varroc engineering...varroc engineering (vel) founded in 1988, is second largest auto component...
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June 22, 2018
IPO Review
ICICI Securities Ltd | Retail Equity Research
Well diversified Indian MNC…
Varroc Engineering (VEL) founded in 1988, is second largest Auto component
group with the global footprint. The company primarily has two business
lines 1) Varroc Lighting System (VLS) sixth largest player in the global exterior
Auto lighting catering to the PV OEMs (accounts for 61% of revenues) & 2)
Varroc India business which includes three segments namely - Polymer,
Electrical & Metallic catering to 2W, 3W, PV, CV & OHV (accounts for 32.5% of
its FY18 revenue). It has low cost strategically located global manufacturing
footprint (36 locations) & in-house R&D capabilities. VEL has long standing
relationship with marquee customer and is also well diversified with no single
customer accounting >20% of its revenue. VEL over the years has grown via
organic & inorganic route. Over FY13-18, VEL’s revenue has registered CAGR
of 19.5% while its margin expanded from ~6% in FY13 to ~8.5% in FY18. It
has low net debt to equity (0.2x) & decent return ratio (>14%).
Key Investment rationale
Diversified across categories (Geography + Product + Customer + Segment)
VEL is well diversified company across categories. As of FY18, in terms of
geography – Europe accounts for 42% of revenue while revenue from India
and North America stands at 35% & 22% respectively & balance of 1% is from
rest of the world. In terms of product, lighting accounts for 61% of revenue
while Polymer/Electrical/Metallic/Others represent 16/10/6/7% of revenue
respectively. It has broad portfolio of lighting technologies (Head lamps, Rear
lamps & Electronics) and comprehensive solution with wide range of products
across polymer, electrical & metallic segments to 2-W OEMs in India. In terms
of segment wise- 4W comprises 63% of its revenue while 2W/3W and Others
account for 34% & 3% respectively. Bajaj Auto, first OEM partner of VEL
continues to be its top customer accounting for 19% of its revenue. Its top six
customer account for ~64.5% of its revenue as of FY18.
Key business strategy
VEL has a clear roadmap to sustain growth which is 1) to focus on high
growth markets for Global lighting business; 2) Increase content per vehicle
in India; 3) Invest in R&D & capitalize on future trends; 4) To look for Inorganic
growth expansion and 5) Lastly, to focus on operational efficiency.
Key Risk & Concerns
Some of the major risks are 1) Slowdown or lower than expected demand in
the overall automotive space 2) Failure to identify & understand evolving
industry trends & preference 3) The synergy & Integration of its inorganic
acquisitions remain crucial for growth & 4) Brexit may adversely affect its
business given that Europe accounts for 42% of its revenue; and 5) VEL is
largely B2B player (as ~98% of its revenue is from the OEM segment) hence
its absence in replacement market can affect its long term growth.
Priced at PE of 29x FY18 EPS (at upper price band of |967/share)
VEL is a Tier 1 auto ancillary player which has wide range of product portfolio
spread across customers & geographies. Further pedigree management,
strong growth opportunity & decent return ratio (~16%) remains positive for
the company. The company is undervalued at 29x its FY18 EPS compared to
some of its peers. Thus, we recommend subscribe to the issue from a long
term perspective
Varroc Engineering
Price band | 965-967
Rating matrix
Rating : Subscribe
Issue Details
Issue Details
Issue Opens 26-Jun-18
Issue Closes 28-Jun-18
Price Band (|) 965-967
Bid Multiples (no of shares) 15.0
No. of Shares on Offer (crore) 2.0
Issue Size* (| crore) 1955.0
QIB (%) 50.0
Non-Institutional (%) 15.0
Retail (%) 35.0
*Assuming issue price of |967
Objects of the Issue
The object of the issue is to achieve the benefits of listing of Equity
shares on the stock exchange and to carry out the offer for sale by
selling shareholders
Shareholding Pattern
Pre-Offer Post-Offer
Promoters & Promoter Group 86.3 85.0
Public 13.7 15.0
Financial Summary
| crore FY14 FY15 FY16 FY17 FY18
Total Revenues 6116 6770 7909 9299 10279
EBITDA 400 617 571 582 878
EBITDA Margins % 6.5 9.1 7.2 6.3 8.5
PAT 42 13 369 303 450
EPS (Diluted) 3.1 1.0 27.4 22.5 33.4
Valuation Summary (at |967; upper price band)
FY14 FY15 FY16 FY17 FY18
P/E 310.1 999.9 35.3 43.0 29.0
EV/EBITDA 34.2 23.3 25.0 24.1 15.6
P/BV 11.6 11.8 7.3 5.9 4.6
Research Analyst
Nishit Zota
nishit.zota@icicisecurities.com
Vidrum Mehta
vidrum.mehta@icicisecurities.com
Page 2 ICICI Securities Ltd | Retail Equity Research
