Analyst view on Varroc IPO: Outlook positive but valuations high


Aurangabad-based Varroc Engineering is launching its maiden public offer today and investors will be keeping a close watch on the subscription figures and grey market movements. After strong demand for IPOs of RITES Limited and Fine Organic Industries, expectations are clearly high from Varroc Engineering and the company’s strong fundamentals and a solid business model make the basis of these expectations. Several analysts and brokerage houses have published their research reports underlining these positives but some have also highlighted the high valuations the company is demanding. Here is a quick overview of analyst views on Varroc IPO recommendations:

ICICIdirect believes Varroc has clear roadmap to sustain growth which is 1) to focus on high growth markets for Global lighting business; 2) Increase content per vehicle in India; 3) Invest in R&D & capitalize on future trends; 4) To look for Inorganic growth expansion and 5) Lastly, to focus on operational efficiency. “VEL is a Tier 1 auto ancillary player which has wide range of product portfolio spread across customers & geographies. Further pedigree management, strong growth opportunity & decent return ratio (~16%) remains positive for the company. The company is undervalued at 29x its FY18 EPS compared to some of its peers. Thus, we recommend subscribe to the issue from a long term perspective,” said its research report.

Centrum Broking is among the ones with positive Varroc IPO recommendations and has given four stars to the offer out of five. “VEL has a strong clientele; the current strategy of diversifying its product base, up-gradation of technology along with any M&A opportunity could further enhance its position. Given this along with decent balance sheet position (debt to equity 0.3x and RoE ~18% as of Dec’17) and comfortable valuations, we suggest that investors can Subscribe to the issue,” said its research note.

Nirmal Bang feels the company is ideally placed to capture the migration within the automotive lighting industry from halogen/xenon to LED. “Varroc is being offered at a PE of 28.9x FY18 (vs. domestic peer average of 41.6x) and EV/EBITDA of 15.9x FY18 (vs. domestic peer average of 17.6x). Thus based on the business capabilities, industry growth prospects and valuations, we recommend subscribing to the issue,” said its IPO note.

Read Also: Varroc Engineering IPO Review: Endurance Encore?

Considering the company’s long-standing customer relationship, Hem Securities is bullish on the prospects of Varroc Engineering. “The co is bringing the issue at p/e multiple of approx. 29 on FY18 eps at price band of Rs 965-967/share. Co has strong competitive position in attractive growing markets has long-standing customer relationship with low cost, strategically located manufacturing and design footprint. Also, company has consistent track record of growth and operational and financial efficiency. Hence, looking after all above, we recommend “Subscribe” on issue,” noted the firm adding to the positive Varroc IPO recommendations.

Varroc IPO Recommendations: Caution, Neutral also make way

Angel Broking noted that the company’s ~35% revenue comes from India i.e. from 2W/3W sector which are not high growth sectors. “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 considering VEL’s historical two year CAGR top-line & bottom-line growth. Further the company’s return ratios are also low compare to its other peers. Thus, we recommend NEUTRAL rating on the issue,” pointed out the brokerage house in its IPO note.

Prabhudas Lilladher finds the company on strong fundamentals but asking high valuations. “Given the stable business model, comprehensive product portfolio, strong OEM relationships, owned technology platforms, healthy balance sheet (D/E at 0.3x) and decent return ratios (RoCE/RoE of 14/16 percent), the stock is structurally a good story. However, in the current market conditions, the same is steeply valued with nothing left on the table in terms of listing gains. We recommend Subscribe to the issue only with a long term investment strategy of 24 to 36 months,” said the brokerage house.

Choice Broking is cautious owing to a host of factors including but not limited to low profitability. “On valuation front, at higher price band, the company is demanding a P/E valuation of 29x (to its restated FY18 EPS of Rs. 33.4) as against the peer average of 23.1x. With respect to FY19 and FY20 EPS too, it is asking a premium valuation to its peers. Thus, the issue seems to be fully priced. However, considering the global market position, future strong growth outlook, low profitability and expensive valuation, we assign a “Subscribe with Caution” rating to the issue,” said the brokerage house.

SMC Global Securities has offered the IPO two stars out of five and noted the expensive valuations. “The company is heavily dependent on the performance of the global passenger vehicle market and the two wheeler and three wheeler market in India. It generates revenue of 65% from global plants and 35% from domestic plants. Any adverse changes in the conditions affecting these markets can adversely impact its business. Also the company has experienced negative cash flows in prior periods and any negative cash flows in the future could adversely affect its financial condition. Also the issue looks expensive. High risk investors may invest in this IPO for medium to long term,” said its research note.

While Varroc IPO recommendations highlight that the company is doing well with its suit of products – something we also underlined in our analysis of the offer. At the same time, there is no denying that the voices of dissent are pointing to a very fundamental issue of high valuation. Since there is no dearth of listed players in the automotive components space, there is no scarcity premium on Varroc Engineering. We will update this list of Varroc IPO recommendations as more analyst reports are issued by brokerage houses. Meanwhile, head to our discussion page to see what fellow investors think about the IPO.


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