This Small Cap Auto Components Stock Likely To Surge 53% In 12 Months, Buy: ICICI Securities

ICICI Securities in its recent report on Varroc Engineering Limited has suggested buy the stocks of the company for a target price of Rs 529 apiece. Considering the brokerage estimated target price, the stock of Varroc Engineering could surge 53% in 12 months. Varroc Engineering is a small-cap auto components & equipment company having a market capitalization of Rs 5,303.22 crore.

Stock Outlook

17 August, the current market price of Rs 346.70 apiece the shares of Varroc Engineering Limited opened at Rs 347 apiece. The current market price of the stock is Rs 86.70 above its 52 week low and Rs 147.15 below the 52-week high.
 
 The 52-week low of the stock was recorded on September 14, 2021, at Rs 260 apiece and the 52-week high was recorded on April 29, 2022, at Rs 493.85 apiece. The ROE of the stock is negative 55.80%.

Stock Returns

In the past 1 week, the stock gained 2.52% and 13.16% in the past 1 month, respectively. In the past 1 year, the stock has gained 17.5%. In the past 3 years, it has given a negative return of 19.55%. Since its listing on the exchange, it has delivered a negative return of 66.49% returns. It was listed in July 2018.

Q1FY23 

VAR's overall revenue remained steady QoQ despite its key domestic customer volume getting affected by chip-supply shortage and existing EU operations facing local macro inflationary challenges. In coming quarters, on the back of gradual improvement in chip supply for its leading customer, VAR is confident of improvement in India business revenue and expects Rs55bn in FY23 as against Rs12.7bn revenue in Q1FY23. Out of Rs 14bn worth of new order won in Q1FY23, Rs2.9bn would get executed in the rest of FY23 itself along with a third of new order won related to EV models.

Expanding capabilities in the areas of 4W plastic parts, EV transmission parts and LED lighting assembly

VAR is focusing on expanding its capabilities in the areas of 4W plastic parts, EV transmission parts for 4Ws and LED lighting assembly for 4Ws beyond the existing portfolio to grow faster than industry and in addition to the revenue potential from EV components space. We believe VAR would sell off IMES, Italy forging facility in the next couple of years and make the balance sheet leaner, improve its capital efficiency and focus more on domestic business.

India business EBITDAM of ~10% is expected to move

In terms of margin, India business EBITDAM of ~10% is expected to move towards 12% in next 3-4 quarters led by reversal of optical impact on raw material cost reversal, other than improving operating leverage and revenue mix. IMES Italy improved EBITDAM significantly from negative 10% to ~7% QoQ, as it was able to re-negotiate its annual pricing contract post taking care of energy and metal cost inflation and had no retrospective adjustments in the number this quarter (Q1FY23). VAR is expecting VLS India 4W lighting business along with global 2W lighting business EBITDAM to touch ~8% levels in next 2-3 quarters on the back of improving scale and gradual pricing adjustments against cost inflation.

Quarterly PBT would get boosted

From Q3FY23, quarterly PBT would get boosted by Rs200mn and interest outgo/quarter may come down as VLS deal would get executed by the end of September. As against annual depreciation of Rs3bn, annual consolidated capex is expected in between Rs2.5-3bn in FY23-FY24. With revenue/EBITDAM improving across India/VLS and China JV turning around post making a Rs45mn loss this quarter due to lockdown, we expect VAR PBT/quarter to improve substantially towards Rs0.8-1bn Q3FY23 onwards from present neutral levels.

Brokerage's views: Undergoing consolidation before turnaround

Varroc Engineering's (VAR) ongoing operations' revenue declined marginally ~1% QoQ to Rs16.3bn, with QoQ decline being led by ex-India operations of Italy forging and global 2W lighting. India business grew 2% QoQ as VAR started supplying new products like traction motor/controllers to its key customers, amidst chip-supply challenges. VAR's ongoing operations reported 8.2% EBITDA margin this quarter, up 200bps QoQ with 9.9% margin (up 20bps QoQ) for core India business and continuing operations under VLS like IMES, 2/4W lighting businesses executing better margins QoQ amidst supply-chain issues and inflated input costs in EU. Core India business is expected to ramp up with gradual revival in domestic 2W demand, post ~35% decline in FY20-FY22 and VAR aiming to grow ~8-10% more than the industry.

Buy for a target price of Rs 529

With EV component portfolio, (traction motor, controller, DC-DC converter etc.) the company is ready for profitable growth with superior RoCE, with a third of its India order book already coming from EVs. We maintain BUY with DCF-based target price unchanged at Rs529, implying ~18x FY24E earnings of the continuing operations.

About - Varroc Engineering Limited

Varroc is a global tier-1 automotive component company.. The company commenced its operations in India with Polymer business in 1990. The company design, manufacture and supply 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.
 
Varroc's strong R&D capabilities and technological partnership have helped to develop products and serve our customers as per emerging megatrends of Safer, Greener, Smarter and Connected Vehicles in the automotive space. As a result, in FY21, we were able to clock revenue in excess of Rs. 113 billion.

Disclaimer

The stock has been picked from the brokerage report of ICICI Securities. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decision.