Buy Varroc Engineering; target of Rs 738: ICICI Securities

ICICI Securities's research report on Varroc Engineering

Varroc Engineering’s (VAR) EBITDAM stood at 11.2%, up ~190bps QoQ, and 90bps higher than consensus estimate in Q4FY24, though reported margin included multiple one-offs, including retrospective incentives and provisions from specific EV customer. On an adjusted basis, EBITDAM for FY24 stood at ~9.5%, as per the management. New lifetime order win in FY24 stood at INR 87bn – with split of 19% / 81% in 4W / (2W & 3W) segments, respectively, with ~43% coming from EV models. We have factored-in 15% revenue CAGR and ~11.4% average EBITDA margin for FY24-26E.

Outlook

Upgrade VAR to BUY from Add with a revised DCF-based TP of INR 738 (earlier: INR 637), implying ~21x FY26E EPS. Change in TP is led by 1%/2% higher EPS on 30bps/50bps higher EBITDAM in FY25/26E and earnings rollover.