Dolat Capital Market's research report on Varroc Engineering
In the past two years, high capex, leveraged BS and demand slowdown, both in India and global markets, impacted earnings and cash flows of Varroc Engineering (VAR). However, we expect that the worst is behind and project strong earnings growth over the next 2-3 years supported by 1) revival in demand across key global markets, 2) cut in capex will help generate strong FCF and de-leverage balance sheet, 3) incremental revenue from past capacity addition (capex of ~Rs 28bn in FY19-20) and 4) cost cutting measures to help in expansion of operating margin. In 2QFY21, EBITDA grew by 13% YoY at Rs. 2.4bn with margin of 8.3% on account of better operating efficiency and benefit of operating leverage in India business. China JV revenue also showing strong revival grew by 11% to Rs. 1.2bn with margin of 16.8% vs 0.3% in Q2 FY20. The company generated ~Rs.4bn FCF in 1HFY21 due to better working capital management and cost saving, resulted into net debt reduction of Rs 3.5bn in 1HFY21; Net Debt equity stands at 1.1x. The near-term key objective of the company is to de-leverage the balance sheet by optimizing cash flows through control on capex and opex both.
Outlook
We expect strong revenue/EBITDA CAGR of 16/54% in FY21-23E for VAR led by revival in VLS business, recovery domestic 2W market, sharp margin expansion and reduction in interest cost. We value the stock Rs 484 (based on 20x for FY23E EPS.)
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