Hold Varroc Engineering; target of Rs 425: Khambatta Securities

Khambatta Securities' research report on Varroc Engineering

Varroc’s business performance remained under stress in 3Q FY22 as the semiconductor shortage continued to affect production at OEMs, impacting VLS sales negatively (-15% y-o-y in euro terms). Although 2W production volumes in India was weak during the quarter, revenues at the India business grew marginally (+2% y-o-y). Consolidated revenues saw a modest sequential improvement, driven by a 10.7% increase in VLS’s euro sales. EBITDA (excluding FX loss/gain on intercompany loans) was down on a y-o-y basis, although it was up sequentially as the company reported material EBITDA in 3Q FY22, compared to a negligible amount in the quarter before. The margin pressure is attributable to sub-optimal capacity utilisation at older VLS plants, input cost pressures, and supply chain disruptions. The net loss was up on a y-o-y basis while, sequentially, the loss was lower.

Outlook

Based on a target P/E multiple of 18.0x FY 24E EPS, we value Varroc at Rs 425, downgrading it to HOLD with an upside of 13% from current levels.

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