Varroc Engineering Ltd

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%)
  • Sticky business:
    • 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.
  • Capital Allocation:
    • 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.
  • Growth Drivers:
    • 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.
    • Domestic business:

      • 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.
    • Margin expansion:

      • 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.
    • Upcoming capacity:

      • 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
    • Political Risk:

      • 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.

  • Technical chart.

Business Overviews: (Annual Report analysis)

  • Company have two primary business
    o To design, manufacture and supply of exterior lighting systems to passenger cars OEMs worldwide which company undertook by its subsidiary forming part of the VLS group
    o To design, manufacture and supply of a wide range of auto components in India, primarily to two-wheeler and three-wheeler OEMs.
  • Company has 36 manufacturing facilities with 16 R&D centers in 10 countries. Company stands at No-2 in two wheeler automotive segment (after Motherson Sumi) in India and No-6 in automotive exterior lighting manufacturing globally.
  • Domestic business offers a diversified set of products across three product lines, namely Polymers/Plastics, Electrical/Electronics and metallic components
  • Company also do the design, manufacture and supply of four - wheeler lighting to global OEMs and under carriage forged machine components for OHVs and drill bits for the oil and gas sector.

Industry Overview

  • Global passenger cars and light commercial vehicle markets.
    o Expected to reach 99 million units in 2021 at a CAGR of 2.0% during the period 2016-2021. The growth will be driven by emerging markets where GDP growth per capita will enable more households to purchase their first car.
  • Global Automotive Exterior Lighting market
    o Expected to grow at 4.3 % CAGR during the period 2016-2021.
    o The higher growth is mainly driven by increase lighting content per vehicle due to increased penetration of new technology like light emitting diodes (“LEDs”) that will increase the value of lighting systems compared to existing technologies and increased importance of lights as a selling point.
  • Industry Trends
    o Advanced driver assistance system (“ADAS”) (and autonomous vehicles)
    o Increased connectivity
    o CO2 emission reduction
    o Vehicle electrification
    o Shared mobility
    o Upcoming technologies such as LED, 3D Lighting, AFS, Matrix and Laser will also lead to high-growth, high-margin products that further bolster the growth of the industry.
    Indian Industry Overview
  • Indian two - wheeler sector is expected to grow at 8-10 % CAGR in next three years to reach 26.3 Mn units by FY2020 and domestic sales will also grow at similar pace but export will grow at 9-11 % from the low base of FY17.
  • Indian three - wheeler sector between FY17 and FY20 is expected to increase at a 13-15% CAGR, because of moderate domestic growth of 8-10% CAGR and a healthy exports growth of 20-22% CAGR.
    Key Strategies
  • Focus on high growth markets for global lighting Business: Company have relationship with new OEMs such as the VW Group, Renault-Nissan-Mitsubishi and Volvo Truck. Through China’s JV, company has two plants and two R&D centers in China. Company targets global platforms with global OEMs, as well as the local SUV and the growing electric car segments
  • Focus on increasing customer revenue for India Business: By extending array of company’s existing products and by continuing to develop technology solutions aligned with their needs. Company has PAN India manufacturing footprint provides visibility with the ability to be close to customers across key automotive manufacturing hubs in India, and company seek to foster customer loyalty by being closely attuned to each of their needs. All polymer product plants are located very close to customers in order to best service their needs.
  • Company has established a new R&D facility in Poland which started operations in 2018.
  • Company is focusing on growing existing product lines, such as automotive lighting and electronics for the global exterior automotive lighting market, in key markets including North America.
  • Company acquisitions:
    o With acquisition of Visteon, company has acquired a substantial portion of assets comprising of the lighting business of Visteon Corporation and subsequently acquired Vieston’s 50% shareholding in a joint venture with TYC, established for the manufacture and sale of the automotive and motorcycle lighting systems and components in China
    o Entered into a JV with Dell’Orto S.p.A. in India, in which company have 50 % shareholding, for the production, marketing and sale of electronic fuel injection control systems globally, with the exception of Europe and China.
    o Company entered into a tripartite technical and marketing support agreement, through which company receive support in Europe regarding the development, sales, marketing, logistical support and engineering of engine valves and other vehicle components
    o In January 2018, Company signed a letter of intent regarding the development of catalytic converter technology for use in India that would comply with the BS-VI emission standards and future legislation.
  • Focus on operational efficiency
    o Company applies a lean manufacturing standard in the Global Lighting Business which refers as the Varroc Excellence System (“VES”). VES is structured to boost industrial efficiencies and increase profits and operating cash flows by reducing costs and eliminating waste in excessive stocks, workforce and processes. Through the VES, VLS aims to achieve operational excellence by meeting key goals of “Superior Quality”, “Lowest Cost”, “Timely Delivery” and “Highest Motivation”.
    o For Indian Business company have implemented total preventive maintenance (“TPM”) in order to help ensure high quality, low costs and on-time delivery for its customers. Company TPM initiatives focus on improving the efficiency of production and support functions by identifying and eliminating losses.
    o Company has set up 3 wind power plants totaling to 12 wind mills with an aggregate power generation capacity of 8.35 MW. These windmills are located at three different locations, with four windmills at Supa, Maharashtra with power generation capacity of 1 MW each, six windmills at Satara, Maharashtra with power generation capacity of 0.35 MW each and two windmills at Jaisalmer, Rajasthan with power generation capacities of 1 MW and 1.25 MW each. The power generated at Supa and Satara is consumed by company plants located at Waluj and Aurangabad and the power generated at Jaisalmer is sold to Rajasthan Vidyut Board as per the Power Purchase Agreement executed with the Rajasthan and Jodhpur Vidyut Nigams. Company have also set up a solar plant at Shiwaji Nagar Sakri Dist Dhule, which has a power generation capacity of 5 MW. The power generated by the solar plant is used by company forging plant at Aurangabad. Also company have setup solar panels at eight of company plants that have sufficient roof space for the installations, with total power generation capacity of 4.2 MW.
  • Business Description with Clientele:
  • Varroc Lighting Systems
    o Headquarter in Plymouth, Michigan, USA.
    o Operate technical/sales centres in Novy Jicin, Ostrava and Rychvald (Czech Republic), Velizy (France), Changzhou (China), Köln (Germany), Monterrey (Mexico) and Pune (India).
    o Operates manufacturing plants in Rychvald (Czech Republic), Novy Jicin (Czech Republic), Pune (India) and Monterrey (Mexico). VLS also operates in Changzhou and Chongqing (China) through its joint venture with VTYC.
    o Customers
     Ford, Jaguar Land Rover, The VW Group, FCA, Groupe PSA, European MNC Car manufacturer and American Electric Car Manufacturer.
    o Products
     LED Front Lighting – Range Rover Evoque
     Advanced Front Lighting Systems- Bentley
     LED Mini-Projectors Low/High Beam Sub-Assembly- Lincoln
     LED Signature Rear Lamp- Peugeot
     Iconic Signal Lighting- Skoda Superb
     Projector Headlamps with LED Signature- Mahindra XUV 500
     LED Signal Lamp