Exhibit 1: Consolidated Key Financials
| crore FY13 FY14 FY15 FY16 FY17 FY18
Total Revenues 4210.2 6116.3 6770.0 7909.2 9298.8 10278.8
EBITDA 252.0 399.5 616.9 570.9 581.8 877.6
EBITDA Margins (%) 6.0 6.5 9.1 7.2 6.3 8.5
PAT -26.0 42.0 13.0 369.3 303.0 450.3
PAT Margins (%) -0.6 0.7 0.2 4.7 3.3 4.4
Diluted EPS -1.9 3.1 1.0 27.4 22.5 33.4
RoE -3.5 3.7 1.2 20.7 13.7 15.8
RoCE 4.9 9.2 18.0 9.4 9.5 13.8
Source: RHP, Presentation, ICICI Direct Research
About the Company
Varroc Engineering (VEL) is a global tier-1 automotive component group. The
company designs, manufacture and supplies exterior lighting systems, plastic
and polymer components, electrical-electronics components, and precision
metallic components across automotive segments. VEL is the 2nd largest
Indian auto component group and a leading tier-1 player catering to 2-W & 3-
W OEMs. It is the 6th largest global exterior automotive lighting manufacturer
and one of the top three independent exterior lighting players.
VEL commenced its operations with polymer business in 1990. The company
initially grew organically in India by adding new business lines, like electrical
and metallic division. Subsequently, the company diversified its product
offerings and expanded the production capacity through various investments,
joint ventures and acquisitions. The most notable acquisition was in 2012,
that of Visteon's global lighting (VGL), which steered VEL as one of the
leading global player in the automotive lighting space. Prior to this acquisition
of VGL business, in 2007 the company acquired I.M.E.S (a manufacturer of
hot steel forged parts for the construction and oil and gas industries) in Italy
and in 2011 acquired Triom (a manufacturer of high end lighting systems for
global motorcycle OEMs) with operations in Italy, Romania & Vietnam. In
2013, the company expanded the global lighting business by acquiring
Visteon's holding in a 50/50 joint venture with Beste Motor Co. Ltd. ("TYC") to
manufacture automotive lighting in China, namely Varroc TYC (which wholly
owns Varroc TYC Auto Lamps, which in turn wholly owns Varroc TYC Auto
Lamps (CQ) (its "China JV"). Recently, on February 13, 2018, it entered into a
joint venture with Dell'Orto S.p.A., one of its customers, in India, for the
development of electronic fuel injection control systems for 2-W & 3-W.
The company has end-to-end capabilities across design, R&D, engineering,
testing, manufacturing and supplies multiple products. The company has two
primary business lines, namely (1) the design, manufacture and supply of
exterior lighting systems to passenger cars OEMs worldwide, which is
undertaken through its subsidiaries forming part of the VLS group & (2) the
design, manufacture and supply of a wide range of auto components in India
(its India Business), primarily to 2-W & 3-W OEMs, including exports. Its India
business offers a diversified set of products across three product lines,
namely polymers/plastics, electrical/electronic & metallic components. In
addition, it has other smaller businesses, which include the design,
manufacture and supply of 2-W lighting to global OEMs, & under carriage
forged machine components for OHVs & drill bits for the oil and gas sector.
Page 3 ICICI Securities Ltd | Retail Equity Research
Exhibit 2: VEL broad company overview
Source: RHP, Presentation, ICICI Direct Research
Exhibit 3: VEL’s business Evolution
Source: RHP, Presentation, ICICI Direct Research
The company has a global footprint of 36 manufacturing facilities spread
across seven countries, with 6 facilities for Global Lighting Business, 25 in
India and 5 (outside India) for its other businesses. VEL is well diversified
company across categories. As of FY18, in terms of geography – Europe
accounts for 42% of revenue while revenue from India and North America
stands at 35% & 22% respectively & balance of 1% is from rest of the world.
In terms of products, lighting division accounts ~61% of revenue while
Polymer/Electrical/Metallic/Others represents 16/10/6/7% of revenue
respectively. It has broad portfolio of lighting technologies (Head lamps, Rear
lamps & Electronics) and comprehensive solution with wide range of products
across polymer, electrical & metallic segments to 2-W OEMs in India. In terms
of segment wise- 4W comprises 63% of its revenue while 2W/3W and Others
account for 34% & 3% respectively. VEL had started its operations with Bajaj
Auto which still remains its top customer accounting for 19% of its revenue
however no single customer account >20% of its overall revenue. Its top six
customer account for ~64.5% of its revenue as of FY18.
