BackVarroc Group in talks with PE firms to raise around Rs400 cr
The group to divest a minority stake to pare debt and fund its growth
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Mumbai: Aurangabad-based auto parts makers Varroc Group is in talks with private equity (PE) firms, including Tata Capital’s recently raised Tata Opportunities Fund, to raise nearly ₹ 400 crore by divesting a minority stake to pare debt and fund its growth, said two people familiar with the discussions but did not wish to be named.
“The talks are in advanced stages and the deal could close in a couple of months," one of them said. Tarang Jain, managing director, Varroc Group, confirmed the development. “We hope to close the deal with one of them (the investors) in another two months," said Jain, adding that Varroc will offload equity stake in “single digits". He declined to share more details or name the potential investors.
The Tata Opportunities Fund is sector agnostic and seeks to provide growth and buyout capital in deals ranging from $50-200 million. In May, the PE fund announced the final close of its $600 million fund. 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 key customers.
The company made $1.2 billion (around ₹ 7,450 crore) in revenue in fiscal 2013, and has been growing at 20% per annum for the past decade, said Jain, adding he targets $4 billion in revenue by 2020.
But Varroc also amassed debt in acquiring the lighting business of US-based Visteon Corp. last year for $75-100 million that made it the biggest maker of automotive lighting parts in India. Nearly half the money being raised will be deployed in retiring the debt, Jain said. Varroc will also use some of the money to finance its growth plans both in India and abroad.
The company has been trying to raise PE investment for the past two years but has not been able to close the deal due to “valuation" issues, Jain said, adding that this time that’s not been a problem. The auto components segment is one of a few in the manufacturing sector that is still drawing interest from investors. This year, in particular, the segment has seen some large-ticket investments despite the sharp slowing in the domestic auto sector. 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.
Earlier in April, PE firm KKR and Co. agreed to buy as much as an 80% stake in Mumbai-based Alliance Tire Group from Warburg Pincus Llc. for an undisclosed sum. While the terms of the transaction were not disclosed, the deal values the tyre maker at about $600 million.
Experts say fast growth and the huge potential of India’s auto components space is luring investors. Researcher IHS Inc. on Wednesday said it expects India’s automobile market to surpass those of Germany, Brazil and Japan to become the world’s third largest by 2016. India, currently the sixth largest automobile market, will account for more than 5% of global vehicle sales by 2016, IHS said. India will also become the fourth largest producer of automobiles by 2020 after China, the US and Japan, it added. According to K. Ramakrishnan, executive director, Spark Capital Advisors (I) Pvt. Ltd, an investment bank, there has been a resurgence in the manufacturing sector and India has historically been in a beneficial spot in the auto components manufacturing space due to its low-cost advantage.
“A lot of global auto manufacturers, including high end luxury car makers, are coming here riding the country’s domestic consumption theme. Quite a few are using India as a manufacturing hub and this should definitely benefit these companies," he said. Ramakrishnan added that though auto components is a capital intensive and low-profit margin business, it is possible for a few companies to generate high profitability levels.
“It is possible for niche, specialized auto components makers to have 25% to 30% Ebitda (earnings before interest, taxes, depreciation and amortization) margins compared with the typical 10% to 15% Ebitda margin" for typical auto components makers, he said. Deepesh Garg, managing director, o3 Capital Global Advisory, said investors are becoming more optimistic and keen on this space now as valuations have become more reasonable. “These firms are looking attractive from a returns point of view. The industry went through a tough phase from 2007 to 2011 and demand and supply has become more rational now."
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