Business Segments Electrical & Electronic Division Metallic division Polymer Business TRIOM business
Business Description Manufactures automotive auto electrical ignition system products Manufactures machined forgings and engine valves for OEMs in India as well as the global market Manufactures plastic components and mirror assemblies for OEMs Manufactures high-end lighting systems for global motorcycle OEMs
Product Portfolio Digital instrument cluster, capacitor discharge Ignition
(CDI), regulator rectifiers , motors and magnetos, lighting systems (headlamps , tail lamps , blinkers ) , handle bar assemblies Transmission assemblies , Hot forged brackets, Steering spindle assemblies , Front wheel hub assemblies , multiple gears, catalytic convertors, camshafts, crankshafts , engine valves, crankpins and flanges Instrument Panel, Door Trims, HVAC and under hood parts , interior trims, mirror assemblies, air filter assemblies , seat assemblies , pointed fairing & seat cowl. Rubber and rubber-to-metal bonded parts Bulb and LED variants for head lamps , tail lamps , direction indicators.
Segments 2Ws/3Ws, CVs,4Ws 2Ws/3Ws 2Ws/3Ws, CVs, 4Ws 2Ws/3Ws
Manufacturing Facilities 5 manufacturing facilities-Maharashtra and Uttarakhand ; hi-tech engineering centre located in Pune. 5 Manufacturing facilities-2 for valves and 3 for forging division 14 manufacturing facilities (including tool room) and 1 technical centre 3 manufacturing facilities – 1 each in Italy , Vietnam and Romania
Key Customers Atul Auto, Bajaj Auto, Honda , Piaggio, Royal Enfield Bajaj, Royal Enfield, FCA, Yamaha, Suzuki , Harley Davidson, Honda , Thyssenkrupp, Donfoss Power , a large American car manufacturer and an Italian vehicle manufacturer Bajaj, Eicher, GM, Hero, Honda, KTM, M&M , Royal Enfield, Suzuki , Tata, Triumph, VW, Volvo Eicher, Yamaha Aprilia, Bajaj, Bombardier, Ducati, EBR, Honda, Kawasaki, KTM, Piaggio , Peugeot, Yamaha


  • The increases the lighting value and lighting content per car as a result of technological improvement and up-gradation presents a big opportunity for lightening business of company
  • There are significant opportunities created by the future safety and emission norms for company Electrical and Lighting divisions.
    Key Financials
  • Net Debt to Equity Ratio for the company is at 0.3x as at the end of FY2018 as compared to 0.5x in FY2017
    Particular 2016 2017 2018
    Sales 7,909.22 9,298.79 10,278.83
    Sales YOY % 16.83 17.57 10.54
    EBITDA 570.94 581.75 877.55
    EBITDA YOY% -7.45 1.89 50.85
    PAT 369.82 313.10 450.26

Particular Sep-17 Dec-17 Mar-18 Jun-18 Sep-18
Sales 2,419.18 2,540.46 2,984.56 2,927.02 3,001.05
Sales YOY% 3.62 5.01 17.48 -1.93 2.53
EBITDA 219.16 204.64 244.30 224.60 303.85
EBITDA % 3.03 -6.63 19.38 -8.06 35.28
PAT 92.58 116.97 142.82 100.44 100.87
PAT % -5.92 26.34 22.10 -29.67 0.43