Page 4 ICICI Securities Ltd | Retail Equity Research
The following is the description of VEL’s major division/products/customers
and manufacturing facilities.
Exhibit 4: VEL’s business segments
Source: RHP, Presentation, ICICI Direct Research
Global Lighting Business
The company’s manufacturing facilities in the Global Lighting Business, are
located in Mexico, the Czech Republic, China (through China JV) and India,
allowing the company to serve the North American, European, Chinese and
Indian markets, respectively. VLS is in the process of setting up a new plant in
Brazil, to serve the South American market & Morocco, to serve the southern
European and north African markets. Company VEL anticipates that its plants
in Brazil & Morocco will commence production in FY19. The company is also
in the discussions to acquire an exterior automotive lighting company in
Turkey in FY19. VLS has a diversified customer base across nearly all major
automotive markets in the world, except Japan and Korea. It has long-term
relationships with marquee auto manufacturers across the premium, mid-
range and mass market pricing spectrum, including Ford, Jaguar Land Rover,
the Volkswagen Group (VW group), Renault-Nissan-Mitsubishi, Groupe PSA,
FCA, a European multinational car manufacturer and an American electric car
manufacturer. VLS has a broad portfolio of lighting products, including
Halogen, Xenon/high-intensity discharge, light-emitting diode (LED), Matrix
LED, high definition Micro- Electro-Mechanical Systems (MEMS) and digital
micro-mirror device (DMD), surface LED, organic light emitting diode (OLED)
module, Flex LED, LED pixel and LED pixel headlamp, catering to the five
product segments within external automotive lighting. VLS has sales offices
in France, Germany & the United Kingdom and is headquartered in Plymouth,
Michigan (United States of America).
India Business
Within its Indian Business, VEL has 25 manufacturing facilities and five R&D
centres spread across India. Its Indian manufacturing and distribution
footprint is strategically located across key Indian automotive hubs, allowing
the company to be closer to its customers and helping to ensure cost
efficiency. The company has a long-standing relationship with Bajaj Auto,
which has been its customer for the past 28 years and to whom the company
has been providing components across its product lines. The other key 2-W
customers in India include Honda, Royal Enfield, Yamaha, Suzuki and Hero.
Page 5 ICICI Securities Ltd | Retail Equity Research
The company exports to global 2-W manufacturers from its facilities in India,
namely KTM and Volvo. In terms of product wise, the company offers various
products in polymer/Electrical/Metallic segment which account for 16/10/6%
of the total revenue respectively.
Polymer business – VEL is one of the largest polymer solution providers to
the 2-W OEMs with a Pan-India presence. Some of the major products include
Air Filter Assemblies, Mirror assemblies, Seat Assemblies, Trims (Interior &
Exterior) and others. The division has around 15 manufacturing facilities
across India and caters to 2-W, 3-W, PV & CV segment.
Electrical business – Within the Electrical division, the company offers
comprehensive solutions in electrical-electronics components, assemblies for
automotive applications and lighting products. Some of the major products
include Digital Instrument clusters, CDI, Motor (Starter & Wiper), Magneto and
others. The division has 7 existing manufacturing facilities & 2 upcoming
facilities in India, and caters to 2-W, 3-W, PV & CV segment.
Metallic business – Within the Metallic division, the company supplies
precision forged & machined parts for engines and transmissions. It also
supplies engines valves in domestic and international markets. Some of the
major products include Transmission assembly, Crankshaft, Connecting
Road, Engine Valve, Gears and others. The division has around 5
manufacturing facilities across India and caters to 2-W, 3-W, PV, CV & OHV
segment
Others segments include IMES & Triom
IMES – The business is into manufacturing of hot steel forged parts for the
construction and Oil & Gas Industries. Some of the major products include
Undercarriage Links, Drill bit cones & heads and others. The division has 2
manufacturing facilities in Italy, and caters to Earth moving & Oil-drilling
segment.
