NEW DELHI: The IPO mart is buzzing again. After a brief hiatus owing to market volatility, the pipeline for mainboard IPOs appears robust. Last week, two issues — RITES and Fine Organic — received solid response from investors. Leading FMCG player Anmol Industries filed draft papers with Sebi for an IPO.
Auto component manufacturer Varroc Engineering is slated to launch its initial public offering on June 26, Tuesday.
Here's a lowdown on everything you need to know about the issue:-
About the company
Varroc Engineering is a tier-1 automotive component group. Tier-1 companies are those companies which directly supply to original equipment manufacturers. It designs, manufactures and supplies exterior lighting systems, plastic & polymer components, electrical – electronics components and precision metallic components to passenger cars, commercial vehicles, two-wheeler, three-wheeler and off highway vehicle OEMs directly worldwide. It has a global footprint of 36 manufacturing facilities spread across seven countries, with six facilities for its Global Lighting business, 25 for India business and five for Other businesses.
Citing CRISIL report, the company claims to be the second largest Indian auto component group (by consolidated revenue for FY2017) and a leading tier-1 manufacturer and supplier to Indian two-wheeler and three-wheeler OEMs (by consolidated revenue for FY2017). Also, it's the sixth-largest global exterior automotive lighting manufacturer and one of the top three independent exterior lighting players (by market share in 2016) (Source: Yole).
About the industry
Over the past 10 years, Yole notes that the market breakdown of global passenger car (PC) and light commercial vehicle (LCV) has changed significantly; global PC and LCV sales reached 90 million units in 2016 (representing 95.5 per cent of total vehicle sales (which also includes heavy trucks and buses)), compared with 64 million units in 2006.
During the 2016-2021 period, Yole expects mature markets such as North America and Europe to grow steadily at a CAGR of 1.6 per cent to 2.0 per cent while India and the rest of Asia are expected to continue growing at a CAGR of 5.3 per cent, 2.4per cent and 2.5 per cent respectively.
Auto component sector
Crisil Research estimates the overall two- and three-wheeler polymer industry to grow at a compound annual growth rate (CAGR) of 19-21 per cent, largely driven by the increase in two- and three-wheeler demand and acrylonitrile butadiene styrene (ABS) prices.
According to Crisil, the market size of the two- and three-wheeler electrical segment was Rs 69-71 billion in FY2017. It expects the segment to record a compound annual growth rate (CAGR) of 16-18 per cent from between FY2017 and FY2020, i.e. Rs 111-113 billion.
Lighting is a vital component in any automotive vehicle and plays an important role in the safety of the vehicle, its occupants and road-users. It provides illumination for drivers and pedestrians on the road to detect the vehicle's position, direction of movement and size. It also enhances the aesthetic appeal of the vehicle.
The two- and three-wheeler lighting segment is estimated to have a CAGR of 16-17 per cent, i.e. from around Rs 16.6 billion in FY2017 to around Rs 19.9 billion, Rs 23.1 billion and Rs 26.5 billion in FY2018, FY2019 and FY2020, respectively.
About the offer
The price band of the offer has been set between Rs 965-967 with face value of Re 1. The IPO consists of entirely an OFS (offer for sale) of 2.02 crore shares by promoters and existing investors. Of the total issue, 0.5 per cent shares i.e. 1,00,000 shares shall be reserved for the employees, who will be offered a discount of Rs 48 per share.
Total size of the issue stands between Rs 1,951 crore and Rs 1,955 crore. The QIB category has been allotted 50 per cent portion, while NIIs quota stands at 15 per cent. Retail investors category has been allotted 35 per cent of the portion. The issue will close on June 28, Friday.
Before the issue, promoters' stake in the company stands at 86.3 per cent while public and others read 13.7 per cent. Post the issue, the promoters' stake will come down to 85 per cent while those of public and others will increase to 15 per cent.
Kotak Mahindra Capital Company, Citigroup Global Markets India, Credit Suisse Securities (India) and IIFL Holdings are the book running lead managers while Link Intime India is the registrar to the issue.
– Pricing pressure from customers may adversely affect our gross margin, profitability and ability to increase our prices, which in turn may materially adversely affect our business, results of operations and financial condition, the company mentions in its DRHP;
– The company is heavily dependent on the performance of the global passenger vehicle market and the two wheeler and three wheeler markets in India. Hence, any adverse changes in the conditions affecting these markets can adversely impact the business, results of operations and financial condition;
– The company is subject to environmental and safety regulations that may adversely affect our business and we have been subject to environmental notices in respect of certain of our manufacturing facilities and may be subject to further notices in the future, it says;
– It has undertaken and may continue to undertake strategic investments and alliances, acquisitions and mergers in the future, which may be difficult to integrate and manage. These may expose the company to uncertainties and risks, any of which could materially adversely affect its business, financial conditions and results of operations;
– Failure to compete effectively in the highly competitive automotive components industry;
– Dependence on third parties for the supply of raw materials and delivery of products and such providers could fail to meet their obligations;
– Failure in implementing our strategies, such as expanding our business in China, South America, Southern Europe and Northern Africa, and East Asia or capitalizing on technological trends in the automotive industry.
• Strong competitive position in attractive growing markets;
• Strong, long-standing customer relationships;
• Comprehensive product portfolio;
• Low cost, strategically located manufacturing and design footprint;
• Robust in-house technology, innovation and R&D capabilities;
• Consistent track record of growth and operational and financial efficiency
On the back of growth across the segments, Varrco reported a 14.3 per cent CAGR (compound annual growth rate) rise in the total operating revenue over FY15-18 to Rs 10,378.46 crore in FY18. Global Lighting Business and India Business reported 12.5 per cent and 19.8 per cent CAGR growth in the business over the same period.
Consolidated Ebitda (Earnings before Interest, Taxes, Depreciation and Amortisation) increased by 12.5 per cent CAGR over FY15-18 to Rs 877.57 crore in FY18. Average Ebitda margin during the period stood at 7.6 per cent.
Average PAT margin during the period stood at 3 per cent. Cash flow from operations increased from Rs 128.34 crore in FY15 to Rs 1,074.85 crore in FY18, i.e. a growth of 103.1 per cent CAGR over FY15-18. Total debt declined by 11.3 per cent CAGR to Rs 9,80.07 crore in FY18. Debt equity ratio improved from 1.3 times in FY15 to 0.3 times in FY18. Average RoE and RoCE stood at 12.9 per cent and 11.9 per cent, respectively, during the period.
Should you invest? Valuation and recommendations
At the higher end of the price band of Rs 967, the issue is priced at P/E of 43 times (post dilution) on FY17 and 29 times on FY18 basis, which is at a discount compared to peer group average of 45.5 times in FY17 and 41.8 times in FY18, observes Centrum Broking in its IPO note.
The company 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, the brokerage says.
"Given this along with decent balance sheet position (debt to equity 0.3 times and RoE nearly 18 per cent as of March 2018) and comfortable valuations, we suggest that investors can subscribe to the issue," Centrum says.
Choice Broking seems a little sceptical of the offer. The brokerage notes that the company 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."
Angel Broking too finds the valuation high as compared to its peers like Motherson Sumi, which is trading at 26.4 times. Further, VEL has lower RoE at 16 per cent against Motherson Sumi at 25 per cent (FY18), it says. The brokerage has 'Neutral' rating on the issue.