Varroc Engineering Ltd.
CMP: 722 MarketCap: 9735 crores
Varroc Engineering ltd. (VEL) was established in 1990 is a global Tier – 1 Auto ancillary provider operates in two businesses: Global Lightening business, Indian component business & designing, Manufacturing and supply of lightening systems for Global 2W OEMs. Basically, VEL is the 6th largest company in Global lightening business and 2nd in India in component business in terms of revenue.
Promoters are relatives of Endurance Tech (twin) and Bajaj (nephew) guys.
Indian Business focuses on 2w - 3W market. There are 3 segments: Polymers (Revenues contributes 15% - 16%), Electrical – Electronics (revenues ~ 9% - 10%) & Metallic (revenues 6%). Product portfolio is 17. Based on revenue sharing, Bajaj Auto contributes the highest (53%). Clientele – Bajaj Auto, Hero Motocorp, Honda, Royal enfield, TVS Motors (is the latest entrant in the list). While in 3W – Atul Auto, Bajaj Auto, Piaggio and so on.
Global lightening business focuses on lightening business, having a portfolio of halogen, Xenon / High intensity, discharge LED, matrix LED, High definition MEMS and DMD, Surface LED and OLED module, Flex LED and LED pixels headlamps. Europe contributes 41.8% and USA contributes 34.4% of the total global revenue share. Clientele – Ford, Renault, Nissan, Mitsubishi, Tesla, Volkswagen, JLR, Fiat & Hyundai (latest entrant).
Low – cost manufacturing:
- Company has manufacturing facilities in countries like India, Mexico, Czech Republic, China, Morocco (started production) and Brazil (will start production)
- In the above countries, Labor costing is very less & these facilities are near manufacturing automotive hub. This low labor costing is helping Company to be more cost competitive compared to its peers.
- There are in total 36 manufacturing facilities. Six manufacturing facilities for lightening business, 25 for Indian business and 5 for other business.
- Company has 16 R&D centers with 1365+ engineers employed in Czech Republic, India, Poland & Mexico. (R&D % to sales comes to around 4%)
- An ancillary service seems to be like a sticky business. VEL gets into manufacturing of small parts and then it builds – up by increasing more and more products portfolio.
- For eg. Company use to supply 1 to 2 products in Honda and after building relations with the company they have increased to 4 – 5 products and company is looking to add more products and also looking to add companies.
- Once the products are approved by the buyers than it will be an agreement for the next few years till the Model is in the market. So, if the model is blockbuster than the business will be constant and long term.
- Company has a good allocation strategy. They have bought companies in the past at low valuation and have built them up. They went into JVs so as to enter into various countries and companies.
- Historical allocation strategy:
- In 2007, formed a JV with Plastic Omnium Auto exterior SAS, France. Acquired I.M.E.S, Italy.
- Acquired 2W lightening business of Triom, Italy in 2011
- Acquired lightening business of Visteon Corporation in 2012
- 50% stake in Varroc TYV corporation, BVI from Visteon International holding in 2014
- Partnership with Scorpion automotive in the UK for 2W security products in 2015
- Partnership with MEKRA Lang in Brazil for manufacturing of mirror system for CVs in 2017
- In 2018 company has entered in various agreements:
- 2W electronic fuel injection technology by entering into a joint venture with Dell’Orto SPA.
- Acquired auto lightening business facility in Turkey and alongside it got a small facility in Bulgaria too
- Agreement with Heraeus, Germany for working on catalytic convertors for working on catalytic converters in India.
- Diversified its business activities by acquiring Team concepts which is in the business of auto accessories.
Global LED business & electric business:
- LED business is getting transformed from Halogen business due to sharp decline in cost, reduction in Co2 emission.
- LED business will be the major contributor for the growth to come in next 2 – 3 years.
- LED business is a high margin business which will further add to the bottom line.
- Company has also won orders from new customers like Geely and Nissan.
- Market share in EV stands at 20% with customers like Tesla and Nissan which are more focused on EV.
- Company has been diversifying business from Bajaj Auto to Hero, Honda & Royal – Enfield.
- Growth was visible in the last quarter.
- Company is able to add new clients in the Bad cycle as well. In last quarter, they were able to add TVS motors in the list.
- Even Bajaj Auto was able to show growth in last quarter which will also help VEL to grow.
BS – 6 Norms:
- Company has recently tied up with Dell’Orto SPA, Italy for Electronic fuel injection which will replace carburetors in two wheeler. This norm will be applicable form April 2020 as per the government.
- Company is in talks with Royal Enfield and Bajaj Auto.
- As per the industry reports, it is expected that every year 2 crore two wheeler are sold and this is the opportunity size for VEL.
- Company is currently operating at 7-8% margins with low scale and lower product portfolio. Currently, in India Company is operating at around 50% capacity utilization in which they sell products to only Bajaj so with the addition of clients there has to be some margin expansion.
- As per the latest concall, company has brought forward the commercial production of Morocco to February 2019 from April 2019 and Brazil to January 2019 from March 2019.
- Halol plant has been started which will be supplied to Hero Motocorp.
- Company will be starting a plant in Chennai only to cater the demand from Hyundai. (this has been possible after the Turkey acquisition)
Risk / Variables
- There are two political risks which are going on i.e. Bre-exit & US – China Trade war.
- 60%+ revenues come from the Europe and USA which is watchful.
Low labor cost:
- With low cost comes lot of problems in dealing with labor unions.
Pricing pressure from customer:
- Company might face some pressure from OEMs which could lead to decline in profitability and they have to maintain quality standards while pursing cost reduction.
Tax benefits completion:
- Company has some tax benefits in China (upto 10%) any non renewal of the incentives might be a decline in Profitability.
Acquisition of companies:
- Company has been able to successfully in the companies they have acquired but this variable has to be tracked.
Slowdown in industry:
- As of now, there has been a slow down in the industry but Varroc has been able to increase the clientele and is also adding new facilities for them which won’t have much effect on the company.
Raw Material prices moving up and if that can’t be passed on.