Broker's call: Varroc Engineering (Buy)

CMP: ₹450.4

Target: ₹611

Varroc Engineering is a global Tier 1 auto components supplier engaged in design, manufacture and supply of auto exterior lighting systems, plastic & polymer components, electrical-electronic components, and precision metallic components used in passenger cars, commercial vehicles, 2-wheelers, 3-wheelers, and off-highway vehicles (OHV) OEMs.

Valuation: Varroc, on the one hand, is working on growing organically by focussing on high growth markets for its global lighting business and increasing revenue share from its customers in India; on the other hand, it is pursuing strategic joint ventures and inorganic growth opportunities in order to drive future revenue growth. Going ahead, VAR has a 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 & capitalise on future trends; 4) To look for inorganic growth expansion; and 5) To focus on operational efficiency. Currently, VAR trades around 9.6x P/E on FY21E basis, which is attractive given the healthy financials.

Risk factors: 1) Two-wheeler industry in India could come under pressure due to cost escalation led by change in regulations; 2) Continued weakness in China JV due to weak passenger car sales; 3) Overhang of promoter reducing stake to 75 per cent from current 85 per cent (by July 2021), as per SEBI minimum public shareholding norms.