An Outlook of Indian Auto component

Industry with Analysis of Varroc

Engineering Limited IPO – Buy, Sell or
Hold

Indian Auto component Industry

Introduction

India auto component Industry has shown a significant growth over last few years. Some of the factors leading to
the growth being, resilient end user market, improved consumer sentiment and trust and the state of liquidity in
the financial system. The auto component industry of India has a growth of compound annual growth rate of
around 14.3 resulting from after market sales. The sales had reached at a level of Rs. 2.92 lakh crore in FY 2016-
17. With the expectation of further growth of around 4-5lakh crore in FY 2018-19.

The present contribution of the industry in the GDP is around 3.8% which is expected to growth up to 13-14% by
2026 under the present Government of India’ plans for the Industry. The contribution of the Industry to the
manufacturing GDP stands at about 25.6%. Manufacturing industry in itself grew at a rate of 4.34 percent in FY
2017-18. This clearly shows the importance of the industry to the manufacturing industry and economic growth
prospects as a whole. Till now the industry has succeeded in generating an employment of about 3million
including 1.5 million indirect employment. A stable government framework, increase in purchasing power,
emerging domestic market, and an ever-increasing infrastructural development have made India a favourable
destination for investment.

The Industry can be broadly divided into following categories: -

1. High valued Products: - The organised sector which mostly deals with the OEM’s (Original Equipment
Manufacturers)
2. Low Valued Products: - Even though low valued, this category is having an important part in the overall
industry. This is an unorganised sector catering to the aftermarket sales.

India’s position in global auto and auto component market: -

In 2017 as per industry analysis data presented by Statista, the region wise export contribution is as follows by
volume: -
Asia/Oceania/Middle East- 40.75 Million units, China- 24.38 million units, Europe- 17.94 million units,
Germany- 3.44 million units, America- 11.3 Million units, NAFTA(North America Free Trade Agreement)- 7.75
Million units, US- 6.1 Million units, Africa- .86 Million units.
India’s total export volume wise for the period stands at 3.48 million units
Of the above India’s geography wise export contribution is as follows: -
Europe: - 35%, Asia- 27%, North America- 26%, Africa- 6%, Latin America- 4%, CIS and Baltics- 1%.

Even though the overall contribution to global exports in automobile industry is low at 3.48 million in volume
wise, India stands at rank 5 world wide as biggest exporter. As auto ancillary and component industry directly
related to the automobile industry, a relative growth was equivalently seen (about which discussed later).

A decade ago out of the overall contribution in global total sales revenue from Automobile industry, the
contribution from US and Europe stood at 27% and 33% respectively to 22% each. China has emerged as the
biggest market player, India being 2nd to it.
Present Market Size and scenario

Revenues have risen from US$ 26.5 Billion in FY08 to US$ 43.5 billion in FY17. Total production in volumes
has increased form 20.6 million units in 2012-13 to 29.07 million units in 2017-18. Domestic sales have increased
from 17.8 Million units to 24.9 million units. Exports has increased from 2.89 million units in 2012-13 to 4.04
million units in 2017-18. With overall 25% contribution to the overall, auto components export from India remain
significant. US and European Union market remain major exporters from India. The figures stand at around 60%.
The total value wise India’s automotive exports stood at Rs. 73,128 Crores (US$ 10.9 Billion) in 2016-17 as
compared 70,196 Crores (10.8 Crores) in the FY 2015-16. This growth has been possible due increased
globalisation of Indian suppliers and robust increase in domestic demand. The Global scenario is also positive
for further growth. Still external global pressure like trade war fears, Brexit and fluctuation of crude oil prices
may hinder the projected growth, although there is an overall optimistic consideration of the future of the industry.

The Indian automotive aftermarket is expected to reach Rs. 75,705 Crore (US$ 13 Billion) by the year 2019-20,
according to the automotive Component Manufacturers Association of India (ACMA). The Automotive Mission
plan 2016-2026 by the government of India initiative is having similar estimates for the industry. According to
the association, the India automotive components industry is expected to register a turnover of US$ 100 Billion
by 2020 backed by strong exports ranging between US$ 80- US$ 100 billion by 2026, from current US$ 11.2
billion. Heavy Commercial vehicle market of US, especially class -8 trucks witnessed strong inflow of about
49.7% Y-o-Y growth during FY 2017. The benefits of the order have already started to reap for the component
suppliers for US Heavy commercial Vehicle market. An optimistic view is that the exports for the US commercial
vehicle space will also grow in the near future based on the recent trends. But the European market space for
personal vehicle and commercial vehicle has increased but not as US market, although the scenario is positive.
The outlook for this geography is relatively muted.