Cash Flow 2015 2016 2017 2018
Cash from Operating 128.34 290.49 676.50 1,074.85
Cash from Investing -285.58 -575.30 -576.69 -545.29
Cash from Financing 70.31 386.08 93.65 -523.18

Balance Sheet 2015 2016 2017 2018
Borrowings 1,651.24 1,600.29 1,508.24 1,193.12
Liabilities 1,775.53 2,018.00 2,322.33 2,962.86
Revenue split by Products 2018
Lighting 60.8 %
Polymer 16 %
Electrical 10.2 %
Metallic 6.3 %
Others 6.7 %
Revenue Split by Geography FY18
Europe 41.8 %
India 34.7 %
North America 22.3 %
Asia Pacific 0.7 %
Others 0.5 %

Highlights Of Q2 FY19 and H1 FY19 Results

  • Financials
    • Revenue grew by 26.5 % YOY to 29,744 million which comprise of India business growing at 27.4% YOY , VLS growing at 24.1 % YOY and other business at 47.4 % YOY.
    • EBITDA grew by 21.7 % YOY to 3202 million compare to 2545 million .
      • India Business EBITDA grew by 32 % YOY leading to a margin improvement of 40 basis points.
      • EBITDA for VLS business grew by 0.6 % leading into a contraction in margins by 130 basis points.
      • EBITDA margins for the other businesses Triom and IMES improved to 11% as against 5% last year same quarter.
    • EBITDA margin stood at 8.6 % compare to 8.9 % last year same quarter. It impacted by the cost relating to setting up of new plants in Brazil, Morocco, and initial cost at other locations.
    • In VLS business revenue grew by 14.4 % in Euro terms YOY.
    • PAT grew by 9 % to 1009 million compare to 926 million last year same quarter.
    • Net Debt at the end of the quarter was 21,009 millions higher than the debt levels compare to last year same quarter.
  • Key Highlights
    • Automotive Industry
      • Political uncertainty in Brexit, US-China trade sanctions, and the Euro diesel regulations had a significant impact and the growth was negative in two of the major passenger vehicle markets, which are Europe and China .
      • The changes in vehicle insurance requirements in India also impacted market sentiments.
    • IndAS 115 Changes
      • Under IndAS 115 engineering design and development revenue and costs are to be recognized on a per piece basis over the estimated life of the programs as against the earlier practice of recognizing the revenue at the time of invoicing to customers after receiving approval for the design before start of production.
    • Company has increase revenue share with its largest customer and other OEMS also.
    • Depreciation increased majorly due to capacity expansion at VLS and Czech Facilities.
    • Turkey acquisition is doing well and company have initiated integration of the same with Triom to leverage synergies from these two entities. The Bulgaria plant, part of the Turkey acquisition is likely to start production later this month.
    • Company in Morocco will start facility by Feb-19. Instead of April-19.
    • Halol plant is ready and expected to start production later this month for Hero Motors.