TRIOM – It is into high end lighting system for the global 2-W industry. Some
of the major products includes Tail and Blinker, Head and Tail light and
others. The division has around 3 manufacturing facilities in Italy, Romania &
Vietnam and caters to the 2-W segment
Exhibit 5: VEL’s diverse portfolio with end to end capabilities across segments
Source: RHP, Presentation, ICICI Direct Research
Page 6 ICICI Securities Ltd | Retail Equity Research
Investment Rationale
Strong competitive position in attractive growing markets
VEL’s Global Lighting Business is the sixth-largest tier-1 automotive exterior
lighting manufacturer globally and one of the top three independent exterior
lighting players. Globally, the exterior lighting market for PV is growing as (1)
lighting has become an increasingly prominent design & aesthetic feature in
PVs, 2) lighting is playing a critical role in safety requirements and 3) lighting
technologies playing a greater role in energy efficiency & increased
functionality, which together have led to higher penetration of more
expensive and higher end lamps, such as LEDs, across car segments. Over
CY14-16, VLS reported revenue CAGR of 27.5% as against the average
growth of ~7% reported by the top 5 players which account for ~80% of
industry revenue during the same period. VLS was the fastest-growing
among the top six global automotive lighting suppliers during the period 2014
to 2016 mainly due to 1) rising share of business with its existing customers;
2) winning new customer contracts; 3) geographical expansion &
development of more technologically sophisticated products. VLS' global
footprint covers nearly all major PV markets globally, including high growth
markets such as China (through JV) and India. It expects its new plants in
Morocco & Brazil to be completed in FY19, following which VLS will be in a
position to target 85% of the global automotive market.
With respect to India business, VEL is the 2nd
largest Indian auto component
group and a leading tier-1 manufacturer and supplier to Indian two-wheeler
and three-wheeler OEMs. It has strong & long-lasting relationships with key 2-
W manufacturers such as Bajaj, Royal Enfield, Honda, Yamaha and Suzuki and
a growing portfolio of products which are supplied. It has positioned itself to
capture further business from these customers, in addition to generating
additional business in the Indian 2-W & 3-W markets.
Exhibit 6: VEL’s is the 6th largest Exterior Auto lighting supplier
Source: RHP, Presentation, ICICI Direct Research
Diversified product portfolio
VEL has comprehensive portfolio of products, which allows the company to
be a one stop-shop for its customers and also helps them to cross-sell its
other products. Its Global Lighting Business has a broad portfolio of lighting
technologies, including Halogen, Xenon/high-intensity discharge, LED, Matrix
LED, high definition MEMS and DMD, surface LED and OLED module, Flex
LED and LED Pixel headlamp, covering the five automotive external lighting
product lines. Its India Business offers a diverse range of products in the
Page 7 ICICI Securities Ltd | Retail Equity Research
polymers/plastics, electrical-electronics and precision metallic components
and is catered across automotive segments. Further the comprehensive
product portfolio is engine agnostic as it is capable of being used across all
fuel types. VEL strength in its product portfolio is shown by the fact that it has
significant presence & customer relationships in each of its product segments.
For instance, in its Global Lighting Business, the company are one of the
biggest players in the electric vehicles market enjoying the second largest
market share. With respect to India Business, across verticals, the company
has 56 customers in Polymer segment, 20 customers in Electrical and 58
customers in Metallic segment.
VEL is well diversified company across categories. As of FY18, in terms of
geography – Europe accounts for 42% of revenue while revenue from India
and North America stands at 35% & 22% respectively & balance of 1% is from
rest of the world. In terms of product, lighting accounts for 61% of revenue
while Polymer/Electrical/Metallic/Others derives 16/10/6/7% respectively. It
has broad portfolio of lighting technologies (Head lamps, Rear lamps &
Electronics) and comprehensive solution with wide range of products across
polymer, electrical & metallic segments to 2-W OEMs in India. In terms of
segment wise- 4W comprises 63% of its revenue while 2W/3W and Others
account for 34% & 3% respectively. VEL had started its operations with Bajaj
Auto which still remains its top customer accounting for 19% of its revenue.
Its top six customer account for ~64.5% of its revenue as of FY18
Low cost, strategically located manufacturing and design footprint
For its Lighting Business, the company has global production, engineering
and customer support capabilities with focus on quality, cost and delivery. In
order to achieve these goals, its facilities are primarily located in low-cost
countries near major automotive markets. The new investments are also
made in newer countries such as Brazil and Morocco, which further allow VEL
to keep its costs low while meeting its customer’s requirement across
geographies. In line with this strategy, the company is in discussions to
acquire an exterior automotive lighting company in Turkey in FY19. For its
India Business, VEL’s facilities are spread across the key Indian automotive
hubs, covering the polymer, electrical/electronic & metallic divisions. The
company accordingly locates its facilities to be in close proximity to major
OEMs in India, which leads to greater cost effectiveness, quicker product
launches, and faster turn-around times, allowing them to serve its customers'
needs in a timely manner.
