VARROC ENGINEERING LIMITED

IPOPrice Band : ` 965 –` 967

our recommendation “neutraL”

THE OFFERTHE OFFERIssue Open Issue Open : : 26 June 2018 to 28 June 201826 June 2018 to 28 June 2018

»»»» Issue TypeIssue Type: Book Built Issue IPO: Book Built Issue IPO

»»»» Issue Size:Issue Size:

›› 20,121,73020,121,730 Equity Shares @ 1 aggregating up toEquity Shares @ 1 aggregating up to ` ` 1945.771945.77 CrCr

»»»» Face ValueFace Value: : `̀ 1 1 Per Equity SharePer Equity Share

»»»» Issue PriceIssue Price: : ` ` 965 965 -- ` ` 967967 Per Equity SharePer Equity Share

»»»» Market LotMarket Lot: : 1515 SharesShares

»»»» Minimum Order QuantityMinimum Order Quantity: : 1515 SharesShares

»»»» Listing AtListing At: NSE, BSE: NSE, BSE

CAPITAL STRUCTURECAPITAL STRUCTUREThe share capital of Company, is set forth below:-

(Amount in ` except share data)

Authorized Share Capital :-

250,000,000 Equity Shares @1 Aggregate value 250,000,000

Issued, subscribed and paid up capital before the Issue :-

134,811,530 Equity Shares @1 Aggregate value 134,811,530

Present Issue:-

2020,,121121,,730730 Equity Shares @ 1 aggregating up to `̀ 19451945..7777 Cr

OBJECT OF THE OFFEROBJECT OF THE OFFERThe objects of the Offer are

To carry out the Offer for Sale by Selling Shareholders.

To achieve the benefits of listing the Equity Shares on theStock Exchanges..

Further, Company expects that the listing of theEquity Shares will enhance visibility and brand imageand provide liquidity to Shareholders.

COMPANY OVERVIEWCOMPANY OVERVIEWThe company incorporated in 1988 is a manufacturer of autocomponent and supplier of exterior lighting systems, plastic andpolymer components, electricals and electronics components,metallic components to passenger car and commercial vehicles withtwo and three wheelers and off highway vehicle ("OHV") OEMsdirectly worldwide.

The company has 36 manufacturing facilities spread acrossseven countries, with six facilities for Global LightingBusiness, 25 for India Business and five for Other Businesseswith 16 R&D centers in 10 countries.

They are the sixth-largest global exterior automotive lightingmanufacturer and one of the top three independent exteriorlighting players.

Plans lined upPlans lined upCompany continue to expand its manufacturing and R&D footprint, andintend to set up one manufacturing facility in Brazil and onemanufacturing facility in Morocco, as well as two manufacturing facilitiesin India which is expected to commence production in FY2019.

Also, VEL is in discussions to acquire an exterior automotive lightingcompany in Turkey in FY2019.

On February 13, 2018, entered into a joint venture with Dell'Orto S.p.A.,one of its customers, in India, for the development of electronic fuelinjection control systems for two wheelers and three-wheelers.

In particular, the Ministry of Road Transport and Highways, India hasmandated the adoption of the Bharat Stage VI ("BS VI") emission standards byApril 1, 2020, as part of which two and three-wheelers in India are expected tointroduce electronic fuel injection systems

Strong ClienteleStrong ClienteleVLS has long-term relationships with marquee automanufacturers across the premium, mid-range and mass marketpricing spectrum, including Ford, Jaguar Land Rover, theVolkswagen Group (the "VW Group"), Renault-Nissan-Mitsubishi, Group PSA, FCA, a European multinational carmanufacturer and an American electric car manufacturer.

Other key two wheeler customers in India include Bajaj, Honda,Royal Enfield, Yamaha, Suzuki and Hero. It also export toglobal two-wheeler manufacturers from facilities in India, namelyKTM and Volvo.

ROAD MAP AHEADROAD MAP AHEADCompany objectives are to expand their market share andaim to accomplish this through the following strategies:

Focus on high growth markets for Global Lighting Business.

Focus on increasing customer revenue for India Business

Pursue strategic joint ventures and inorganic growthopportunities

Focus on operational efficiency

Continue to invest in R&D

STRENGTHSSTRENGTHS Strong competitive position in attractive growing

markets.

Strong, long-standing customer relationships

Low cost, strategically located manufacturing anddesign footprint

Robust in-house technology, innovation and R&Dcapabilities

Consistent track record of growth and operationaland financial efficiency

FINANCIAL PERFORMANCEFINANCIAL PERFORMANCE

Consolidated Revenue from operations for the FY 2016, FY 2017 and9M FY 2018 stood at ` 8218.90 crores, ` 9608.54 crores and ` 7393.91crores, respectively with-

` 4430 crores from Global Lighting Business, ` 2660 crores fromIndia Business (` 1220 crores for polymers/plastics, ` 770 crores forelectrical/electronics/lighting, ` 480 crores for metallic componentsand the remainder from other sources) and ` 300 billion from OtherBusinesses, for 9M FY18.