  • Kindly provide brief on $ 200 billion revenue target in next 4 years and how is the competition ?
    • Company have two business
      • Varroc Lighting Systems
      • India Business.
    • In first six months company is meeting its budget when it comes to revenue growth. Company has not increase the revenue because of volatile market
    • In last year and a half year company has directed its attention towards VW group and Renault Nissan and Mitsubishi groups are the two largest groups and there company hope to win lot of business from them last year and this year in fact some of the new plants which are coming up in Brazil and Morocco and other regions will be largely to also cater to these two people . In this year company is concerned for the VW and Renault than also company has increased its volume.
    • Company is winning new business even on the VLS side. On the India side company is already aligned with all the, 90% of business is two wheeler market and this business for company is growing.
    • Company is one of the largest players with Bajaj, Honda, Hero, Yamaha, Royal Enfield, and now recently even TVS Motors also started. and with a whole new range of new portfolio including some of the newer products which company is entering like catalyst for BS VI and the electronic fuel injection systems, which is additional revenue stream for company , also the more penetration of LED lamps, more of electronic instrument clusters, and going forward company is also working on power train , on the motor side and once the EVs also come in to the mark. Company is very sticky in two wheeler space in India which is one-third of company business. So company is on track to achieve target of revenue of 20,000 Cr in next four years
  • What will be the sustainable margin going forward ?
    • In India side in the first six month company margins have expanded and there is a lot of work happening on the manufacturing efficiency side, on the purchasing side, and purchase side obviously because when volume grows than one get better purchasing efficiencies and of course with revenue growth one is absorbing its fix cost in a much better way which is the biggest driver of profitability. In Q2 company is at 12.1 % EBITDA on India business and going forward company will do well in India business.
    • On the VLS side company have some head winds with some of company big customer like JLR especially because of the Brexit issues and also because of the China-US trade wars, China market has actually also gone down.
      • Company also have some headwind from Ford also and also PSA has been flat for company. But company grown in VW and Renault so because the revenues have not grown up to expectations that has impacted margins to some extent
      • In Czech operations also company have some operational issues but from September this year company have seen a lot of improvement in Czech operation in company biggest plant which is in Moravia region so company will now see better results in the Czech operations which are the biggest operations for company in VLS business, that is the biggest region for company today.
  • Did Q2 margins were the bottom end and from here company would see improvement ?
    • Yes company will do better on the margins going forward in VLS.
  • How company will cover the gap of margin with top players ?
    • All bigger competitors have scale so their margins are better and company scale is lower. Now after IndAS 115 accounting also earlier company was doing it within a two year time frame at the time of SOP business but all other competitors like Valeo , Hella etc are doing it on over the life the life of the program. , which is over may be at least five years. By following that program today company overall margin have grown in VLS also because now after the second quarter company is aligned with the global players. So they are accounting for it. Now, what has happened is that with this accounting change, it has been positive for company but going forward it will all normalize, so basically company need volume growth, with new growth and with just stable kind of operational efficiencies and now what is happening in India will also happen in VLS.
  • What is the breaks up of revenue from top six customers compare to last year same quarter ?
    • Customer A was 24.3% compared to 22.5% this year; customer B last year was 16.5, now it is 22.2; customer C was 15.7 last year, marginally improved to 15.9; customer D was 12% last year, it has gone down to 6.1% this year; customer E which was the fifth customer last year was 8.4, now it is 7.7; and customer F last year was 8.5, now it is 12.5.
  • What will be the factor that will not continue in Q3 on margin side ?
    • Company investing in new capacity because company have won incremental business so that is driving the growth of VLS. Company is on track to reach its organic growth for 2021 and 2022 for VLS so because of this organic growth company is building new plant. Company is building Morocco , Brazil and company have now accelerated the pace for this new plant so initially Morocco was supposed to start in April which is now getting start February. Company have pass the first quality audit and now producing the first pieces and now company is in full validation with first customer.
    • In Brazil company was supposed to start in March but now company have secured the start of production for January and company is trying to produce the first part delivered to the customer already in December this year. So this upsides are adding additional cost which company was not having in last year and as soon as company start delivering from these new plants company will get benefit from the revenue that they will be generating, so that is one part to improve the margin on the short-term.
    • Company has put a new leadership in plants and with their push company have been able to reduce the labour number and direct labour. Company have shown decrease in September and will be showing another decrease in October and now in November for the third month company will show another decrease so this is showing that company is in right lane and this will translate in better numbers on company bottom line. so this c ombination of labor reduction, insourcing in addition to this cars that has well stabilized is what is showing the stability of the actions that company have put in place and will impact the margin of VLS.
  • Will the EBITDA improvement will start seeing from FY20 onwards ?
    • Company have seen improvement in EBITDA, also in VLS from third quarter onwards, It will start happening because till the last quarter company were e like kind of really on the process of turning around. In September, company have turn around and now company will see better number from Czech plant where the major issues were from an operations angle, but yes, there are concerns on the revenue, Company is still growing on the revenues so those revenues will be there for company and because of the improvement in the Czech facility company will see better margins. but yes, one thing is still there that China, the revenues are still lower than budget when it comes in Europe and in China, that is something company not know because till these trade agreements happened between the US and China that is the major one or till like say between US and Europe also trade agreement needs to happen, so unless some of these trade things kind of materialize. Sale will increase in VLS also and company will see margin improvement.
  • How much program company had won last year and first half a nd how it will play out going forward ? what will drive the VLS business apart from the new program organically like adoption of LED and metrics LED in those whole process ?
