / managed or co-managed public offering of securities of the subject company/ies / received compensation for investment banking or merchant banking or brokerage services from the subject company/ies / received compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company/ies / received compensation or other benefits from the subject company/ies or third party in connection with the Report of subject company/ies during the past twelve months engaged in market making activity for the subject company/ies. In the preparation of the material contained in the Report, Dealmoney has used information that is publicly available, as also data developed in-house. Some of the material used in the document may have been obtained from members/persons other than Dealmoney and which may have been made available to Dealmoney. Information gathered & material used in the Report is believed to be from reliable sources. Dealmoney has not independently verified all the information and opinions given in this material/document/report. Accordingly, no representation or warranty, express or implied, is made as to the accuracy, authenticity, completeness or fairness of the information and opinions contained in this material/document/report. For data reference to any third party in this material no such party will assume any liability for the same. Dealmoney group companies provides finance related product services like distribution of financial products and as such is a provider of many services like loans, mutual funds, tax & trust planning etc. mentioned in this brochure. And hence, Dealmoney do not warranty / guarantee about performance of any products and customer servicing w.r.t third party products per se. Third party products are subject to code of conduct to be adhered to by the representatives of Dealmoney and Dealmoney is not responsible for the losses, whether actual or notional incurred by any investor. Services assured and expected may vary from actual service and Dealmoney does not guarantee about the quality of services. Investments in securities and commodities are subject to market and other risks and there is no assurance or guarantee that the objectives of any of the Investments/Schemes/product would be achieved. Past performances are only indicative and returns are not assured and guaranteed by Dealmoney group companies. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. The recipient alone shall be fully responsible, and/or liable for any decision taken on the basis of this material/document/report. Dealmoney does not in any way through this material solicit or offer for purchase or sale of any financial services, commodities, products dealt in this material/document/report. Dealmoney/its affiliates/associates/directors shall not be in any way responsible for any loss or damage of any nature, including but not limited to direct, indirect, punitive, special, exemplary, and consequential, as also any loss of profit that may arise to any person/entity from or in connection with the use of information contained in this material/document/report. All recipients of this material/document/report before dealing and/or transacting in any of the products advised, opined or referred to in this material shall make their own investigation, seek appropriate professional advice and make their own independent decision. Noting contained in this material/document/report should be construed as investment or financial advice. Clients are advised to assess their risk profile/ appetite before acting on any information contained in this material/document/report. Investors should also refer to risk tag and compare it with is own risk appetite before taking any investment decision. Reports on technical and derivative analysis are based on studying charts of a stock s price movement, outstanding positions and trading volume as opposed to focussing on a company s fundamentals and as such, may not match with a report on a company s fundamentals. The opinions expressed in the Report are our current opinions as of the date of this report and may be subject to change from time to time without notice. Dealmoney or any persons connected with it do not accept any liability arising from use of this material/document/report. Information/ opinion conveyed through this material/document/report are strictly meant for the registered Clients of Dealmoney group of Companies of the respective segments. This information is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation or which would subject Dealmoney or its affiliates to any registration requirement within such jurisdiction or country. This information does not constitute an offer to sell or a solicitation of an offer to buy any financial products to any person in any jurisdiction where it is unlawful to make such an offer or solicitation. No part of this material may be duplicated in whole or in part in any form and / or redistributed without the prior written consent of Dealmoney. This material/document/report is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on directly or indirectly. For any grievance mail at compliance@dealmoney.com A graph of daily closing prices of securities available at and a company from te list on the browser and select the three years period in the price chart). Recipients of the Report shall always independently verify reliability and suitability of the Report and opinions before investing. For Company details, please visit our website For research related query, write to us at research@dealmoney.com June 2018