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Business News/ Market / Mark-to-market/  Lights dim at Varroc as Street unimpressed

Lights dim at Varroc as Street unimpressed

Varroc's quarterly performance does not justify its expensive valuation of 29 times its one-year forward earnings estimate

Graphic: MintPremium
Graphic: Mint

Varroc Engineering Ltd may be among the fastest-growing global exterior auto lighting suppliers, but its stock, listed less than a quarter ago, is yet to light up investor fancy. The stock has taken investors on a roller-coaster ride since listing in July and closed lower after the company’s results were declared on Wednesday.

Given that the June quarter results are the first quarterly set to be announced post-listing, there are hardly any brokerage estimates yet. But the Ebitda (earnings before interest, tax, depreciation and amortization) margin of 8.8% was a tad lower than the 9% it had posted a year ago. This was in spite of strong 20.2% year-on-year revenue growth.

Evidently, input costs, especially cost of raw material, took a toll on profitability. The Ebitda margin of its domestic operations, which supplies diverse auto parts to two- and three-wheeler makers, inched up from the year-ago period. The consolidated margin was weighed down by the drop in profitability of Varroc Lighting Systems, the global lighting systems supplier to passenger car original equipment manufacturers.

Meanwhile, the company’s 36 manufacturing facilities across seven countries notwithstanding, it is still on an expansion path. Acquisition in Turkey and near-completion of new units in Morocco and Brazil will add to its revenue.

However, the moot question for the investor is how profitability will pan out. One of the main concerns during the firm’s initial public offering was its erratic profitability. This time, too, the Ebitda margin was not impressive. Meanwhile, higher depreciation due to expansions seems to have also impacted its margins. That apart, more tax outgo due to higher contribution from the India business weighed on net profit during the quarter, which rose barely 2% from the year-ago period.

Varroc’s quarterly performance does not justify its expensive valuation of 29 times its one-year forward earnings estimate. Further, slow growth in Europe and the US for passenger cars—which accounts for most of its overseas business—and growth moderation in two-wheelers back home—its key market—may dampen revenue growth, too.

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Published: 07 Sep 2018, 08:39 AM IST
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