    • Company had launched 140 programs last year world wide. Issue was company have significant amount of program that company launched in the same facility in Czech Republic, So company will balance the program going forward with Morocco plant so that company will not have all the programs starting at the same time in the same geographic location.
    • Going forward in terms of margin improvement in addition to the short-term activities that company is having and that will impact short-term in the next quarter. Company have signed a JV agreement for electronics with a company Elba in Romania and it is company target to start producing it own electronics. Today company have the capacity to fully design electronics , but company also send electronics to EMS company. With the joint venture company is able to obtain significant portion of the manufacturing, unlike this company is able to generate significant savings. According to the feasibility studies company is able to reduce 10 % price of electronics compared to external purchase price from own EMS. In addition, this joint-venture will contribute also to the profit of company so this is a significant step for company and this will be another step towards improving the profitability on the margin of business.
  • In Europe many players are going for EV vehicles so does company have any program for that ?
    • Company is focusing on the specific segment of the industry. Company is trying to avoid the segments with lot of technology content, but low volume which is very consuming, draining in terms of engineering resources. Company is trying to avoid the segment of very high volume, but no technology content where there is more players and also more pressure on the margin . Company is focusing on the segments with volume and technology. A good example are the two main customers that are rising company growth right now, the Volkswagen group and Renault Nissan and Mitsubishi group.
    • Reason for this step is because for example last year Renault had produced 10.4 million vehicles. they had announced already that by 2021 they would produce 14 million vehicles. They have announced also that every Renault branded vehicle will have full LED headlamps, so this is the kind of customers company want.
    • Coming of ADB technology is a big announcement that was legal in Europe until now is becoming legal also in North America in the US. This is a big news for industry because company will be able to increase the technology content of the product that company is selling in US as early as next year. Company have already started with its main customers in North America. Today company have products with ADB content , ADB technology.
    • Company has continue to deploy this growth strategy, so company worked again with VW, with Renault but also in China. In China company have won significant new businesses with Shanghai Volkswagen, SVW. This customer were in the past and these are customers that did very well in the same ones wherever want to play. In China, these are customers that are growing, that are leaders in their business, so they bring volumes and they bring technology.
    • Company has also win a new launch on Greely vehicles , Greely is the fastest growing car manufacturer in China. They are producing their first vehicle in Europe and they have chosen Varroc for their launch with specific technology, very advanced technology that company had patented and only one to able to deliver to market. so these are good signs that this strategy is working that the customer are receptive to company and continue to trust company.
  • What is the company strategy to win project from Japanese or Korean players in VLS business ?
    • In Korea, there are two strong lighting companies already, but company is very close to Hyundai because company is bringing foot print to Hyundai that their current supplier do not necessarily have. Right now company acquisition in Turkey is helping Hyundai in Turkey. With company positioning in India in the South in Chennai company is able to ship of them in the right location in India.
    • With new plant in Brazil and there are no right now supplier in Brazil, they are forced to import the lighting, so with this new footprint of company , company is becoming more important for Hyundai. Company is very close to enter in Hyundai.
    • Company have done a tech show recently in Hyundai . Company has also open a small office in Korea where company have representative that is helping to link and navigate better the Hyundai purchasing organization that company is familiar with. He is a former Hyundai key purchasing executive, so he has the right connection as well and he is helping company to develop and grow the momentum.
    • On Japan Side company have already won a program from Nissan, so that has been a start, the part of Renault-Nissan group, so Nissan company had already start a platform where there are Japanese OEM and also company have some interest from some other Japanese OEMs. Company has also open a office in Japan and Japanese are also big players in the global market.
    • Company have to be with the Korean and the Japanese also because they together control at least 20% to 25% of the total car market.
  • K indly elaborate on the electronic fuel injection system and catalytic convertor ?
    • This is for the India business on the two wheeler side, so for two wheeler today company have huge product range of 16 types of products across three divisions in India , polymer , electrical , electronic and metallic. Now, because of the new emission regulations, this gives company opportunity to be also because of the new BS VI from April 1, 2020, this has given an opportunity to be also a player in some of these high technology items like the electronic fuel injection, which are high cost items with lot of electronics in it and here company have tied up with an Italian company and already won a business with one of the large two wheeler OEMs in India. Similarly, in the catalytic front also because for the BS VI, company have also won programs on the BS VI catalyst front, so these are some new products which company have entered which will add to revenue stream going forward. Today , it is not part of company revenue stream, but going forward these two products will add to revenue stream.
  • How many CAPEX does company have in next three years ?
    • 800-1000 Cr every year to be able to reach that kind of objective YOY and reach 20,000 Cr vision.
  • Where will be the whole CAPEX be utilized ?
    • Capacity expansion, new plants these kind of things, also for some new products, also some capacity in the electronics also company is setting up a JV abroad. There will be further electronics because there is more and more electronics in products now, so company is also putting a world class electronics facility in Chakan in Pune, so all these future things which are coming in global market place of company and two wheelers.
  • What kind of debt equity ratio is comfortable for company ?
    • Company will not cross 1:1
  • Kindly give the composition in the VLS, what is halogen versus the LED?
