Varroc Engineering is a leading tier-1 manufacturer of automotive exterior lighting and supplier of polymers, electrical and metallic products to two-wheeler and three-wheeler OEMs in India.
Varroc Engineering is a leading tier-1 manufacturer of automotive exterior lighting and supplier of polymers, electrical and metallic products to two-wheeler and three-wheeler OEMs in India. Varroc is likely to benefit from the shift towards LEDs in automotive lighting globally and deeper penetration with Indian OEMs.
Low-cost manufacturing, impressive R&D footprintR&D footprint, strong product portfolio and strengthening relationship with European OEMs will drive market share gains for the company over the next few years. Initiate with a ‘buy’ rating and target price of Rs 1,250 based on 20X September 2020E consolidated EPS. We ascribe a valuation premium to Varroc over its peers due to superior growth prospects driven by increase in market share in the automotive exterior lighting industry and Indian two-wheeler auto component industry.
We expect the automotive exterior lighting industry to outpace automotive vehicle volume growth over the next five years led by the increase in adoption of LEDs. Automotive OEMs are shifting to LEDs due to (1) Sharp decline in LED costs over the past five years; (2) Better aesthetic appeal compared to halogens; (3) Reduction in Co2 emissions; and (4) Enhancement in safety of drivers. Varroc Lighting Systems is well-placed to benefit from the shift towards LEDs due to (1) Low-cost manufacturing and R&D footprint; (2) A strong product portfolio; and (3) Deepening relationships with next-generation automotive OEMs.
Bajaj Auto is the largest customer of Varroc in India but the company is likely to increase wallet share with Honda, Royal Enfield and Hero MotoCorp as these OEMs diversify from its existing supplier base. We expect Varroc’s India revenues to grow at double-digit CAGR over the next few years.