Buy Varroc Engineering: target of Rs 283: ICICI Securities

ICICI Securities research report on Varroc Engineering

Varroc Engineering’s (VEL) Q4FY20 operating performance missed estimates due to Covid-related shutdown and supply chain disruptions from China. VLS sales declined ~10% YoY to EUR233mn while margins slumped by ~690bps YoY to 2.5%. FCF generation (~Rs4.4bn) in FY20 has been strong considering the large capex incurred (Rs9.7bn). FY22 is likely to be an inflection year for the global lighting business (VLS) as steep fixed initiatives are likely to provide additional boost to profitability as new plants stabilize and revenues ramp up. India business is expected to benefit from domestic two-wheeler demand recovery coupled with increased BS-VI content.

Outlook

Stock is trading at ~16% FY20 FCF yield which we believe remains alluring. We maintain our BUY rating on the stock.