Varroc Engg eyes fast-paced growth after deal closure with Plastic Omnium

Will sharpen focus on domestic market, play to its strength in lighting and electrical and electronics components as part of re-aligning focus and enhancing ROCE

Varroc Engineering will sharpen focus on the domestic market and play to its strength in the lighting and electrical and electronics components as part of re-aligning focus and enhancing return on capital employed (ROCE).

Last week, the company said it had signed an agreement to sell its four-wheeler lighting business in Europe and Americas to Compagnie Plastic Omnium SE for an enterprise value of Euro 600 million, as it seeks to consolidate position in its home market and exit from the underperforming ones. The lighting business in India and China are not part of the deal.
 

Post the closure of the deal by July or August this year, the plastic and polymer, electrical-electronics and precision metallic parts major envisages doubling its earnings before interest, tax, depreciation and amortisation (Ebitda) next year.

“We will be targeting a double digit Ebitda and a ROCE of over 20 per cent. We see a good free cash flow in all the remaining businesses. We are poised for a very good level of profitable growth,” Tarang Jain, Varroc Engineering, told Business Standard. Post the deal, 85 per cent of its business will come from India.

The focus on the domestic market is a change in tack for the Tarang Jain-led company which was aiming to be the top three global lighting players after its acquisition of Visteon in 2012.

“Our larger play will remain in India now. I don’t want to get into a global lighting business any more. We will rather focus on India and China. Even China, we need to see how it goes,” he said. Varroc will also take a call within a year on whether it wants to remain in the lighting business in China.

The proposed transaction will help the company become debt free. The net equity value that Varroc will get after paying off all the debt (in Varroc Lighting Systems) will be Euro 160-175 million. It would use some of that for partially retiring some of the high-cost debt in India which it had taken for VLS operations. It would use the balance for dividend or some other purpose.

Net cash accretion to Varroc, post-tax and net of escrow, is estimated to be between Euro 160- 175 million subject to closing adjustments. The escrow of Euro 35 million would be released over 2-3 years, the company said in a filing to the exchanges.

“Turning from gross debt of Rs 400 crore to Rs 500 crore at India level to net cash of Rs 200 to Rs 300 crore would result in interest outgo saving of Rs 60 crore to Rs 70 crore thus enhancing the bottom line significantly,” wrote Basudeb Banerjee, analyst at ICICI Direct in a 3 May research report.  The India business can reach revenue of Rs 6,000 crore without any major capex, he added.

Jain, who is credited with building the multinational auto component group, said all the new plants the company had set up were grossly underutilised to match the footprints of the global auto firms it was a supplier to.

“We were facing a lot of headwinds and had to support VLS (Varroc Lighting Systems) with cash from India. Eventually we had to take a professional call as a company. It was a difficult decision but in the interest of the investors had to do it,” said Jain.

Two years after the coronavirus (Covid-19) pandemic hit Varroc hard. While it recovered from the pandemic, its consequence—the semiconductor shortage didn’t spare the firm. “We realised that the semiconductor shortage was here to stay. Even if people do put up capacities, it will take 2-3 years to materialise,” said Jain adding that he doesn’t see it getting resolved for a year or so.

With its leaner working capital structure, Banerjee expects Varroc to generate free cash flow consistently and rise from sub-10 per cent RoCE to around 15-20 per cent band. ICICU has a ‘buy’ rating on the stock with a revised target price of Rs 563 (earlier Rs 465). 

What would be left with  Varroc Engineering after its deal with Plastic Ominuim

Businesses  by geography	Annual revenue (Rs cr)
India business	5000
Varroc Lighting  System 4 wheeler biz	400 to 500
Vietnam and EU
2 wheeler lighting business	500
Romania
Electronic component manufacturing	250 to 300
Italy
Forging entity	300
China
JV stake to remain as earlier	Annual PAT of Rs40 to Rs70 crore

 

Source: ICICI Direct