Varroc Engineering IPO – Should you Subscribe or Avoid?
Mumbai based Varroc Engineering IPO would open for subscription on 26th June, 2018. Varroc Engineering is a global tier-1 automotive component group catering to OEMs. Company revenues grew by 12% CAGR in the last 4 years. It has earned profits between 3% to 4.5% in the last 3 years. What are positive factors in this Varroc Engineering Limited IPO? What are the hidden factors in Varroc Engineering IPO? Should you invest in a Varroc Engineering IPO? Let me provide some insights about this IPO and do the review.
About Varroc Engineering Limited
They are a global tier-1 (tier-1 companies are companies that directly supply to original equipment manufacturers ("OEMs")) automotive component group. Their design, manufacture and supply exterior lighting systems, plastic and polymer components, electrical-electronics components, and precision metallic components of passenger car, commercial vehicle, two-wheeler, three-wheeler and off highway vehicle OEMs directly worldwide. They are the second largest Indian auto component group and a leading tier-1 manufacturer and supplier of Indian two-wheeler and three-wheeler OEMs (by consolidated revenue for FY2017). They are the sixth-largest global exterior automotive lighting manufacturer and one of the top three independent exterior lighting players.
Varroc Engineering IPO Issue details
IPO opening date: 26-June-2018
IPO closure date: 28-June-2018
Face Value: Rs 1 per share
Issue price band: Rs 965 to Rs 967 per share
Issue size: 1,945 Crores
IPO Lot size: 15 shares and 15 shares, there-off
Minimum investment: Rs 14,505 on higher price band
Leading Managers: Kotak Mahindra Capital, Citigroup Global Markets, Credit Suisse Securities, IIFL Holdings
Listing: BSE / NSE
Objects of the Varroc Engineering IPO issue
The Objects of the issue are:
a) Offer for Sale (OFS): OFS by selling shareholders. The company will not receive any proceeds from the Offer and all the proceeds will be received by the Selling Shareholders, in proportion to the Equity Shares offered by the respective Selling Shareholders as part of the Offer.
b) To achieve the benefits of listing the Equity Shares on the Stock Exchanges. Further, the company expects that listing of the Equity Shares will enhance its visibility and brand image and provide liquidity to its Shareholders. The listing will also provide a public market for the Equity Shares in India.
The Promoter of the Company is Tarang Jain.
Company Financials (reinstated-Consolidated)
1) The company generated revenue of Rs 7,038 Crores for the year ended Mar-15 and Rs 10,417 Crores for the year ended Mar-18 indicating growth of 12% CAGR in the last 4 years.
2) The company posted a profit of Rs 16.8 Crores for the year ended Mar-15 and profit of Rs 450.7 Crores for the year ended Mar-18.
3) Its FY18 basic EPS is Rs 33.4 and last 3 years average EPS is Rs 32.35.
Company Financials (reinstated-Standalone)
1) The company generated revenue of Rs 1,609 Crores for the year ended Mar-15 and Rs 2,124 Crores for the year ended Mar-18.
2) The company posted a loss of Rs 338.9 Crores for the year ended Mar-15 and profit of Rs 69.8 Crores for the year ended Mar-18.
What are the key strengths of Varroc Engineering Limited?
Here are the key strengths of the company.
1) Strong, long-standing customer relationships.
2) Strong competitive position in attracting growing markets.
3) Comprehensive product portfolio.
4) Low cost, strategically located manufacturing and design footprint.
5) Robust in-house technology, innovation and R&D capabilities.
6) Consistent track record of growth and operational and financial efficiency.
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What are the Strategies of Varroc Engineering Ltd?
Here are the key strategies of the company.
1) Focus on high growth markets for its Global Lighting Business.
2) Focus on increasing customer revenue for its India Business
3) Continue to invest in R&D, design, engineering and software capabilities in order to capitalize on future trends.
4) Pursue strategic joint ventures and inorganic growth opportunities.
5) Focus on operational efficiency
Reasons to invest in Varroc Engineering IPO
Company posted Good Revenue growth. It posted simple growth of 48% in the last 4 years (12% CAGR)
Risk Factors / Reasons not to invest in an Varroc Engineering IPO
1) Pricing pressure from customers may adversely affect its gross margin, profitability and ability to increase its prices, which in turn may materially adversely affect its business, results of operations and financial condition.
2) Its business is dependent on certain major customers, with whom they do not have firm commitment agreements. The loss of such customers, a significant reduction in purchases by such customers, or a lack of commercial success of a particular vehicle model, of which there is a significant supplier could adversely affect its business, results of operations and financial condition.
3) Their are exposed to counterparty credit risk of its clients and any delay in receiving payments or nonreceipt of payments may adversely impact its results of operations.
4) They are heavily dependent on the performance of the global passenger vehicle market and the two wheeler and three wheeler market in India. Any adverse changes in the conditions affecting these markets can adversely impact its business, results of operations and financial condition its failure to identify and understand evolving industry trends and preferences and to develop new products to meet its customers' demands may materially adversely affect its business.
5) They are subject to environmental and safety regulations that may adversely affect its business and they have been subject to environmental notices in respect of certain of its manufacturing facilities and may be subject to further notices in the future.
6) They may not be successful in implementing its strategies, such as expanding its business in China, South America, southern Europe, northern Africa and east Asia, or capitalizing on technological trends in the automotive industry, which could materially adversely affect its business, results of operations and future prospects.
7) They have substantial capital expenditure and working capital requirements and may require additional financing to meet those requirements, which could have an adverse effect on its results of operations and financial condition.
8) They have in the last 12 months issued Equity Shares at a price that could be lower than the Offer Price.
9) They have been placed on the RBI caution list pursuant to 174 cases of mismatch between export data and export realization data.
10) There is outstanding litigation against the company, its Subsidiaries and its Directors, which, if adversely determined, could affect its business and results of operations.
11) They regularly work with hazardous materials and activities in its operation can be dangerous, which could cause injuries to people or property.
12) Company will not receive any proceeds from the Offer.
13) Company has experienced losses in prior periods and any losses in the future could have a material adverse effect on its business, prospects, financial condition, cash flows and results of operations.
14) They have experienced negative cash flows in prior periods and any negative cash flows in the future could adversely affect its financial condition and the trading price of its Equity Shares.
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Should you invest in Varroc Engineering IPO or Avoid it?
On FY2018 consolidated EPS of Rs 33.4 and on an upper price band of Rs 967, P/E works out to be 28.9x. On last 3 years average EPS of Rs 32.35, P/E works out to be 29.9x. Means company is asking for a higher price band Rs 967 where P/E would be in the range of 29x to 30x. There are listed peers like Motherson Sumi trading at P/E of 42x, Bharat Forge trading at P/E 41x and Endurance Technologies trading at P/E of 45. Hence Varroc Engineering IPO Price of Rs 967 is fully priced.
Company posted revenue of 12% CAGR in the last 4 years. However, it earns thin margins. Its issue price is fully priced. The recent IPO market is showing mixed reaction. Investors cannot bet on good IPOs for short to medium term. High risk investors can invest in this IPO for medium to long term of 4 to 6 years. Investors may or may not get listing gains.
Disclaimer: I do not have an interest in investing in this IPO and above analysis is based on my personal views. The idea of giving positive and negative factors to investors in this article is to create awareness and education about this IPO. One should NOT constitute this as investment advice to buy or not to buy. Please consult your investment advisor before you invest in such high risk investment options.
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Varroc Engineering IPO – Should you Subscribe or Avoid