    • Company is in range of 47 % of LED penetration for the quarter. There is still a little bit of a HID and the remaining halogen technology, but it varies also between headlamp and rear lamp. Now, in terms of rear lamp technology, more than 60% of LED penetration and going forward, every new rear lamp that company is developing has some kind of LED content. Very interesting is that for the many driven in Europe by the new emission norm. Every OEM knows he is pushing to have more LED content on the front lighting. By implementing full LED lighting on the front, they are able to get credit of 1 g of CO2 per kilometer which is significant for them because everybody has been struggling in Europe to reach this emission technology, so for example recently, with company customer Ford, company is in the process of switching the Fiesta and Focus that are smaller cars, so historically with more halogen content, company is switching to full LED content, so this is a very good opportunity for company and company will start to see this incremental revenue and incremental margin as early as next fiscal year, so company is accelerating the deployment.
  • What was the revenue between electric vehicles and the diesel engine vehicles in VLS?
    • Last year company had 21 % of the electric vehicle lighting market, number one position was having 22 %. So company is definitely a leader in the electric lighting vehicle. In this quarter in electric vehicles company is close to 19 % to 20 % of revenue of VLS.
  • With respect to domestic market in the India business, Which are the particular segments for example polymer or metallic which has grown significantly in this Q2 FY19 ?
    • Company have grown significantly across board because for the reason that 50% of revenues in India come from Bajaj and with Bajaj across all product company have e a significant share of business and they have been pretty aggressive in the market place in this year. So respect to that company have grown very well across segments and also with the other customers whether it is with Honda, with Royal Enfield even with Hero and with also the other customers also especially in the first quarter the growth was more, it has slowdown a little bit in the second quarter, but fortunately for company major customer has grown much faster than the rest of the players and to grab market share, that has really helped company to grow across all segments, across all divisions , product segments also .
  • Will company maintain it statement of increasing margin by 150 BPS at the end of year ?
    • In second quarter compare to last year company have already achieved that 150 BPS increase because EBITDA is 12 and last year and last year company was probably at about 10.5% to 10.6% or something as a whole on a full-year basis and this year already the second quarter is 12 % EBITDA. So company have actually crossed that in the second quarter itself and company is hoping that it is able to sustain till the end of the year.
  • What happen to FCA why it decline more than 40 % on YOY basis ?
    • It is company interior plastic business that company keep referring to in North America was an FCA business , that was the interior, the console for the Dodger van. Company decided last year that was rising for company to exit the business and this way on the gap in terms of revenue compare to last year in the specific business , the interior business.
    • Going forward it will be stable there will not be any increase or decrease.
  • What about Renault , is it classified in others ?
    • Right now Renault is very small with company , yes it is inside the others and then in next three years they will be in top three customers of VLS .
  • There is 4 % decline in Euro terms , has that been a relatively bigger decline because since Renault is growing, will there be other customers which has reported a bigger decline in others?
    • In others, the impact that company have seen specifically in the last quarter is mainly driven by China. China was volatile the last quarter, company have seen decrease notably from company local customers like Shanghai Ford for example. The good thing in China is right now government has decided to give some incentive to the new car buyers to divide by two the tax that is on new vehicles, so from that there is a boost in car sales. All the actors in the automotive industry, company is following it very closely and hope that this time the incentive will work again.
  • I n India business what is the kind of out of 16 products how much company supply to Hero and Honda , any development in first half of the year ?
    • With Honda, there has been no increase except for the fact that some of the new products company got into like instrument clusters, company have seen now the volumes coming in this year. Now, presently company is in discussion with three other products with them, today company supply six products to them today to Honda , so company will be discussing three more products with them that is something which will be another maybe six to seven months to materialize because this will be post April 2020 when the new norms kick in, so that is something company is in discussion . Company should see attraction of at least two or three products by the end of this year.
    • In Hero, company will be starting the lighting facility for them in Halol this year and this month it starts the production, so that is more about to start with a million sets for vehicle sets for them, so that is after painting business, this is a second product company got into them. Company is in discussion already for another five or six products with Hero and that is something which is close to finalize, a lot of these are close to finalization within the next three to four months. So company will have some wins within the next three to four months with Hero .
  • What would be company potential investment in Romania that Varroc would have to invest ?
    • Romania JV, the investment will be in a gradual manner so initially company is envisaging a total investment of 2 million Euros out of which about 70% company will be putting in and JV partners will put in the balance 30% and over the next 12 to 18 months as company step up the capacity in the range of product , investments will go up, but overall company expect about 100% investment in the JV would be around 12 million Euros or thereabouts, out of that 70% will be done by company.
  • In how many time company will scale up to 12 million Euros ?
    • Next 12 to 18 months, up to year-and-a-half depending on how quickly company is able to scale up.
    • In a year time company want to start a SOP but company is just saying on the safe the total investment is anyway about 12 million, of which 70% is company share which is part of company CAPEX plan.
  • In electronic JVs , what is the share of electronics as a total cost of lighting today?
    • Including LEDs as part of electronics because they are electronic components, It is coming closer to 40% today of total purchasing amount. JV will be doing LED and PCB assembly . So company will take the different electronic components including the LEDs and then assemble them on PCB boards, so this is closer to 15-20 % of total purchasing amount .
  • Does company will only manufacture 30 % of the electronics requirement in house ?
    • Yes
  • What will be the revenue share of the Turkey company which was acquired and the margin share of the Quarter-2 figures?
    • On the average revenue are about 2 to 2.5 million Euros, company have to pull out the extact numbers , but it is about 2 to 2.5 million Euros a month company do and the EBITDA there is high in that business, but revenues are at the moment small 8 to 9 million for the quarter was the revenues from Turkey.
  • Did company have won any program under ADB technology and surface LED technology ?
    • In ADB company have already similar vehicles running on the ADB technology. For surface LED company have won first product already and company is very close to win the second one right now.