A sample study of 48 auto ancillary companies by ICRA, leading research firm, which constitute around 26% of
the total Industry turnover, grew at 18.5% revenue-wise during Q3 FY 2018. The Q-o-Q growth, 9M FY 2018,
was 12.3% which was better than the earlier 9%-11% growth in the previous quarter, due to adverse impact of
demonetisation. A few auto ancillaries, particularly those reliant on steel have likewise seen Y-o-Y decrease in
crude material cost amid Q3FY2018, because of range bound steel costs over last 2-3 quarters and ancillaries
capacity to pass on value heightening to its client (OEMs) in the meantime. By and large, OPM of sample space
extended by 41bps Y-o-Y to 14.1% basically determined by enhanced working influence. Over a similar period,
OPM of tire organizations in ICRA's example declined by 37bps Y-o-Y which was more than counter balanced
by 73bps development in OPM of non-tire organizations. A snapshot of the present automobile exports trend is
given below1.

1: - Sources: - siamindia.com, ibef.com

As auto component industry is directly related to automobile industry, exports growth is robust.

Product Segments: -

Auto Components: -
Engine Parts: - Pistons & piston rings, Engine valves & parts, Fuel-injection systems & carburettors, cooling
systems and parts and power train components.
Drive transmission & steering parts: - Gears, wheels, steering systems, axles, clutches.
Body and chassis
Suspension & braking parts: - Brake & braking parts assemblies, Brake linings, Shock absorbers, Leaf springs
Equipment: - Headlights, Halogen bulbs, Wiper motors, Dashboard instruments, Other panel instruments.
Electrical parts: - Starter motors, Spark plugs, Electric Ignition systems, flywheel magnetos, other equipment.
Others: - Sheet metal parts, Hydraulic pneumatic instruments, Fan Belts, Pressure die Castings.

Favourable policy measures aiding growth: -

1. Automatic approval for 100 per cent foreign equity investment in auto component manufacturing
facilities.
2. Manufacturing & imports are exempt from licensing & approvals
3. National Automotive Testing and R&D Infrastructure Development (NATRiP)- Set up at an aggregate
cost of US$ 388.5 million to empower the business to embrace and execute worldwide execution
principles.
4. Focusing on easy availability of low-cost manufacturing & product advancement arrangements.
5. Created a US$ 200 million fund to modernise the auto components industry by giving a premium
appropriation on loans & investment in new plants & equipment.
6. Provided export benefits to intermediate suppliers of auto components against the Duty Free
Replenishment Certificate (DFRC).
7. Automotive Mission Plan 2016-2026 targets a 4-fold development in the automobiles sector in India
which includes the manufacturers of automobiles, auto components & tractor industry over the next 10
years.
8. It is relied upon to produce an extra employment of 65 million.
9. The plan is aimed at boosting all vehicle segments i.e. 2 Wheeler, 3 Wheeler Auto, Passenger 4
Wheeler Vehicle, Light Commercial Vehicles and Buses. It covers hybrid & electric technologies like
Mild Hybrid, Strong Hybrid, Plug in Hybrid & Battery Electric Vehicles.The scheme has been
extended to March 2018 from March 2017.
10. By announcing increase in skill development centres, in union budget 2017-18, Government of India
has tried to boost the skills development as major portion of the sector is unorganised.
11. Target of the Government of India to increase adoption of more electric vehicle by 2030.
12. 928 Multi National Companies have set up 1165 R&D centres. India contributed around 60% of total
global engineering & R&D centres in world in 2015
13. India is on the way to become global hub. Eg: - Nissan India exports engine and body parts regularly to
countries from India. Brakes India Pvt. Ltd. Plans to export turbochargers casting to US and EU.
Similarly Honda India ltd. Has plans on board to supply components to foreign countries. Maruti
Suzuki has stood a market player by showing a Compound annual growth rate of 19.3% in the last 5
years.
14. New tie-ups: - In 2016 VVIPL (Vishnu Vaibhav Industry Pvt. Ltd. Entered into a collaboration with a
German company to supply 4-wheeler automotive switches in India.
15. ACMA in talks with Taiwanese companies for investment in India.
16. ZF Friedrichshafen, a German auto component manufacturer, signed a LoI with the government of
Telengana.
17. Cummins has planned to expand its investment in India based R&D centres.
18. MNC’s working for development of low fuel emission technology in India.
19. Advent of 3D printer technology. Ford’s plans to bring the technology to India.

