Varroc Engineering IPO review (May apply)

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Review By Dilip Davda on June 19, 2018

Varroc Engineering Ltd. (VEL) is a global tier-1 automotive component group catering to OEMs. It designs, manufactures and supplies exterior lighting systems, plastic and polymer components, electrical-electronics components, and precision metallic components to passenger car, commercial vehicle, two-wheeler, three-wheeler and off highway vehicle ('OHV') OEMs directly worldwide.  VEL is the second largest Indian auto component group and a leading tier-1 manufacturer and supplier to Indian two-wheeler and three-wheeler OEMs. It is the sixth-largest global exterior automotive lighting manufacturer and one of the top three independent exterior lighting players with a compound annual growth rate ('CAGR') of 12.37% in terms of revenue.

VEL commenced operations with polymer business in 1990. It initially grew organically in India by adding new business lines, such as our electrical division and metallic division. Subsequently, the company diversified our product offerings and expanded production capacity through various investments, joint ventures and acquisitions. VEL has a global footprint of 36 manufacturing facilities spread across seven countries, with six facilities for Global Lighting Business, 25 for India Business and five for other Businesses. Within its India Business, it has 25 manufacturing facilities and five R&D centers spread across India. VEL’s Global Lighting Business had 185 patents as of March 31, 2018. As on March 31, 2018, it has filed 14 applications with the Controller General of Patents, Designs and Trade Marks in India and two applications with the World Intellectual Property Organization for 16 patents which are in various stages of grant. The 16 pending applications relate to, among other things, electrical-electronics, polymer, metallic, lighting and polymer-related products. VEL’s customer list includes Ford, Jaguar Land Rover, FCA, Groupe PSA, the VW Group, Bajaj, Royal Enfield, Yamaha, Suzuki, Honda, Hero, Piaggio and Harley Davidson. It has recently included few more world giants in automobile sector, as specially in EV arena in its list. 

For listing of its shares and providing exit to some of its stakeholders, VEL is coming out with a maiden IPO of 20221730 equity share of Re. 1 each via book building route. Issue price band is fixed at Rs. 965-Rs. 967 per share. Minimum application is to be made for 15 shares and in multiples thereon, thereafter.

Issue opens for subscription on 26.06.18 and will close on 28.06.18. Company hopes to mobilize Rs. 1951.40 cr. to Rs. 1955.44 cr. (based on lower and upper price bands). Post allotment, shares will be listed on BSE and NSE. VEL has reserved 100000 shares for its eligible employees and offering a discount of Rs. 48 per share to them. The net offer is for 20121730 shares. BRLMs to this issue are Kotak Mahindra Capital Co. Ltd., Citigroup Global Markets India Pvt. Ltd., Credit Suisse Securities (India) Pvt. Ltd. and IIFL Holdings Ltd. Link Intime India Pvt. Ltd. is the registrar to the issue. Issue constitutes 15% of the post issue paid up capital of the company. Having issues initial equity at par, it raised further equity in the price range of Rs. 51.50 to Rs. 625 per share (on the basis of FV of Re. 1 per share). It has also issued bonus shares in the ratio of 28 shares for every 1 share held in February 2011. Being offer for sale, VEL’s paid up equity capital post issue remains same at Rs. 13.48 cr. The average cost of acquisition of equity shares for the selling shareholders is in the range of Rs. 0.00 to Rs. 162.43 per share.

On performance front, for last four fiscals, VEL has (on a consolidated basis) posted turnover/net profits of Rs. 7038.46 cr. / Rs. 16.81 cr. (FY15), Rs. 8239.52 cr. / Rs. 369.82 cr. (FY16), Rs. 9702.27 cr. / Rs. 303.39 cr. (FY17) and Rs. 10417.07 cr. / Rs. 450.78 cr. (FY18). For last three fiscals it has posted an average EPS o f Rs. 29.40 and an average RoNW of 16.12%. Issue is priced at a P/BV of 4.61 on the basis of its NAV of Rs. 209.69 as on 31.03.18. Based on FY18 workings, issue is priced at a P/E of around 30 against Industry composite P/E of 42.6. It generates revenue of 65% from global plants and 35% from domestic plants. No customer is contributing over 20% in revenue, it has diversified customer relationship. It derives better performance due to low cost, diversified manufacturing and R&D footprint. It has just 0.3:1 debt equity ratio. As per offer documents, it is showing Motherson Sumi, Bharat Forge and Endurance Tech as its listed peers that are trading at a P/E of around  26, 37 and 44. (as on 19.06.18)

On BRLM’s front, four merchant bankers associated with the offer have handled 40 issues in the past three fiscals out of which 13 issues closed below the issue price on listing date.

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