Mumbai: Tata Opportunities Fund, the private equity (PE) arm of Tata Capital, on Thursday said it has invested 300 crore in Varroc Engineering Pvt. Ltd for a significant minority stake.

This is Tata Opportunities Fund’s first investment outside of the Tata group and its third transaction overall, having earlier invested in Ginger Hotels and Tata Sky.

Varroc supplies polymers, metallic, electrical and electronic parts to makers of passenger cars, commercial vehicles and two-wheelers, counting Volkswagen, JLR Automotive Plc, Bajaj Auto Ltd and Maruti Suzuki India Ltd among its customers.

The capital raised will be utilized by Varroc to pare its debt and fund its growth. Varroc took on debt to buy the lighting business of US-based Visteon Corp. in 2012 for $72 million, making it the biggest automotive lighting parts manufacturer in India.

Nearly half the money that has been raised will be deployed in reducing debt, said Tarang Jain, managing director of Varroc Group.

The company has set a target of more than doubling its sales to 20,000 crore by 2020 from about 7,450 crore in fiscal 2013.

The company has seen sales grow at 20% a year for the past decade, said Jain, adding that much of the growth will be contributed by the two-wheeler segment. “We are not just banking on the economy’s economic growth; we are rapidly increasing our market share and are looking at ways to cross-sell products across various OEMs (original equipment manufacturers)," said Jain.

He added that the company will certainly look for an initial public offering in five years’ time. Even as the auto market has been hit by a slowing economy and weak purchasing power, the two wheeler segment has continued to expand. In the eleven months to February, while passenger vehicle sales have dropped 6% to 2.27 million units, two-wheeler sales have expanded 6% to 13.5 million units.

Surjit Singh Arora, an analyst at Prabhudas Lilladher Pvt. Ltd, estimates the market for motorcycles and scooters to expand at a 9% pace annually over the next five years. The growth, according to Arora, will be fuelled by the scooters that have been steadily increasing their share in the overall market particularly in the urban region.

Tata Opportunities Fund has also committed capital to a fourth company, said Padmanabh Sinha, managing partner, Tata Opportunities Fund, declining to give more details of the transaction.

The PE firm has committed $200 million across four transactions in less than a year of raising the fund, he said.

In May, the PE fund announced the final close of its $600 million fund.

Tata Opportunities Fund is sector agnostic and seeks to provide growth and buyout capital for deals ranging from $50-200 million.

“We are taking contrarian bets and are staying away from auction like situations," said Sinha. On the Varroc deal, Sinha said “the two-wheelers market is resilient." Sinha added that the PE firm is open to investments in the infrastructure space and has considered a few opportunities.

The auto components segment has continued to draw investors, despite the sharp slowdown in automobile sales. In July, PE firm Blackstone Group LP agreed to buy a majority stake in auto parts maker Agile Electric Sub Assembly Pvt. Ltd for about $110 million. In the same month, Citi Venture Capital International invested $56 million for a “substantial stake" in Sansera Engineering Pvt. Ltd, which manufactures automotive engines and aerospace components.

Experts say the huge potential of India’s auto components space is luring investors.

“A good auto components company works on margins of 17-18% and return on capital of 25-30%," said Vineet Toshniwal, director, Equirus Capital, an investment bank, explaining the interest in the auto components space. “It’s a cyclical business and after a downturn of two years, a cyclical recovery is expected now. With rupee depreciation, export oriented businesses are looking attractive to investors," Toshniwal said.

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