Robust in-house technology, innovation and R&D capabilities
Its R&D team is focuses on quick adoption of technology, which enables the
company to grow its product portfolio in line with customer expectations and
industry developments. The company’s R&D focus has allowed them to
establish a presence in key emerging technologies (such as LED) as well as a
broad portfolio of headlamp technologies (such as matrix LED and laser), and
to supply products for electric vehicles. Its R&D efforts at India Business, seek
to capitalize on emerging trends such as the increased use of electronics,
stricter environmental regulations, emission reduction & light-weighting of
vehicles, as well as the emergence of new technologies such as multi-point
fuel injection. The company has ~1,414 R&D engineers & 185 patent globally.
In FY18, R&D cost stood at |461.5 crore which is ~4.5% of its revenue.
Consistent track record of growth
VEL initially grew organically in India by adding new business lines, such as
electrical & metallic division. Subsequently, the company diversified its
product offerings & expanded its production capacity through various
investments, joint ventures and acquisitions. VEL over the years has grown
via organic & inorganic route. Over FY13-18, VEL’s revenue has registered
Page 8 ICICI Securities Ltd | Retail Equity Research
CAGR of 19.5% while its margin expanded from ~6% in FY13 to ~8.5% in
FY18. It has lower net debt to equity (0.2x) & decent return ratio (~16%).
Exhibit 7: Revenue trend
4210.2
6116.36770.0
7909.2
9298.8
10278.8
0
2000
4000
6000
8000
10000
12000
FY13 FY14 FY15 FY16 FY17 FY18
| crore
Total Revenues
Source: RHP, Presentation, ICICI Direct Research
Exhibit 8: Profitability trend
-26.0
42.0
13.0
369.3
303.0
450.3
-100
0
100
200
300
400
500
FY13 FY14 FY15 FY16 FY17 FY18
| crore
PAT
Source: RHP, Presentation, ICICI Direct Research
Exhibit 9: EBITDA & PAT margins (%)
6.06.5
9.1
7.2
6.3
8.5
-0.6
0.70.2
4.7
3.3
4.4
-2
0
2
4
6
8
10
12
14
FY13 FY14 FY15 FY16 FY17 FY18
%
EBITDA Margins (%) PAT Margins (%)
Source: RHP, Presentation, ICICI Direct Research
Exhibit 10: Return ratios (RoE & RoCE)
-3.5
3.7
1.2
20.7
13.7
15.8
4.9
9.2
18.0
9.49.5
13.8
-6
-2
2
6
10
14
18
22
FY13 FY14 FY15 FY16 FY17 FY18
%
RoE RoCE
Source: RHP, Presentation, ICICI Direct Research
Exhibit 11: Net debt/ equity
1.2
0.5
1.2
0.7
0.5
0.2
0.0
0.5
1.0
1.5
2.0
FY13 FY14 FY15 FY16 FY17 FY18
| crore
Net Debt/Equity
Source: RHP, Presentation, ICICI Direct Research
Exhibit 12: Free cash flow
59.3
185.0
-222.5
-308.7
52.1
496.7
-400
-300
-200
-100
0
100
200
300
400
500
600
FY13 FY14 FY15 FY16 FY17 FY18
| crore
FCF
Source: RHP, Presentation, ICICI Direct Research
Page 9 ICICI Securities Ltd | Retail Equity Research
Exhibit 13: Segment wise revenue mix – FY18
4433 48206124 6312
2119
3081
31683641
399
319
316426
1067
1224
15341229
0
2000
4000
6000
8000
10000
12000
14000
FY15 FY16 FY17 FY18
| crore
Global Lighting India Others China JV
Source: RHP, Presentation, ICICI Direct Research
Exhibit 14: Segment wise EBITDA margin (%) – FY18
9.66.5 6.2 7.8
11.0
8.8 8.810.6
11.3
1.55.5
9.4
11.5
13.4
15.3
15.7
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
FY15 FY16 FY17 FY18
%
Global Lighting India Others China JV
Source: RHP, Presentation, ICICI Direct Research
Exhibit 15: Revenue split by geography (%) – FY18
-
Europe,
41.8
India, 34.7
North
America,
22.3
Asia
Pacific, 0.7
Others,
0.5
Source: RHP, Presentation, ICICI Direct Research
Exhibit 16: Revenue split by products (%) – FY18
Lighting,
61%
Polymer,
16%
Electrical,
10%
Metallic,
6%
Others, 7%
Source: RHP, Presentation, ICICI Direct Research
Exhibit 17: Revenue split by Segment (%) – FY18
4-W, 63%
2/3-W,
34%
Others, 3%
Source: RHP, Presentation, ICICI Direct Research
Exhibit 18: Revenue split by Customer (%) – FY18
Bajaj Auto,
19%
Customer A,
14%
Customer
B, 11%
Customer C,
9%
Honda, 4%
Others
Source: RHP, Presentation, ICICI Direct Research
Page 10 ICICI Securities Ltd | Retail Equity Research
Key Business Strategy
VEL has a clear roadmap to sustain growth and has laid down its business
strategy which are as following -
Focus on high growth markets for its Global Lighting Business
The next leg of growth in the global exterior automotive lighting will come
from trends like autonomous driving & connectivity between cars, with
lighting becoming an increasingly prominent design and aesthetic feature, as
well as playing a critical role in safety requirements and lighting technologies
playing a greater role in energy efficiency and design flexibility. Its aim is to
become a globally preferred lighting systems provider to automotive OEMs.
