Buy Varroc Engineering; target of Rs 406: ICICI Direct

ICICI Direct's research report on Varroc Engineering

Varroc Engineering’s (VAR) EBITDAM for Q1FY24 was at 9.5%, up 20bps QoQ, and higher than our estimate of 8.7%. The beat was due mainly to better business mix, operating leverage and continued cost-reduction efforts. Revenue increased 6% QoQ to INR 17.9bn due to higher 2W volumes, which accounted for ~70% of revenue. VAR is at ~60-65% capacity utilisation, with scope for operating leverage pushing margins further up driven by recovery in 2W demand. New lifetime order win in Q1FY24 was INR 9.6bn – split 29% / 71% in 4W / 2W segments, respectively. We have factored-in 15% revenue CAGR for FY23-FY25E as we expect VAR to be a beneficiary of gradual recovery in the India 2W market, post remaining subdued in FY20-FY22.

Outlook

Maintain BUY with a DCF-based target price of INR 406 (earlier: INR 366), implying ~17x FY25E EPS.