Varroc Engineering IPO gets subscribed by 33% on first day; should you invest?

Global tier-1 automotive component group Varroc Engineering's  initial public offering (IPO) completed its first day. However, looking at the data, the company got only 33% subscription for its issue. The IPO will be available for subscription till June 28, 2018. Varroc through this IPO plans to raise about Rs 1,955 crore by offering somewhat 20,221,730 equity shares on benchmark indices BSE and NSE.  The company designs, manufactures and supplies exterior lighting systems, plastic and polymer components, electrical, electronics components, and precision metallic components to the passenger car, commercial vehicle, two -wheeler, three-wheeler and off-highway vehicle OEMs directly worldwide. 

Data given by NSE reveals that Varroc received cumulative bid of 46,18,470 equity shares which was just 33% subscription of total issue. 

Price band for this IPO is fixed at lower end of Rs 965 per piece and upper end of Rs 967 per piece. 

The company will not be receiving any proceeds from the offer. All proceeds will go to the selling shareholders, as the offer is to divest holdings of the selling shareholders.

On the valuation front, at a higher price band of Rs 967, the stock is available at a P/E valuation of 29 (on FY18 earnings) which seems fully priced. 

According to BP Wealth, favorable position in the global exterior PV lighting space and being a leading tier 1 auto component supplier to domestic 2 & 3 wheelers with a comprehensive well diversified product portfolio in an increasing content per vehicle environment would help in cross selling opportunities. Moreover, the company also has a well diversified client base both domestic and abroad which can help justify its premium valuation. 

Analysts at BP Wealth said, “Considering above factors we advise our investors to ‘SUBSCRIBE’ to the issue for long term.”

According to Centrum Wealth, Under the global lighting business (61% of 9MFY18 sales), VEL caters to the exterior lighting systems to PC OEMs globally. Its portfolio includes Halogen, Xenon/high-intensity discharge, light-emitting diode (LED), Matrix LED, digital micro-mirror device (DMD) etc. 

Centrum explains, India business (35%) caters mainly to 2W and 3W OEMs and exports with polymers & plastics, electrical-electronics and metallic components. Given the product base, VEL has been able to cater to customer requirements thus strengthening its client relationships and market presence. 

Over FY16-18, VEL registered revenue and PAT CAGR of 14% and 10%, respectively. Average EBITDA margins stood at 7.3%. As of Mar’18, debt to equity is 0.3x (vs 0.6x in FY17) and RoE at ~18%.  

Considering above, Centrum said, “VEL has been continuously building up on its in-house R&D and technology capability so as to be in sync with the current emerging trends from the automobile sector. 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 Mar’18) and comfortable valuations, we suggest that investors can Subscribe to the issue.”