Investments: -

1. Tata Opportunities Fund got a 15 percent stake in Varroc group in Aurangabad for US$50 Million.
2. Investments in the auto components industry sector reached US$ 372.44 Millions in 2016-17.
3. Schaeffler India, the Indian arm of Germany's car and mechanical parts producer, is intending to
contribute Rs 300 crore (US$ 46.66 million) per annum finished FY18-19.
4. CEAT Ltd. plans to reach at a production level of 17 million 2 wheeler tires, annually, 1 million Truck
& Bus Radial (TBR) tires & 6 million passenger car radial tires, annually. Hence planning to invest
around US$ 413.50 Million to expand its tire production during 2017-2022.
5. UNO Minda group invested around US$ 91.87 Million in Gujarat to expand its manufacturing capacity.
6. Amara Raja Batteries started its 2-wheeler battery plant in Andhra Pradesh, in December 2017. The
initial capacity in first phase being 5 million units and having an overall target of 17 million units.
 7. RSB Group and Indoshell Mould Ltd are being financed by Piramal Finance Limited through its
Corporate Finance Group with Rs. 275 Crores(US$ 42.55 Million) and Rs. 290 Crores (US$ 44.87
Million) respectively.
8. Friction materials maker ASK Automotive has signed an agreement with Fras-le of Brazil to set up a
joint venture of a brake pads and linings facility for commercial vehicles in Haryana at an investment of
over US$ 15.6 million.
9. In March 2017, in a major development, Tata Motors and Volkswagen Group with Skoda Auto AS as a
third party to the agreement, signed a MoU to develop vehicle concepts and other components, jointly.
10. In Pune, Mercedes Benz India Pvt Ltd. Has set up India’s largest spare parts unit with a capacity of
44,000 parts and covering an area of 16,500 sq. mtrs. It is also having plans for setting up a vehicle
preparation centre that can stock upto 5700 cars, to be customised before delivery.
11. In next 3 years, Sundar Clayton, a part of TVS motors, plans to invest US$ 50 Million in US and Rs. 400
crores in India.
12. Gradually India is emerging as an outsourcing hub. Hyundai plans to source its gasoline and Diesel
engines from its Indian manufacturing units for its domestic and global business.
13. With the support of Indian government, Hyundai, is intending to set up its third new plant in the nation
and extend its generation ability to 7.2 lakh units every year.
14. Ford went for an expansion of its retail distribution network of genuine parts in Gujarat, Daman & Diu
& Silvasa. In 2015, the organization opened another generation office in Sanand, Gujarat which is
probably going to expand its ability by including 240,000 autos and 270,000 motors to its current creation
level. US$ 1 billion has been contributed for this assembling plant.
15. Honda is in talks to set up its 3rd Manufacturing unit in Gujarat for which US$ 384.9 Million has been
initially invested and planned to reach around US$ 655.1 Million by the end of the project. Honda has
also plans for an investment of US$ 59.23 Million in Tapukara plant for production capacity expansion
from 120,000 units per annum to 180,000 units per annum.
16. Toyota Connect, a fully integrated cloud telematic service for Indian market, recently disclosed by
Toyota Kirloskar Motors.
17. Major market players are continuously adding capacity for increasing and future plans of growth.
18. Notwithstanding, select OEMs are investigating inorganic development openings in India and
additionally in abroad market to help development and in addition expand its customer base and item
portfolio. Ancillaries keep on focusing towards climbing the esteem bind to moderate productivity and
aggressive weight in the seriously aggressive industry. Incremental ventures via auto ancillaries are
basically towards new request/stage related necessity or debottlenecking of existing limit. Maybe a
couple have begun putting remembering the necessities for BS VI (in 2020), CAFE standards and electric
vehicles in 2030.

