Home >Market >Stock-market-news >Varroc Engineering posts strong gains, gets over 7% premium on stock-market debut

Mumbai: In the biggest initial public offering (IPO) of fiscal year 2019 so far, Varroc Engineering Ltd made a firm stock- market debut on Friday.

Shares of the auto component maker closed at 1,037.35 each on the National Stock Exchange, up 7.28% from its issue price of 967. The stock was listed at 1,015, offering premium of 4.6% from its issue price. Varroc’s 1,955 crore IPO was open for subscription on 26-28 June with a price band of 965-967 per share. It was subscribed 3.6 times.

According to Canara Bank Securities Ltd, the issue was reasonably valued. “Varroc Engineering Ltd has an earnings per share (EPS) at 33.40, FY 2018 and at the upper end of the price band the company would trade at 28.95 times of FY18 earnings," it said in a note on 22 June.

However, it added that Varroc has a few risks—pricing pressure from customers, regulatory risks and geographical concentration risks as more than 45% of its revenue comes from Europe. “Pursuing cost-cutting measures while maintaining rigorous quality standards may lead to erosion of VEL’s margins, which may have a material adverse effect on its business, results of operations and financial condition," Canara Bank Securities said.

ICICI Securities Ltd said the company is undervalued 29 times from its FY18 EPS compared to peers. “Varroc is a tier 1 auto ancillary player that has a wide range of products spread across customers and geographies. Further pedigree management, strong growth opportunity and decent return ratio remain positive for the company," it said.

The brokerage firm said Varroc has a clear road map to sustain growth, which is to focus on high-growth markets for the global lighting business, increase content per vehicle in India, invest in research and development, and capitalize on future trends.

According to ICICI Securities, a slowdown or lower-than-expected demand in the overall automotive space, failure to identify and understand evolving industry trends, and preferences are some of its risks.

It added that Brexit may adversely affect the company given its dependence on Europe.

In terms of segments, four-wheelers comprise 63% of its revenue, while two- and three-wheelers and others account for 34% and 3%, respectively. It is the second-largest Indian auto component group by consolidated revenue for FY17 and a leading tier-I manufacturer and supplier to Indian two-wheeler and three-wheeler original equipment manufacturers. From FY15 to FY18, Varroc had recorded a compound annual growth rate of 12.37% in terms of revenue.

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