It’s a very good company. Good management. I think near term challenges are there. Many of their customers facing slowdowns.


Varroc Enginerring Ltd

Highlights Of Q3FY19 and Nine Month FY19 Results


  • Q3FY19
    • Revenue grew by 18.3 % to 2927 Cr compare to last year same quarter.
    • EBITDA on like to like basis grew by 40 % to 273 Cr compare to 195 Cr last year same quarter. EBITDA grew by 33 % to 277 Cr compare to 209 Cr last year same quarter.
    • EBITDA of India business grew by 39.9 % YOY leading to margin improvement of 150 basis points.
    • EBITDA of VLS business on like to like basis increase by 41.6 % leading to margin expansion of 140 Bps primarily due to improvement of operational efficiencies in check operation.
    • EBITDA margin for other business improved to 12 % against 9.1 % in Q3 FY18.
    • Margins stood at 9.3 % as against 7.9 % last year same quarter.
    • EBITDA was positive due to lower la unch expenses in the current quarter but negatively impacted because of current cost of setting up of new plant in Brazil , Morocco and Poland.
    • Depreciation on YOY gone up due to increase in check facility in VLS and application of IND-AS 115.
    • PAT for the quarter 12 Cr against 11 Cr last year same quarter
  • Nine Month FY19
    • Revenue grew by 20.1 % to 8883 Cr from 7393 Cr last year same period
    • EBITDA grew by 28.3 % to 839 Cr from 654 Cr last year same period
    • EBITDA on like to like basis grew by 29.3 % to 787 Cr from 608 Cr last year same period
    • EBITDA margin stood at 8.9 % compare to 8.6 % last year same period
    • PBT grew by 10.6 % to 405 Cr from 367 Cr compare to last year same period
    • PAT De-grew by (-1.5%) to 303 Cr from 308 Cr compare to last year same period
    • Net Debt grew by 51.6 % to 2201 Cr from 1452 Cr last year same period.

Key Highlights

  • India business growing at +22.6 % YOY , VLS growing at +15.9 % YOY and other business growing by 23.6 % YOY.
  • India business is continue to benefit from strong growth of larger customer as well as increase of business of various OEMS.
  • In VLS business revenue on comparable basis increase by 8% in Euro terms.
  • Turkey acquisition is progressing well. Company has initiated integration of the same with VLS Italy to leverage synergies from these two entities the Bulgaria plant of turkey acquisition has started production as per plan.
  • Brazil and Halol plant in India facilities have started production.
  • The Morocco facility is expected to start production in February and company already started construction of the Phase-2
  • 80 % volume and 20 % technology led increase revenue in this quarter.
  • Right now company is focusing on developing Halogen , company have developed reflective base LED solution that is very competitive and it is more expensive than Halogen but it is so much usable in terms of functionality. It is lower perception in terms of energy. It will give more stylish look for the OEM and this will help company to attract the market share of Halogen and increase the penetration on the front.
  • In morocco company is firstly launching utility vehicle. Company is very much in line with the volume of the customer.
  • Company utilization is 80-85 % right now and company still have some launches which will bring them to maximum capacity. Plants in Brazil and Morocco are raising up and company is going by stages so now company is at stage-1 and it will be 100 % in first 12 month and then company will be in stage-2 and then company will not try to break too much capacity going ahead. The capacity available today is in Mexico where one-third of capacity is available right now and here company is working very hard to win business to full this capacity so that will impact the whole VLS.
  • Revenue Share from top Customers
    • In VLS
      • Customer A it was 15 % reduction in terms of revenue YOY
      • Customer B it was 10 % growth in terms of revenue YOY
      • Customer C it was flat in terms of revenue YOY
      • Customer D it was 40 % reduction in terms of revenue YOY
      • Customer E it was 8 % growth in terms of revenue YOY
      • Customer F it was 24 % growth in terms of revenue YOY
    • In India
      • Bajaj Grew by about 23 % YOY in terms of revenue
      • Honda grew by 22 % YOY in terms of revenue
      • Royal Enfield was flat YOY in terms of revenue
      • Mahindra was flat YOY in terms of revenue


  • Planning to end the year with Debt to Equity of 0.60 from current 0.73.
  • Company is looking for double digit growth going forward.
  • Planning to add one more customer on EFI front
  • Cataylst business will go up toward 250-300 Cr in immediate term.
  • Planning to grow Indian business at 15-20 %.
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In tough environment, this company has done better than expected, as per Q4 results.


The company’s revenues from India looks to be increasing very well with new customer addition. So inspite of sector weekness they will grow.

Interesting case for me is depreciation greater than net profit. Thats kind of tax advantage.
Huge cashflows via depreciation route.

Product is perception based. Style factor is high. Amazing their customers with new unthinked/useen models of lighting will make winning business easier.



I was trying to find all the players in the automotive lighting industry globally. Since Varroc (VLS) has 2/3rds of its sales from this segment. Also VLS has roughly $1.1 Bn Sales in FY19 with 17.7% YoY growth in this segment.

Please click to read. There could be some unintentional misrepresentation of data. I wanted to focus on international markets rather than India.

The key players seem to be Koito, Hella, Osram, Vella & group companies and Magnetti Marelli (a Fiat company).

A friend also pointed out that in the DRHP the following is given:

The global automotive exterior lighting industry comprises more than 20 players around the world. This industry is in the hands of eight main players (namely Koito Manufacturing Co., LTD, Magneti Marelli, Valeo, Stanley Electric Co., LTD, Hella KGAA Hueck&Co, Varroc Lighting Systems, SL Corporation and ZKW) which generated US$16.3 billion in revenue, representing 91% of the total global automotive exterior lighting revenue (estimated at US$17.8 billion in 2016).


disc: studying the company. do not have any significant position in the company



There were few concerns raised on social media on Varroc. They are the following:

  1. Varroc has tax disputes
  2. Varroc has subsidiaries which are not audited
  3. Varroc pays less tax
  4. Varroc’s promoters have some questionable history

I think the answers to the first three are clearly stated in the DRHP of Varroc.

Varroc has tax disputes
This is called out as a risk explicitly along with other criminal and civil cases. All cases combined they have quantified it to ~55 Crs. (point 21 in Internal Risk Factors).