Risks and Bottleneck associated: -

1. Change in consumer preferences / dynamics

Changes in purchaser inclinations, administrative or industry prerequisites or in focused advancements may render
certain items outdated or less appealing. The capacity to envision changes in innovation and administrative
principles and to effectively create and present new and upgraded items on a regular basis is a noteworthy factor
in staying focused. With ever changing technology the preferences of the customer base is also changing fast.
Also with growth in world economic base purchasing power of consumers are changing. Consumers now are
inclined to change. And change is very fast. So in order to be in the industry and prove the mettle Indian Auto
component industry has to do a lot to be updated with changing scenario. Assessing customer requirement and
forecasting plans accordingly is a must. Change in methodology of business planning as per the requirement is a
necessity in the present scenario in order to be a global player.

2. Highly competitive automotive components industry.

Competition from other low-cost countries like China, Taiwan, Thailand etc. Even though is on the road to the
target 3rd position in world rankings for global auto component exporter, still there are major market players in
the industry world wide. With China emerging as the biggest market player in the global market as well as the
emerging markets, Indian companies have to do every bit possible in achieving the set targets. A big plus for the
industry is the fall of economy of Japan and South Korean. India being 2nd to China has already set the stage for
a fierce competition, still the ways ahead will not be as easy as planned. Technological advancement is a
necessity for the sustaining the competition with players like China, Indonesia, Taiwan, etc.

3. Free Trade Agreements: -

Free trade agreements like NAFTA, EU, ASEAN, etc. of which India isn’t a member, the proportion of export
and business is low. In order to emerge as a market player in these market Indian companies need to plan
strategically. Like recently Indian companies going into Joint ventures with foreign companies for entering into
the specific market.

4. Impact of major global and national events: -

On June 23, 2016, the UK voted to leave the European Union ("Brexit") by way of referendum. Indian companies
like Varroc Engineering, Motherson sumi, Wabco, etc conduct significant business in the UK, as do many of their
customers(Indian OEMs). So it cannot be predicted the impact that Brexit will have on the operations of the
industry players or on thier customers, especially in the absence of specific regulations (such as import or export
taxes). Any number of these potential challenges may materially adversely affect their business, results of
operations, financial condition and prospects.
Then changes in Crude oil prices, is having a direct impact on demand of Automotive. As the auto component
industry is directly linked with the automotive industry, any changes in demand of the automobiles will have an
effect on the auto component sector. Suppose there is an increase in Global crude oil prices, the demand for
automobiles will reduce if not significantly but slow down of demands. In such a scenario the demand for auto
components will reduce. Also, national events such as Demonetisation, change of govt. etc. can create a gap
between projected growth.

5. Unorganised Sector within the Industry: -

The unorganized sector within the industry constitutes of around 90% of the total industry. If we go by turnover
the total % contribution from this sector is only about 15%. This shows the necessity of the industry to target the
sector in organizing as major employment is generated from this sector. Although Government of India recently
launched schemes for increasing skill development centers targeting the improvement of employment in this
sector, still a lot needs to be done as this sector possess high potential of growth.

6. Segment specific growth: -

As can be seen from the figure below, Indian automobile major market is two wheeler segment. And going by the
auto component industry supply to OEM’s, majority is towards passenger vehicles. In order to achieve sustainable
growth in the global industry it is necessary to cater to other segments also. Recently US MNCs are looking
towards Indian companies for Heavy commercial Vehicle, Light commercial Vehicle, etc.

7. Capital requirement: -
Aside from above two impeding elements, the ongoing increment in loan costs has additionally skewed the photo
against India as a speculation goal with regards to another basic M – Money (capital). As an outcome of these
issues, vehicle makers have either put on hold their speculation designs or are going moderate on them. Interest
in the auto segments industry is likewise liable to be influenced if auto majors keep on deferring their venture
designs.

Being a booming sector with positive domestic sentiment and growing global opportunities, thanks to
globalization and slowdown of developed economies, Indian companies need to capitalize the opportunities
available and take effective steps to clear the bottlenecks in growth.

Varroc Engineering Limited- IPO – Buy, Sell or Hold

We had a look on the auto component industry, its segments, current market position, opportunities and risks and
threat to growth. Now on the basis of that here is an analysis of an emerging company in the industry. This analysis
is based on the industry analysis and company performance over the years. Here we will analyse the intrinsic
value of the company and the current market price.

