The nearly 2,000 crore Varroc Engineering IPO, which opens on Tuesday, will see 2 crore shares being sold by its promoters in a price band of 965-967 apiece with the lot size at 15 shares and in multiples thereafter. The issue closes on 28 June.

Varroc Engineering, a Tier I automotive component group, designs, manufactures and supplies exterior lighting systems, plastic and polymer components, electrical-electronic components, and precision metallic components to passenger cars, commercial vehicles, two-wheelers, three-wheelers, and off highway vehicle manufacturers. Varroc has a global footprint of 36 manufacturing facilities spread across seven countries.

The Varroc Engineering IPO consists entirely an OFS (offer for sale) of nearly 2 crore shares by promoters and some existing investors. Pre-issue, promoters’ stake in the company stands at 86.3%. Post-issue, the promoters’ stake will come down to 85%.

Varroc Engineering consolidated top-line and bottom-line CAGR of nearly 12% and 10% respectively over FY2016-18, says Angel Broking in a note. In FY18, Varroc reported total operating income of 10,378 crore with net profit at 451 crore.

Since Varroc Engineering derives nearly 65% of revenue from global business, any unfavourable currency volatility could impact the company’s profitability, says Angel Broking.

The positives include Varroc Engineering’s focus on high growth markets for global lighting business, increasing customer revenue for India business and continuous investment in R&D, design, engineering and software capabilities to capitalise on future trends, Angel Broking says.

Brokerage recommendations

Angel Broking has a neutral rating on the Varroc Engineering IPO. The brokerage finds the valuation high as compared to its competitors like Motherson Sumi.

“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 Centrum 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.

“Given this along with decent balance sheet position (debt to equity 0.3X and RoE of nearly 18% as of March 18) and comfortable valuations, we suggest that investors can subscribe to the issue," it added.

Last week, RITES and Fine Organics IPOs saw strong demand. The RITES IPO was subscribed nearly 67 times.

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