Here is what brokerage houses had to say on the Varroc Engineering IPO which is opening today i.e. 26th of June and closing on 28th of June 2018:
Varroc Engineering (VEL) is a global Tier I company that designs, manufactures and supplies exterior lighting systems, plastic and polymer components, electronic components and precision metallic components to passenger car (PC), commercial vehicle (CV), two-wheeler (2W), three-wheeler (3W) and off-highway vehicle (OHV) original equipment manufacturers (OEMs) directly.
After commencing its operations in 1990 with the polymer business, VEL has added business lines and made strategic investments which have led to the company expanding its global and domestic footprint.
Going forward, VEL is looking to capitalise on opportunities in the PC vehicle exterior lighting market, strengthening its position in the Indian 2W and 3W market (develop electronic fuel injection systems as mandated by the Bharat Stage VI emission standards which will come into effect by April 1, 2020) and invest in new partnerships along with manufacturing facilities (to gain access to high growth automotive markets).
At the higher end of the price band (Rs 967 per share), the issue is priced at a price-to-earnings of 43 times (post-dilution) FY17 and 29 times FY18, which is at a discount compared to its peer group average of 45.5 times FY17 and 41.8 times FY18.
VEL has been continuously building up its in-house R&D and technology capability so as to be in sync with the current emerging trends from the automobile sector. It has a strong clientele. The management’s current strategy of diversifying its product base, upgradation of technology and any merger & acquisition opportunity could further enhance its position.
Along with a decent balance sheet position (debt-to-equity 0.3 times and return on equity of around 18 percent as of March) and comfortable valuations, we suggest that investors subscribe to the issue.
VEL is a Tier I auto ancillary player which has a wide range of products catering to diverse customers and geographies. Pedigree management, strong growth opportunities and decent return ratio (around 16 percent) remain a key positive. The share is undervalued at 29 times FY18 earnings per share compared to some of its peers. Longer-term investors can subscribe to this issue.
The company has priced the issue around 29 times FY18 P/E. VEL has strong a competitive position in attractive growing markets, long-standing customer relationship with low cost, strategically located manufacturing and design footprint.
Also, the management has a consistent track record of growth and operational and financial efficiency. Hence, we recommend subscribing to the issue.
The company is heavily dependent on the performance of its global PV market and 2W and 3W market in India. It generates 65 percent and 35 percent revenue from global and domestic plants, respectively. Any adverse changes in the conditions affecting these markets can adversely impact its business.
VEL has experienced negative cash flows in the past and any redux in the future could adversely affect its financial condition. The issue looks expensive. High-risk investors may invest in this IPO for the medium to long-term.
At the higher price band, the company is demanding a P/E of 29 times (to its restated FY18 EPS of Rs 33.4) as against its peer average of 23.1 times. With respect to its FY19 and FY20 EPS too, it is seeking a premium to its peers.
Thus, the issue seems to be fully priced. But considering its global market position, strong growth outlook in the future, low profitability and expensive valuation, we assign subscribe but with a caution rating to the issue.