Company Overview

VEL is a global tier-1 (tier-1 companies are companies that directly supply to original equipment manufacturers
("OEMs")) automotive component group. It designs, manufactures and supply exterior lighting systems, plastic
and polymer components, electricals-electronics components, and precision metallic components to passenger
car, commercial vehicle, two-wheeler, three-wheeler and off highway vehicle ("OHV") OEMs directly worldwide.
It is the second largest Indian auto component group (by consolidated revenue for FY2017) (Source: CRISIL
Research) and a leading tier-1 manufacturer and supplier to Indian two-wheeler and three-wheeler OEMs (by
consolidated revenue for FY2017) (Source: CRISIL Research). The company is the sixth-largest global exterior
automotive lighting manufacturer and one of the top three independent exterior lighting players (by market share
in 2016) (Source: Yole). From FY2015 to FY2017 we had a compound annual growth rate ("CAGR") of 17.57%
in terms of revenue.

The product portfolio of the Global Lighting Business covers all major external lighting products and technologies
such as Halogen, Xenon/high-intensity discharge, LED, Matrix LED, high definition MEMS and DMD, surface
LED and OLED module, Flex LED and LED Pixel headlamps.

The company commenced operations with their polymer business in 1990. Initially grew organically in India by
adding new business lines. Subsequently, diversified their product offerings and expanded their production
capacity through various investments, joint ventures and acquisitions. The most notable acquisition included the
2012 acquisition of Visteon's global lighting business, now known as Varroc Lighting Systems. In 2013, it
expanded the global lighting business by acquiring Visteon's holding in a 50/50 joint venture with Beste Motor
Co. Ltd. ("TYC") to manufacture automotive lighting in China, namely Varroc TYC (which wholly owns Varroc
TYC Auto Lamps, which in turn wholly owns Varroc TYC Auto Lamps (CQ) ("China JV"). On February 13,
2018, it entered into a joint venture with Dell'Orto S.p.A., one of their customers, in India, for the development of
electronic fuel injection control systems for two-wheelers and three-wheelers. In order to expand its
manufacturing and R&D footprint it invested in nine manufacturing plants and an additional R&D center in India
since 2012. It is in a continuously process of increasing its R&D footprints, and intend to set up one manufacturing
facility in Brazil and one manufacturing facility in Morocco, as well as two manufacturing facilities in India. The
two primary business lines of the company, namely (i) the design, manufacture and supply of exterior lighting
systems to passenger cars OEMs worldwide ("Global Lighting Business"), which it undertakes through the
subsidiaries forming part of the VLS group and (ii) the design, manufacture and supply of a wide range of auto
components in India (our "India Business"), primarily to two-wheeler and three-wheeler OEMs, including
exports. For FY2017, the consolidated revenue from operations was ₹96.1 billion with ₹61.2 billion from the
Global Lighting Business, ₹31.7 billion from the India Business (₹14.8 billion for polymers/plastics, ₹9.0 billion
from electrical/electronics/lighting, ₹5.4 billion for metallic components and the remainder from other sources)
and ₹3.2 billion from the Other Businesses. For 9M FY2018, the consolidated revenue from operations was ₹
73.9 billion with ₹44.3 billion from our Global Lighting Business, ₹26.6 billion from the India Business (₹12.2
billion for polymers/plastics, ₹7.7 billion for electrical/electronics/lighting, ₹4.8 billion for metallic components
and the remainder from other sources) and ₹3.0 billion from our Other Businesses.

The company is having a global presence with 36 manufacturing facilities spread across 7 countries, with 6
facilities for the Global Lighting Business, 25 for Indian business, 16 R&D centres spread across 9 countries and
5 for other businesses. Due to the above presence the revenue stream is well diversified both across geographically
as well as across customers. A strong customer base makes the company stand out as compared similar companies
in the industry. The major customers being Jaguar Land Rover, Ford, Volkswagen Group, FCA, Groupe PSA,
Renault-Nissan-Mitsubishi in Global Lighting business. The key Indian customers are Bajaj, Royal Enfield,
Yamaha, Suzuki, Honda, Hero, Piaggio, Harley Davidson, Eicher Volvo, Mahindra & Mahindra, KTM, Tata
Cummins. Global Lighting business had 184 patents as of Dec 2017. It has already applied for 14 patents in India
with comptroller general of patents, designs and trademarks and two applications with the World Intellectual
Property Organisation 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.

