Varroc Engineering IPO: All You Need to Know About the Biggest Public Issue of 2018-19

Aurangabad-headquartered auto component maker Varroc Engineering Ltd is set to open on its IPO (initial public offering) on Tuesday, 26 June 2018. With a target to raise Rs 1,955.44 crore on the upper price band, it is the biggest IPO in the financial year 2018-19 so far.

About the company

Varroc Engineering is Tier-1 automotive company, which means it directly supplies auto parts to Original Equipment Manufacturers (OEMs). It designs, manufactures and supplies exterior lighting systems, plastic and polymer components, electrical-electronics components and precision metallic components for passenger cars, commercial vehicles, two-wheelers, three-wheelers and off-highway vehicles of OEMs worldwide. It has 36 manufacturing facilities spread across seven countries.

As per CRISIL Research, Varroc is the second-largest auto component supplier (from FY 2017 consolidated revenue) and a leading tier-1 manufacturer and supplier for OEMs of Indian two-wheeler and three-wheelers. Its two-wheeler customers in India include Bajaj Auto, Honda, Royal Enfield, India Yamaha Motor, Suzuki Motorcycle India and Hero MotoCorp. It also exports to international brands namely KTM and Volvo from its Indian units.

As per market researcher Yole, the company was sixth-largest global exterior automotive lighting manufacturer (Varroc Lighting Systems (VLS)) and one of the top three independent exterior lighting players (by market share in 2016).

IPO Details

Price band: Rs 965 to 967
Face value: Re 1
Minimum lot size: 15 shares
Offer period: 26 to 28 June
To be listed on: NSE and BSE
Issue managers: Kotak Mahindra Capital Company, Citigroup Global Markets India, Credit Suisse Securities (India) and IIFL Holdings.
Registrar: Link Intime India Private Ltd

The promoters along with existing investors will be placing 2.02 crore equity shares on offer through offer-for-sale (OFS). Out of this, 0.5 percent that is 1 lakh shares will be reserved for employees and offered to them for a discount of Rs 48 per share. The total sale will fetch between Rs 1,951 to 1,955 crore.

Selling shareholders include promoter Tarang Jain (17.52 lakh equity shares), Omega TC Holdings Pte Ltd (153.73 lakh equity shares) and Tata Capital Financial Services Ltd (14.1 lakh equity shares). Post issue, promoter share will stand at 85 percent from 86.3 percent.

Should you invest?

Angel Broking has given a 'neutral' rating to the issue as it feels that the valuation is higher compared to peers like Motherson Sumi. "In terms of valuations, the pre-issue price-to-earnings ratio works out to 28.9X FY2018 earnings (at the upper end of the price band), which is high compared to its peers like Motherson Sumi, which is trading at 26.4X. Further, Varroc Engineering has lower RoE at 16% versus Motherson Sumi at 25% (FY18). Considering the above factors and two-year low profitability growth, we recommend neutral rating on the issue," it said in its IPO note.

Centrum Broking, on the other hand, observed that at a higher end of the price band, the issue was 43 times the P/E ratio post-dilution on FY17 and 29 times on FY18, which is discounted compared to its peer group average of 45.5 times in FY17 and 41.8 in FY18.

"Varroc Engineering has a strong clientele; the current strategy of diversifying its product base, upgradation of technology along with any M&A opportunity could further enhance its position," it said in its IPO note.

It further said, "Given this along with decent balance sheet position (debt to equity 0.3X and RoE of nearly 18% as of March 18) and comfortable valuations, we suggest that investors can subscribe to the issue."