Varroc Engineering Ltd (VEL) is a tier-1 automotive component group. It designs, manufactures and supplies exterior lighting systems, plastic & polymer components, electricals-electronics components and precision metallic components to passenger cars, commercial vehicles, 2W, 3W and off highway vehicle OEMs directly worldwide. VEL has a global footprint of 36 manufacturing facilities spread across seven countries, with six facilities for its Global Lighting business, 25 for India business and five for Other businesses. Currently, VEL's ~34.7% of revenue comes from india and balance from Europe (41.8%), North America (22.3%), Asian pacific (0.7%) and others (0.5%).
Positives: (a) Focus on high growth markets for global lighting business, (b) Focus on increasing customer revenue for India business, (c) Continuous investment in R&D, design, engineering and software capabilities in order to capitalize on future trends. Investment concerns: (a) VEL reported low consolidated top-line and bottom-line CAGR of ~12% & ~10% respectively over FY2016-18, (b) The company's ~35% revenue comes from India i.e. from 2W/3W sector (which are not high growth sectors).
Outlook & Valuation: In terms of valuations, the pre-issue P/E works out to 28.9x FY2018 earnings (at the upper end of the issue price band), which is high compared to its peers like Motherson Sumi, which is trading at 26.4x. Further, VEL has lower RoE at 16% vs. Motherson Sumi at 25% (FY18). Considering the above factors and two year low profitability growth, we recommend NEUTRAL rating on the issue.