The company is having a strong Top line over the years with revenue for FY 2015, FY 2016, FY 2017 and 9M
FY 2018 was ₹69,507.70 million, ₹82,189.00 million, ₹96,085.40 million and ₹73,939.01 million, respectively.
The Earnings before interest, tax, depreciation and amortization (EBITDA) before exceptional items for the ablove
mentioned period was ₹7,045.73 million, ₹5.915.65 million, ₹6,754.84 million and ₹6547.85 million,
respectively.

Management / Corporate governance

Every company needs a stable and sound management base in order to carry out planned operational goals.
Frequently changing management leads to discouraging effect on the investors as new head with new ideas can
equally be good and bad for the future prospects of a company. In case of Varroc Engineering Limited, with a
strong and stable management base the company is having a promising future ahead. The management team
comprises of: -

Naresh Chandra: - Chairman and Non- Executive Director

 Bachelor’s degree in Economics and a Master’s degree in History from the University of Delhi.
 Diploma in Business Administration from the City of Birmingham College of Commerce, United
Kingdom.
 Over 50 years of work experience, with over 35 years’ experience in the Automobile Industry.
 Associated with the Company since incorporation and became the Chairman of the Company in 1997.

Tarang Jain: - Managing Director

 Bachelor’s degree in Commerce from the Sydenham College of Commerce and Economics, University
of Bombay.
 Diploma in Business Administration from the University of Laussane, Switzerland.
 30 years of experience in the Automotive Industry.
 He founded the Company in 1988 and was appointed as the Managing Director in 2001.

Ashwani Maheswari: - Whole-time Director CEO, India business

 Bachelor’s degree in Mechanical Engineering from the Indian Institute of Technology, Roorkee and
Master of Science degree in Leadership and Strategy from the London Business School, United
Kingdom.
 Successfully completed the Executive Development Program at the Wharton School, USA and the
Stanford Graduate School of Business, USA.
 Previously held several leadership roles with Tata Steel, ITC group and Century Pulp and Paper Mills
and Birla Tyres division of Kesoram Industries. He has been on our Board since March 2016.

Stephane Vedie: - President and Chief Executive Officer, Varroc Lighting Systems
 Diploma in Purchasing Management function from the Academy of Grenoble, France and a degree from
the Amiens Business School, France.
 Previously associated with Magneti Marelli. He has 13 years of experience in automotive lighting.
 Joined our Subsidiary, Varroc Lighting Systems Inc. in December 2016.
Arjun Jain: - Whole-time Director Business Head - Electrical Division
 Bachelor’s degree in Arts from the Vassar College, New York.
 Previously associated with Bain & Company, India.
 Joined in October 2013 as the General Manager - Business Excellence division.
 Appointed as the Business Head of the Electrical division in May 2015. He was appointed as the Whole-
time Director in August 2018.

T.R. Srinivasan: - Chief Financial Officer

 Bachelor’s degree in Commerce from the Bharathidasan University, Tamil Nadu and Post Graduate
Diploma in Management from the Indian Institute of Management, Calcutta. Member of the Institute of
Cost and Works Accountant of India.
 Previously been associated with Hindustan Lever, Philips Electronics, Reliance Digital Retail, Siro
Clinpharm and Alliance Tire Group.
 Approximately 29 years of work experience. He joined our Company in October 2017 and was appointed
as the Chief Financial Officer in February 2018.

Sethumadhavan D.: - Business Head – Polymer

 Master’s degree in Materials Science from the Regional Engineering College, Trichy, India.
 22 years of diversified work experience in large multinational conglomerates like Assa Abloy, Stanley
Black & Decker, Schneider Electric, General Electric and Lucas TVS. He joined our Company in June
2018.

SWOT Analysis: -

Strengths

1. Strong presence in growing businesses in India and abroad.

As discussed above the company is having its presence in 9 countries and continuously making investments in
acquiring and making joint ventures.

2. Long-standing customer relationships

The number of key customers has been contributing to the top line significantly Y-o-Y. The company is successful
in creating strong relationship with the customers. Also the industry being customer specific and the products
provided by the company depends on the specification as per the customer requirement. With changing trends the
company is successful in providing and maintaining deadlines for the orders.

3. Diversified product portfolio

The company is having a diverse range of products. Even though the major business being Global lighting system,
the other businesses also contribute respectable percentage to the revenue of the company. A diversified portfolio
has helped the company in maintaining the revenue growth at times of Demonetization, GST, Crude oil price
crisis, etc, when other companies faced a downfall in revenue.

4. Consistent Revenue growth

Consistent revenue growth is a strength for the company as the company has been able to achieve what it had
planned over the year.

