Hold Varroc Engineering; target of Rs 595: ICICI Securities

ICICI Securities recommended hold rating on Varroc Engineering with a target price of Rs 595 in its research report dated August 07, 2024.

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August 09, 2024 / 15:06 IST

hold

26 Aug, 2025 12:21

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ICICI Securitie's research report on Varroc Engineering

Revenue was up 6% YoY at INR 19bn with 11% YoY growth in India operations partially offset by negative growth in overseas operations. VAR expects gradual recovery in growth of overseas operations from Q3FY25, over the next 1-2 years. Revenue contribution from EV customers stood at 7.8% in Q1 vs 5.3% in FY24. New lifetime order win in Q1 was INR 80bn – split 22% / 78% in 4W / (2W + 3W) segments with 48% orders from EV segment. These new orders should help VAR’s growth, with likely additional revenue of INR 8.7bn in FY25 from these orders and with higher content/unit in EV (5-6X) vs ICE variants driving growth. VAR expects EV revenue to pick up in near term on account of ramp-up of these new orders.

Outlook

Varroc Engineering’s (VAR) EBITDAM stood at 9.2%, down 30bps YoY, and 100bps lower than consensus estimate in Q1FY25. Margin decline YoY was due to startup costs for two new plants in Maharashtra and higher employee cost (annual wage increase). Revenue growth was 6% YoY, with 11% YoY growth in India operations partially offset by negative growth in overseas operations. We have factored-in 9% revenue CAGR and 10.7% average EBITDA margin for FY24-26E. We have cut our FY25/26E EPS by 8%/10% due to i) weak revenue growth (underperforming domestic industry growth), and subsequently ii) weak margins, consistently below 10%. We downgrade VAR to HOLD (from Buy) with DCF-based revised TP of INR 595 (earlier: INR 738), implying 22x FY26E EPS.

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