Financial statements of subsidiaries not audited
13 subsidiaries and 3 JVs (outside India) have a total asset base of ~80Crs 9MFY18 and a comprehensive loss of 2.2Crs in same period. This is also an explicit mention in Internal Risk Factors point 42.

Varroc Pays less Tax
An explicit ‘Statement of Tax Benefits’ which is issued in the DRHP. It calls out the benefits Varroc receives under

  1. Section 80IC for the Pantnagar undertaking (100% decution for first 5Y then 30% of profits)
  2. Section 80IA for windmills in Maharashtra and Karnataka (100% deduction for first 10Y, then depreciation at 4% on written down value of block of assets from FY18)
  3. Section 35(2AB) for R&D under Department of Scientific and Industrial Research (200% deduction on R&D, from FY21 it will be 100%)
  4. VLS s.r.o. Czech - tax incentive of 40% of costs
  5. Varroc TYC Changzhou China - favorable tax rate of 15%
  6. Varroc Morocco - tax holiday for 5Y till FY18 then 8.75% for 20Y then 17.5% thereafter. Some discount also on lease of building.

On the 4th about promoters I don’t have any factual data. But after googling I couldn’t find anything much. If someone can throw light on promoters it will be helpful. I understood that Tarang Jain and Anurag Jain are identical twins. Anurag runs Endurance Tech. Their mother is the sister of Rahul Bajaj. They are the great grandsons of Jamnalal Bajaj I believe.


Disc: Not a registered analyst/adviser. Studying the company.


Yes; Tarang Jain and Anurag Jain are the nephews of Rahul Bajaj.

Both, the brothers entered into a Memorandum of Agreement in 2010; wherein they have agreed to stay away from each other’s company and avoid any ownership in each other’s company.

The interesting thing to note is that; Endurance, earns more profit than Varroc at 2/3rd of Varroc’s sales. The mcap of Endurance is more than 2x of Varroc.

This shows that Endurance is far more efficient than Varroc.


Hi Ankush

Thanks for your input. I have not studied Endurance in detail but I understand that they are doing different product lines like die castings, transmissions for ICE, suspensions and braking systems. I am assuming the margins in these businesses will be different for Endurance when compared to Varroc.

Correct me if you think this is wrong thinking.

Thanks & rgds

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Though Endurance ratios are good now, they are going to get disrupted by EV migration. Varroc is set to gain on EV push, as EV vehicles tend to have more interior lighting components. Varroc supplies to Tesla.

Plus Varroc has done huge capex on setting up new plants globally and those will start contributing to the revenues in couple of quarters.


Hi Deepak,

Yes, the product portfolio of Endurance is very different from that of Varroc and this might be the reason for better efficiency.

But, i think that one should not compare a company with another company with the same product portfolio only; they both are in the same industry and thus are comparable.

I feel that the entire EV migration is over hyped.

The EV technology is not at a point wherein it can be used for day to day purpose.

The biggest issue with the current tech is the time taken to refuel/recharge the batteries. One can get a full tank in probably 5min but for battery it takes an hour easily. And people might say, “Swap-able battery is the fix”, but that’s a too costly endeavor.

India’s first public charging station was established in NAGPUR few years back by OLA for there electric cabs. The program failed big time, as cab drivers had to wait for hours to get there vehicles re-charged. And i had witnessed it first hand.

Even if the tech evolves to a state wherein this is not an issue; it will take a no. of years (10 years at-least) just to get the charging infrastructure in place.

(Just a personal opinion; not an argument)


The Niti Aayog has already mandated for transitioning to 100% EVs for 3-wheelers by 2023 and 100% 2-wheelers < 150 cc by 2025. In no time, we are going to see charging stations in tier 1 & 2 cities. Then dictate for 4 wheeler will soon follow.

Whether Electric or normal vehicles. Electric and LED components are needed for all vehicles. Varroc is in this business only and the stock is beaten due to less demand and bad phase of Auto industry. My personal opinion is that when the cycle turns Varroc profits would increase and stock can increase substantially.

Also regarding EV’s my opinion is that india should adopt Hydrogen Fuel cell technology for EV’s as it is better than Lithium batteries. Refuelling is also easy for Hydrogen Fuel cell. In 2018 ISRO and Tata jointly developed a Hydrogen fuel cell bus and it was a success. ISRO had done years of research to develop this technology and also the opinion of scientists at ISRO is that Hydrogen Fuel cell vehicles should be adopted in India.

Any inputs on Corporate Governance issues as highlighted by @deevee.

I have seen such information on CG on twitter as well …

What is Varroc doing to ensure the numbers are Audited on foreign firms and WHY disputes are lingering for so long …?

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Endurance is a very good company too and so is Varroc. I would say, Varroc will be less affected by EV transition. More than 90% of their revenues are not going to be affected. In fact, it may gain as it already has a large share (more than 20%) in EV space for their products.


The latest AR is a very good read. It tells about the company initiatives and how they are moving forward with various initiatives. And leading in technology. They have very good R&D strength with more than 1500 R&D engineers. More than 10% of their workforce. They have 185 patents.