Weaknesses

1. Dependence on certain major customers

2. Dependence on certain Automotive segment
3. Capital requirement

Opportunities

1. GDP growth and increase in purchasing power of consumers(domestic)

2. Increased penetration rate of LED technology and intelligent lighting
3. GOI’s Automotive Mission Plan 2016-2026
4. Shift towards electric, electronic and hybrid cars
Threat

1. Global events (Eg. Fluctuations in Crude oil prices)

2. Competition

Company Strategy/ Outlook: -

The company’s vision is to be a Rs. 200 Billion supplier of innovative solutions for transportation and allied
industry in 2020. Core business sectors will be exterior lighting and two-wheeler mobility. Be a partner of choice
for the vision, mission and emission technologies. Be the fastest growing player in the core sector. Be among the
Top 3 players in the global lighting business. The mission of the company is to bring leading edge technologies
markets to the mainstream markets with high quality, cost competitive solution. By delivering customised solution
with superior service with speed, agility, creativity. Fostering an environment that empowers employees and
encourages the pursuit of excellence.
 Varroc Engineering Limited
Valuation Report

Date:- August 30, 2018

Varroc Engineering Ltd is one of the largest companies that supplies
Sell OEMs to various automative firms in India and as well in foreign
CMP Target countries and is also the top 6 player in this sector.
Rs. 1144.55(As on 30th Aug,2018) Rs. 715 Top-line growth: Varroc Engineering Ltd posted annual result with
profit from net sales Rs. 96,085 million in comparison to Rs. 82,189
Nifty 11676.80 million in FY 2016 thus showing a growth in sales of around 17%
Sensex 38690.10 YOY.

VARROC ENGINEERING LTD Stock Price Chart
Bottom-line growth: Net Profit was down by %17.95 to Rs. 3034 mn
as against Rs. 3698 mn in the corresponding year. EBDITA or
Operating Profit fell by %12.73 YOY. The company reported EBDITA
of Rs. 2447 mn compared to Rs. 2804 mn in same period last year.
(Source :Thomson Reuters)

New Segments: Varroc Engineering Ltd. Has 100% subsidiary of

Source: Moneycontrol
Stock Details as on 30th Aug, 2018
VPPL, Varroc Lighting Systems, I.M.E.S Italy, Varroc Lighting
Systems Moroco, etc to name a few. Also, 64.3% of the revenue in FY
2017 was derived from global markets. (Source: Draft Red Herring
Prospectus)
Key drivers: The Global Lighting Business has 184 patents as of 31st
December, 2017. The company also has nine strong global R&D
centers and employs 900 engineers. (Source: Draft Red Herring
Prospectus)

Sector Auto Parts Focus Areas: Varroc Engineering Ltd. primarily focuses on Electronic
BSE Code 541578 components after the BS6 norms that was introduced by the Govt. of
Share Capital (Rs Mn.) 134.81 India.
Face Value (Rs.) 1.00
No of shares o/s (Cr) 28.98 Tax Scenario: PBT (Profit before Tax) was fell by 16.5% at Rs. 3272
52 week H/L 1150/931.10 mn against Rs. 3918 mn in FY17.
Market Cap (Rs Cr.) 15433.90
Relative Valuation: Compared to their direct competitors, Varroc
Turnover (Rs lakh.) 24.37
Engineering Ltd. Is aggressively investing in developing economies
like Brazil, Morocco, Vietnam, etc. It will help the company to expand
its business in Latin America, Africa and South-East Asia. Varroc had
Shareholding Pattern (%) an operating profit ratio of 2.55% while the same for industry was
8.05%. Varroc also had EPS of Rs. 22.47 while the same for industry
was 35.51. (Source: Company).
Aug 18
Promoters 84.99 Investment Rationale: The Company have started tapping the foreign
FII 00.00 markets and this will help the firm to grow, however, setting up new
DII 07.81 plants abroad would take a lot of time and hence they would realized
profits in the long run therefore the share price of the company would
Others 07.18 decrease in the short run.