In order to capture global growth in the exterior lighting segment, it aims to
expand its international footprint through the development of new plants in
Brazil and Morocco, in order to open up the South American, southern
European and north African markets. These markets, in addition to the Indian
and Chinese markets, will help VLS to target 85% of the global automotive
market. Also through its China JV, the company currently has two plants and
two R&D centres in China.
Focus on increasing customer revenue for India Business
The overall domestic two-wheeler production is expected to grow at a robust
pace of 8-10% CAGR in the next three years to reach around 26.3 million
units by FY20. In addition to benefiting from the overall growth in the Indian
2-W & 3-W markets, VEL also intends to increase its revenue by expanding
the array of its existing products to the existing customers and by continuing
to develop technology solutions aligned with their needs. For instance, in the
past, VEL used to supply painted parts and plastic parts to HMCL however
after 2017 the company also started supplying crank pins, head lamps, tail
lamps and lighting parts. In addition, the company is witnessing a growing
revenue in the PV & CV segments in India for both its lighting and polymer
businesses.
Invest in R&D & capitalize on future trends
VEL plans to continue expanding its R&D, engineering & software
development capabilities in order to capture future growth trends. It seeks to
expand its capabilities in a cost efficient manner, by focusing on low-cost
geographies nearby major automotive markets, in order to expand the
capabilities in a cost-efficient manner. For example, in India the company
established a R&D facility specifically catering to VLS, which provides support
to its core R&D facility in the Czech Republic. By focusing on technology, VEL
seek to benefit from key trends in the automotive industry, including electric
vehicles, emission reduction and shared mobility. For India Business
company, seeks to capitalize on the migration to BSVI emission standards
through its continuing development of emission reduction and light-weighting
technologies.
To look for Inorganic growth expansion
The company intends to actively pursue acquisitive opportunities and
strategic alliances with targets that are complementary their business. VEL in
particular, seeks to make acquisitions that provide them access to new
technologies, new customers & new geographies. For instance, it has recently
acquired Team Concepts, a manufacturer of auto accessories in Bangalore
with Japanese OEMs as key customers, and are in discussions to acquire an
exterior automotive lighting company in Turkey in FY19. Further it has good
track record of successfully completing & integrating acquisitions and has
benefitted from the same. Its low leverage in particular provides VEL the
ability to quickly react to inorganic opportunities.
Page 11 ICICI Securities Ltd | Retail Equity Research
To focus on operational efficiency
VEL focuses on operational efficiency in order to improve returns in a rapidly
changing technological environment. For instance, they have implemented
various initiatives to lower costs, such as purchasing raw materials in bulk to
take advantage of promotions and economies of scale. The company apply a
lean manufacturing standard in the Global Lighting Business and has
implemented total preventive maintenance (TPM) in the India business.
Page 12 ICICI Securities Ltd | Retail Equity Research
Key Risk & Concerns
Slowdown in the overall demand environment (Automotive space)
VEL performance is largely dependent on the automotive space; and any
slowdown or lower than expected demand in the space could directly impact
its performance. In the event of a decline in auto demand, or any other
developments that make the sale of components market less economically
beneficial, the same can adversely affect its business, results of operations
and prospects.
Failure to identify and understand evolving industry trends & preference
Any change in regulatory/industry requirement or in competitive technologies
may render certain of its product obsolete or less attractive. The ability to
anticipate changes in technology and regulatory standards and to
successfully develop and introduce new and enhanced products on a timely
basis is a significant risk factor to the company.
Synergy & Integration of its inorganic acquisitions remain crucial for growth
VEL has ~20 subsidiaries & ~4 JVs. Over the years the company has grown
through inorganic route which we expect to continue going ahead. We
believe if the acquired company fails to provide synergy to its existing
business its integration might not be smooth thereby impacting its overall
performance.
