Varroc Engineering IPO: Will This IPO Give Solid Returns?
The Varroc Engineering public issue will be a pure sale of shares by the promoter and investors. The company does not plan to raise any fresh capital for investing in its business. The IPO is opening for subscription on 26th June and will go till 28th June.
Varroc Engineering IPO details |
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| Subscription Dates | 26 – 28 June 2018 |
| Price Band | INR965 – 967 per share |
| Fresh issue | Nil |
| Offer For Sale | 20,221,730 shares (INR1,951.4 – 1,955.4 crore) |
| Total IPO size | 20,221,730 shares (INR1,951.4 – 1,955.4 crore) |
| Minimum bid (lot size) | 15 shares |
| Face Value | INR1 per share |
| Retail Allocation | 35% |
| Listing On | NSE, BSE |
Business details of Varroc Engineering Ltd:
- Global Lighting Business– The design, production and supply of exterior lighting for passenger car OEMs worldwide.
- Indian Business– The design, production and supply of a wide variety of auto parts in India, mainly to two-wheeler and three-wheeler OEMs.
- Other Business– The company also has a third business line, which includes the design, production and supply of two-wheeler lighting to global Original Equipment Manufacturer’s (OEM), under carriage forged machine components for Off Highway Vehicle’s (OHV) and drill bits for the oil and gas sector.
Varroc Engineering Ltd is the second largest Indian auto component group and is a leading tier-1 producer and supplier to our country’s two-wheeler and three-wheeler OEMs.
The company has 37 production facilities, 12 engineering centres, 13,500 employees and 760 engineering experts in 10 countries, according to the it’s website. It claims to be the number one two-wheeler automotive component supplier in the country.
Varroc Engineering’s financial performance (in INR crore) |
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| FY2013* | FY2014* | FY2015 | FY2016 | FY2017 | FY2018 | |
| Total revenues | 4,225.3 | 6,139.4 | 7,038.5 | 8,239.5 | 9,702.3 | 10,417.1 |
| Total expenses | 4,220.9 | 6,055.2 | 7,063.3 | 7,897.5 | 9,454.3 | 9,973.5 |
| Profit after tax | -25.4 | 42.0 | 13.0 | 369.0 | 303.0 | 450.3 |
| Net margin (%) | -0.6 | 0.7 | 0.2 | 4.5 | 3.1 | 4.3 |
Listing Details of Varroc Engineering:
IPO Opening Date: 25 June 2018
IPO Closing Date: 28 June 2018
Finalisation of Basis of Allotment: 3 July 2018
Initiation of refunds: 4 July 2018
Transfer of shares to demat accounts: 5 July 2018
Listing Date: 6 July 2018
Objects of the Issue:
The objects of the Offer are to achieve gains of listing the Equity scrips on the Stock Exchanges and to carry out the Offer for Sale by selling existing shareholder’s share. Further, Varroc Engineering anticipates that listing of the equity scrips will better their visibility and brand image and give liquidity to their Shareholders. The listing will also give a public market for the Equity Shares in the country.
Varroc Engineering will not get any amount from the offer of sale and all the proceeds will be received by the selling shareholders, in proportion to the equity shares offered by the respective existing shareholders who are selling their stake. The selling shareholders have approved the transfer of their respective portion of the equity scrips as per the offer for sale as set out below:
1. Tarang Jain- 1,752,560
2. Omega TC Holdings Pte. Ltd.- 15,373,608
3. Tata Capital Financial Services Limited- 1,410,432
Comparison with peers:
| Company Name | Face Value | EPS | PE Ratio | RoNW | NAV |
| Varroc Engineering Ltd | 1 | 33.40 | 28.95 | 15.93% | 209.69 |
| Motherson Sumi Ltd | 1 | 7.59 | 41.94 | 17.60% | 61.01 |
| Bharat Forge Ltd | 2 | 16.38 | 40.42 | 16.11% | 100.55 |
| Endurance Technologies Ltd | 10 | 27.78 | 45.43 | 17.98% | 154.47 |
Expansion plans for Varroc Engineering Ltd:
Varroc Lighting Systems is in the process of setting up a new manufacturing plant in Brazil, for the South American market, and Morocco, for the southern European and north African markets. Varroc Engineering anticipates that their manufacturing plants in Brazil and Morocco will start production in FY2019.
The company has also entered into an agreement to acquire an exterior automotive lighting company based in Turkey and the deal was signed on May 30, 2018, with the sale scheduled to complete by the end of this month, subject to receiving approval from the Turkish competition authority.
Positives for Varroc Engineering Ltd:
- Global lighting business- Focus on high growth markets.
- India business- Focus on increasing customer revenue.
- Continuous investment in research and development, design, engineering and software capabilities in order to capitalize on future trends.
Investment concerns for Varroc Engineering Ltd:
- The company reported low consolidated top-line and bottom-line CAGR of 12 % & 10% respectively over FY 2016-18
- Varroc Engineering’s 35 % revenue comes from our country i.e. from 2wheeler and 3wheeler sector which are not high growth sectors.
Exits from Varroc Engineering Ltd:
Few companies and funds will be exiting the company by selling their stakes and receiving the proceeds of the offer for sale. Tata Opportunities Fund will completely sell their share in Varroc Engineering. It owns a 12.55 % stake in the company and stands to make Rs 1,635.8 crore from the public issue. The fund had invested Rs 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 public issue exits by any private equity firm in India.
Lead Managers to the Issue:
- Citigroup Global Markets India Pvt Ltd
- Credit Suisse Securities (India) Pvt Ltd
- IIFL Holdings Ltd
- Kotak Mahindra Capital Company Ltd
IPO vs Mutual Funds
If you have no knowledge of the equity markets but are looking to gain from the equity markets, mutual funds are ideal. Investments can be made in Mutual Funds since they provide a wide variety and also the amount of investment can vary as per investor’s preference.
Many mutual funds invest in IPOs – many times at discounted rates that are not available to retail investors.
It is necessary to not get carried away by the hype surrounding IPOs. Don’t jump into IPO if you do not have the necessary skills.
In a mutual fund, a skilled and trained professional handles all investments for you and therefore, you can benefit from the equity markets without spending too much time gaining the skills needed to understand the markets.
Different Funds:
- Large Cap Funds– Here the investment is made in large cap companies. These companies offer 12-18% return. Moderate risk is involved and it is suggested to invest here for 4 years or more.
- Mid Cap Funds– Here the investment is made in mid cap companies. These companies are offer 15-20% return. Moderately high risk is involved and it is suggested to invest here for 5 years or more.
- Small Cap Funds– Here the investment is made in small cap companies. These companies offer 15-20% return. High risk is involved and it is suggested to invest here for 6 years or more.
- Balanced Fund– This fund is a combination of equity and debt in its portfolio. Depending on the proportion of investment made in Equity and Debt, the risk and returns are accordingly determined. It is suggested to invest here for 2 to 3 years. Returns in this fund range from 11-14%.
Investment can be made via lump sum investment or through SIP (Systematic Investment Plan) mode in any of these funds.
Moreover return is something that cannot be promised but these return estimates have been given on the basis of past performance.
Mutual Funds for 2018
Large Cap Fund:
These funds invest in large companies that have a history of good performance and stable balances.
Mid Cap Fund:
These are funds that are high risk – high return. They’re a bit riskier than large cap funds.
Small Cap Fund:
These are the funds that you can invest in if you want very high growth. They are very high risk too.
Happy investing!
Disclaimer: the views expressed here are of the author and do not relfect those of Groww.