Mumbai: The Varroc Engineering IPO was subscribed 33% on Tuesday, the first day of the initial public offering. As of 5 pm of Tuesday, the portion of shares reserved for institutional investors was subscribed 104%, while those reserved for retail investors and high net-worth individuals (HNIs) were subscribed 10% and 1%, respectively. The auto components firm, backed by Tata Opportunities Fund, has fixed a price band of ₹ 965-967 per share.
The Varroc Engineering IPO, which closes on 28 June, is a pure sale of shares by the promoter and investors. The company does not intend to raise any fresh capital for investing in its business. At the upper end of the price band, the selling shareholdeers will fetch ₹ 1,955.4 crore with the promoter, Tarang Jain, earning ₹ 169.4 crore. He holds a 46.35% stake in the company.
Tata Opportunities Fund will make a complete exit from Varroc Engineering. It owns a 12.55% stake in the company and stands to make ₹ 1,635.8 crore from the IPO. The fund had invested ₹ 300 crore in 2014. Another Tata entity, Tata Capital Financial Services Ltd, will also sell its entire 1.15% stake in the company. Tata Opportunities Fund’s exit from Varroc will be among the largest IPO exits by any private equity firm in India.
Investment banks Kotak Mahindra Capital Co Ltd, Citigroup Global Markets India Pvt. Ltd, Credit Suisse Securities (India) Pvt. Ltd and IIFL Holdings Ltd are managing the Varroc Engineering IPO.
Founded in 1990 in Aurangabad, Varroc Engineering designs, manufactures and supplies exterior lighting systems, plastic and polymer components, electricals-electronics components, and precision metallic components to passenger car, commercial vehicles, two-wheelers, three-wheelers and off highway vehicle manufacturers worldwide.
Between FY16 and FY18, Varroc’s revenue grew at a compound annual growth rate of 12.37%.
Varroc has not shied away from growing through inorganic opportunities.
In 2012, it acquired US automotive electronics supplier Visteon Corp.’s global lighting business and renamed it Varroc Lighting Systems. In 2007, Varroc acquired I.M.E.S (a manufacturer of hot steel forged parts for the construction and oil and gas industries) in Italy. In 2011, it bought Triom (a manufacturer of high end lighting systems for global motorcycle brands) with operations in Italy, Romania and Vietnam.
Varroc has a global footprint of 36 manufacturing facilities spread across seven countries.
Analysts take on Varroc Engineering IPO
Domestic brokerage Angel Broking has a neutral rating on the Varroc Engineering IPO, citing high valuations. The brokerage finds the valuation high as compared to other competitors like Motherson Sumi Systems Ltd.
“In terms of valuations, the pre-issue price-to-earnings ratio works out to 28.9X FY2018 earnings (at the upper end of the price band), which is high compared to its peers like Motherson Sumi, which is trading at 26.4X. Further, Varroc Engineering has lower RoE at 16% versus Motherson Sumi at 25% (FY18). Considering the above factors and two-year low profitability growth, we recommend neutral rating on the issue," Angel Broking said in a note.
Another brokerage ICICI Securities Ltd recommends subscribe to the Varroc Engineering IPO from a long-term perspective. “Varroc is a Tier 1 auto ancillary player which has wide range of product portfolio spread across customers and geographies. Further pedigree management, strong growth opportunity and decent return ratio (nearly 16%) remains positive for the company," ICICI Securities said in its IPO note.
Centrum Broking has a subscribe rating. “Varroc Engineering has a strong clientele; the current strategy of diversifying its product base, upgradation of technology along with any M&A opportunity could further enhance its position," said Centrum in its IPO note.