High concentration risk
Though company has presence across segments; it has higher dependence
on the global 4-W segment which account for ~61% of its revenue as of
FY18. The overall growth in the global PV space is relatively moderate thus a
lower than expected growth might also impact its performance. As of FY18,
42% of the revenue is from European market and Brexit may adversely affect
its business, results of operations, and prospects. Also it has higher
dependency on the OEM segment (~98% of revenue) & has relatively lesser
exposure in the replacement segment. In terms of customer concentration,
revenue from top six customer account for ~64.5% of its revenue as of FY18.
Also loss of any of its key customers or a significant reduction in demand
from its customers could have an adverse effect on their business.
Page 13 ICICI Securities Ltd | Retail Equity Research
Key Management Team
Mr. Naresh Chandra - is the Chairman & Non-Executive Director of VEL. He
holds a bachelor’s degree in economics and a master’s degree in history from
the University of Delhi. He also holds a diploma in business administration
from the City of Birmingham College of Commerce, United Kingdom. He has
over 50 years of work experience, with over 35 years’ experience in the
automobile industry & has previously been associated with Kaycee Industries.
He has been associated with VEL since incorporation & became the Chairman
in 1997.
Mr. Tarang Jain - is the Co-founder & currently the Managing Director of VEL.
He holds a bachelor’s degree in commerce from Sydenham College of
Commerce and Economics, University of Bombay and a diploma in business
administration from University of Laussane, Switzerland. He has around 30
years of experience in the automotive industry. He has been associated with
the company since incorporation & was appointed as the Managing Director
in 2001.
Ashwani Maheshwari - is a Whole-time Director & Chief Executive Officer of
VEL. He is also president of the metallic division of the Company. He holds a
bachelor’s degree in engineering (mechanical engineering) from the Indian
Institute of Technology, Roorkee and a master of science degree in leadership
and strategy from the London Business School, London, United Kingdom. He
has also successfully completed the executive development program from
the Wharton School, University of Pennsylvania, USA. He has previously
worked with The Tata Iron and Steel Company as a graduate trainee, as a
senior vice president – India business division in ITC Infotech India and as the
president – Birla tyres at Kesoram Industries. He has been on the Board since
March 2016.
Stephane Vedie - is the President & Chief Executive Officer of Varroc Lighting
Systems. He holds a diploma in purchasing management function from the
Academy of Grenoble, France and a degree from Amiens Business School,
France. He has previously been associated with Magneti Marelli. He has 13
years of experience in automotive lighting. He joined the Subsidiary, Varroc
Lighting Systems Inc. on December 12, 2016.
T.R. Srinivasan - is the Chief Financial Officer of VEL. He holds a bachelor’s
degree in commerce from Bharathidasan University, Tamil Nadu. He has
obtained a post graduate diploma in management from Indian Institute of
Management, Calcutta. He is a member of the Institute of Cost and Works
Accountant of India. He has previously been associated with Hindustan Lever
Limited, Philips Electronics India, Reliance Digital Retail, Siro Clinpharm
Private, ATC Tires Private. He has approximately 29 years of work experience.
He joined VEL on October 3, 2017 and was appointed as a Chief Financial
Officer on February 6, 2018.
Page 14 ICICI Securities Ltd | Retail Equity Research
Objects of issue
The object of the issue is to achieve the benefits of listing of Equity shares on
the stock exchange and to carry out the offer for sale by selling shareholders.
The company is offering 2.02 crore equity share which is 15% of paid up
capital; of which 1.3% stake sale will be done by promoter, 12.55% by
Omega TC Holding and 1.15% by Tata Capital financial services. Thus, the
overall offer size stands at ~|1,955 crore (at the upper price band of
|967/share).