What is impeding Varroc growth? Due to the recent introduction of

1. www.bseindia.com the Bharat Stage 6 norms and the new pollution rules has impacted the
industry’s growth which indirectly affected the company’s growth.
2. www.nseindia.com
There is also a cut-throat competition given by foreign companies.
3. www.sebi.gov.in
Revenue and Earnings Estimate:
The revenue Varroc Engineering Ltd is expected to grow at approximately 20% YoY for FY18, FY19 and FY20. This
revenue growth will be dependent on new plant that are yet to start and also the new norm (that is, Bharat Stage 6)
which essentially state that vehicles using the BS3 and BS4 will no longer be sold by the Automative companies, hence
this will boost the sale of newer vehicles using BS6 standards which in turn will increase the demand for OEMs.

Valuation:
The management has given clear roadmap of its growth in formulation sales which implies 15‐20% CAGR in FY15E‐
18E. While the company’s injectable portfolio to be value multipliers, it also balanced US portfolio with diversify into
ophthalmology, hormones and microsphere drugs. With more than 10% CAGR in ARVs and EU sales
(post Actavis), the company’s roadmap for growth has limited challenging scenario once the ANDAs are cleared.

FORECAST
Particular 2015 2016 2017 2018 2019 2020
(A)Total Revenue 69508 82189 96085 115302 138362 166034.9
(B)Cost of Revenue, Total 43738 53589 63465 74946 89936 107923
(C)Gross Profit(A-B) 25769 28600 32620 40356 48427 58112
(D)Selling/General/Admin. Expenses, Total 9972 11615 13619 16106.94 21071.85 25752.07
(E)Research & Development 172 310 402 576.51 760.9932 996.2093
(F)Depreciation/Amortization 2534 2917 3365 3864.65 4444.348 5111
(G)Interest/Investment Income –
Operating 6 6 6 6 6 6
(H)Other Operating Expenses, Total 8939 10948 12781 15738.72 18886.47 22663.76
Total Operating Expense(B+D+E+F+G+H) 65361 79385 93639 111239.1 135105.2 162451.7
(I) Operating Income[C-(D+E+F+G+H)] 4147 2804 2447 4062.877 3257.183 3583.167
(J) Investment Income - Non-Operating -3416 1749 750 2306.04 2767.25 3320.7
EBIT (I + J) 731 4553 3197 6368.91 6024.43 6903.86

Sectoral View:
The Automotive sector has shown exceptional growth in India as the purchasing power of people is rising constantly
in tier 2, tier 3 and rural areas. The turnover for this sector is 34,56350 mn and its contribution to Indian GDP is
2.3% and its providing employment to 1.5 million people directly.
(Source: ACMA report)

Favourable Reasons:
• Growth of Rural Sector by 23% will result in increase of market
• Upcoming plants in Brazil, Morocco, Vietnam will help in tapping foreign markets.
• The company has filled 184 patents.
• The company has four successful acquisition.

Unfavourable Reasons:
• This sector is heavily dependent on Crude oil as 94.65% of automobiles run on crude oil.
• Frequent changes in the regulatory norms may hamper its business as well as growth.
• As 65% of revenue comes from foreign countries and recession in European market may hamper its business.

RECOMMENDATION: I give a recommendation of sell for this stock for a short term and medium-term basis.
References: -
1. www.statista.com/statistics/257653/passenger-car-sales-by-region/
2. focus2move.com/world-car-market/
3. economictimes.indiatimes.com/industry/auto/auto-news/how-india-has-emerged-as-a-significant-market-
for-the-auto-industry/articleshow/62813553.cms
4. auto.economictimes.indiatimes.com/news/industry/changing-auto-landscape-will-india-miss-or-catch-the-
bus/64029513
5. www.siamindia.com/statistics.aspx?mpgid=8&pgidtrail=15
6. www.ibef.org/download/Auto-Components-April-2017.pdf
7. auto.economictimes.indiatimes.com/news/auto-components/icra-upgrades-indian-auto-component-
industrys-growth-to-13-15-in-fy18/63127105
8. www.investindia.gov.in/sector/auto-components
9. www.makeinindia.com/article/-/v/make-in-india-sector-survey-automobile-components
10. www.makeinindia.com/article/-/v/make-in-india-sector-survey-automobile-components
11. www.ibef.org/industry/auto-components-presentation
12. myinvestmentideas.com/2018/06/Varroc-engineering-ipo-review/
13. Annual reports of Varroc Engineering Limited FY 2018
14. Draft Red Herring prospectus of Varroc Engineering Limited
15. Moneycontrol
16. NSE.com
17. Data for calculation of valuation collected from Thompson and Reuters, ProwessIQ.