EBITDA stood at ` 591.57 crores, ` 6,75.48 crores and ` 654.79crores, for the FY 2016, FY 2017 and 9M FY 2018 respectively.

For 9M FY2018, ROE was 17.1% and RoCE was 15.5%,(bothannualised)

Net debt to equity ratio as of December 31, 2017 was at 0.54.

Continue…Continue…

Cash flow from operations increased from ` 128.34 crore in FY15 to ` 1,074.85 crore in FY18, i.e. a growth of 103.1 % CAGR over FY15-18.

Total debt declined by 11.3 % CAGR to ` 9,80.07 crore in FY18.

Revenue- Geographical Distribution

Company received 36.6% of revenue in FY2017 from customers inEurope (39.8% in 9M FY2018), 32.7% from customers in India(35.7% in 9M FY2018), 20.4% from customers in the UnitedStates of America (17.0% in 9M FY2018), 0.6% from customers inthe Asia Pacific region (0.6% in 9M FY2018) (excluding Indiaand China JV, which we account for via the equity method), and9.7% from customers in other geographies (6.8% in 9M FY2018).

SNAPSHOT SNAPSHOT -- CONSOLIDATEDCONSOLIDATED

PEER COMPARISONPEER COMPARISON

VEL has lower ROE at 13.88 % amongst its peers as seen in the chart above.

Note: Peer comparison is done on the basis of FY17 revenues(including other income).

INDUSTRY OVERVIEWINDUSTRY OVERVIEWOutlook on export and domestic markets

According to SIAM and CRISIL Research, overall domestic two-wheelerproduction is estimated to grow at a robust pace of 8-10% CAGR inthe next three years to reach around 26.3 million units by FY2020.Domestic sales, which forms approximately 85% of total production,is also estimated to grow at a similar pace of 8-10% during the period.Manufacturers' focus on urban markets, expansion in thedistribution network in semi-urban and rural areas, modellaunches, and better product positioning, will drive up volumes.

In FY2019, CRISIL Research expects the two-wheeler industry to grow6-8%, assuming normal monsoons and improved rural demand, StatePay Commission pay-outs, and a pick-up in infrastructure activities.Further, improvement in government spending is likely to boostdemand in the second half, pushing demand upwards by 1-3%.

Key Growth drivers for domestic Key Growth drivers for domestic sales and export salessales and export sales

Outlook of the Indian three-wheeler industry

Strong demand from international markets.

Issuance of fresh permits for passenger three-wheeler vehicles.

Availability of funding, especially through organised channels.

Replacement demand - an important growth driver, improving network of CNG fuel stations is driving the replacement of older petrol- or diesel-powered vehicles with the CNG-based vehicles.

Cab aggregators are aggressively expanding their three-wheeler transportation to provide affordable and last-mileconnectivity, thus acting as another growth driver.

RISK FOR THE BUSINESSRISK FOR THE BUSINESS Pricing pressure from customers may adversely affect

gross margin, profitability and ability to increase prices,which in turn may materially adversely affect business,results of operations and financial condition.

Expiry of intellectual property rights could lead to increasedcompetition.

The cyclical and seasonal nature of automotive sales andproduction can adversely affect business.

Political instability, changes in economic policy, changinglaws, rules and regulations and legal uncertainties,including adverse application of tax laws and regulations,may adversely affect business and financial performance.

Currency exchange rate fluctuations could have anadverse effect on reporting of results of operations.

VALUATIONVALUATIONThe company claims to be the second largest Indian auto component group and aleading tier-1 manufacturer and supplier to Indian two-wheeler and three-wheelerOEMs.

Overall domestic two-wheeler production is expected to grow at a robust paceof 8-10% CAGR in the next three years. Higher GDP growth and lower inflationwill lead to better affordability, measured by an increase in disposableincomes.

Further, the government is backing the sector with several initiatives likeEmission norms compliance to impact demand in 2021.

Though drivers such as increased LED penetration rate, technology innovation,Increased lighting content per vehicle , improving financial scenario,Anticipated improvement in rural demand would enhance the share andbusiness looks attractive but high valuation at current level fails to infuseoptimism in company

On the upper price band of ` 967 with annualized EPS of ` 30.45 for FY18,Estimated P/E works out at 32xs.

We recommend to be ‘NEUTRAL’ for this IPO.

DISCLAIMERSDISCLAIMERS

This Research Report (hereinafter called report) has been prepared and presented by RUDRA SHARES & STOCK BROKERS LIMITED, which does not constitute any offer or advice to sell or does solicitation to buy any securities. The information presented in this report, are for the intended recipients only. Further, the intended recipients are advised to exercise restraint in placing any dependence on this report, as the sender, Rudra Shares & Stock Brokers Limited, neither guarantees the accuracy of any information contained herein nor assumes any responsibility in relation to losses arising from the errors of fact, opinion or the dependence placed on the same.

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We hereby declare, that the information herein may change any time due to the volatile market conditions, therefore, it is advised to use owndiscretion and judgment while entering into any transactions, whatsoever.

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