Valuations
VEL is a Tier 1 auto ancillary player which has wide range of product portfolio
spread across customers & geographies. Further pedigree management,
strong growth opportunity & decent return ratio (~16%) remains positive for
the company. The company is undervalued at 29x its FY18 EPS compared to
some of its peers. Thus, we recommend subscribe to the issue from a long
term perspective
Page 15 ICICI Securities Ltd | Retail Equity Research
Exhibit 19: Profit & Loss statement
Income statement (| crore) FY13 FY14 FY15 FY16 FY17 FY18
Gross Revenue 4,210.2 6,116.3 6,950.8 8,218.9 9,608.5 10,378.5
Less Excise duty 180.8 309.7 309.8 99.6
Total Income 4,210.2 6,116.3 6,770.0 7,909.2 9,298.8 10,278.8
Raw Material expenses 2,547.5 3,599.4 4,193.1 5,049.2 6,036.8 6,382.7
Employee benefits 580.3 937.0 902.2 1,039.9 1,203.8 1,313.5
Other expenses 830.4 1,180.4 1,057.8 1,249.1 1,476.5 1,705.1
Total Expenditure 3,958.2 5,716.8 6,153.1 7,338.3 8,717.0 9,401.3
EBITDA 252.0 399.5 616.9 570.9 581.8 877.6
Other Income 15.1 23.0 87.7 20.6 93.7 38.6
Financial charges 83.7 100.3 475.4 (42.6) 90.4 86.2
Depreciation 179.0 238.0 254.0 292.2 337.1 386.5
PBT 4.4 84.2 (24.8) 341.9 248.0 443.5
Extraordinary items - - 51.8 - - -
Taxation 30.5 41.3 46.5 22.0 23.8 61.8
Reported PAT (26.1) 42.9 16.9 369.8 303.4 450.8
Share of Minority Interest (0.1) 0.9 3.9 0.5 0.4 0.5
PAT (26.0) 42.0 13.0 369.3 303.0 450.3
Source: RHP, Presentation, ICICI Direct Research
Exhibit 20: Balance Sheet
Balance Sheet (| crore) FY13 FY14 FY15 FY16 FY17 FY18
Equity Share Capital 10.5 40.5 9.6 26.2 13.5 13.5
Reserves & Surplus 700.2 1,054.5 1,072.9 1,736.6 2,171.9 2,814.5
Share application money - - - - - -
Minority Interest 23.2 30.5 21.4 20.3 20.2 20.8
Total Shareholders fund 733.8 1,125.5 1,103.9 1,783.2 2,205.5 2,848.8
Long term borrowings 877.8 636.8 1,023.1 763.4 755.3 636.1
Deferred tax liability (net) 53.9 50.0 62.2 47.3 13.0 50.9
Other long term liability 19.1 18.8 22.2 15.4 17.4 43.3
Long term provisions 53.6 56.4 75.5 76.5 74.0 100.2
Total Non-current liabilities 1,004.3 762.0 1,183.0 902.6 859.7 830.6
Short term borrowings 203.7 234.7 383.0 641.9 599.2 343.9
Trade Payables 939.9 1,139.7 1,029.3 1,269.1 1,549.7 2,565.7
Other current liabilities 457.9 649.7 715.2 623.3 586.5 218.5
Short term provisions 56.8 54.3 14.0 25.8 59.7 44.8
Total current liabilities 1,658.3 2,078.4 2,141.5 2,560.1 2,795.1 3,173.0
Total Liabilities 3,396.5 3,965.8 4,428.5 5,245.9 5,860.4 6,852.4
Fixed Assets
Tangible assets 1,182.0 1,338.9 1,932.5 2,254.4 2,558.5 2,956.9
Intangible assets 69.7 143.0 106.8 121.0 114.6 170.1
Capital work-in-progress 376.3 318.7 177.5 315.3 292.5 344.0
Total 1,628.1 1,800.7 2,216.8 2,690.6 2,965.7 3,471.0
Goodwill 25.0 27.5 15.1 15.1 15.1 33.5
Deferred tax assets - - 14.4 29.4 28.3 115.4
Long term loans & advances 30.5 59.2 5.9 6.4 8.3 10.7
Non-current Investments 1.2 50.0 0.0 0.0 0.0 0.0
Other non-current assets 1.5 6.7 159.0 145.7 124.5 161.3
Total non-current assets 1,686.4 1,944.0 2,411.2 2,887.2 3,141.9 3,791.9
Current Investment 1.7 53.7 22.3 11.9 - 3.0
Inventories 534.0 777.8 586.1 682.9 753.5 864.1
Trade receivables 818.7 773.2 1,071.4 1,185.2 1,138.3 1,402.7
Cash and bank balances 186.3 256.0 69.0 177.1 354.0 328.9
Short-term loans and advances 145.4 135.6 3.7 4.0 4.2 4.0
Other current assets 24.1 25.5 264.7 297.6 468.4 457.6
Total Current assets 1,710.1 2,021.8 2,017.3 2,358.7 2,718.5 3,060.4
Total Assets 3,396.5 3,965.8 4,428.5 5,245.9 5,860.4 6,852.4
Source: RHP, Presentation, ICICI Direct Research
Page 16 ICICI Securities Ltd | Retail Equity Research
RATING RATIONALE
ICICI direct endeavours to provide objective opinions and recommendations. ICICI direct assigns ratings to its
stocks according to their notional target price vs. current market price and then categorises them as Strong
Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is
defined as the analysts' valuation for a stock.
Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;
Buy: >10%/15% for large caps/midcaps, respectively;
Hold: Up to +/-10%;
Sell: -10% or more;
Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com
ICICI Direct Research Desk,
ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai – 400 093
research@icicidirect.com
Page 17 ICICI Securities Ltd | Retail Equity Research
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