Target: ₹536
CMP: ₹525.60
Varroc Engineering recently reported a slight decline in its EBITDAM by 110 bps q-o-q, standing at 9 per cent compared to the consensus of 10.3 per cent. This margin decrease was primarily due to a one-time impact from higher tooling costs and inventory correction. Despite this, the company achieved a 10 per cent y-o-y growth in revenue, with a 10 per cent y-o-y growth in its India operations and flat growth in its overseas operations. Varroc Engineering is optimistic about a gradual recovery in the growth of its overseas operations over the next 1-2 years, backed by recent order wins.
In our estimates, we have considered an 8 per cent revenue CAGR and an average EBITDA margin of about 10.3 per cent for FY25–27E. In the medium term, the company plans to improve its EBITDAM by focusing on cost reduction through working capital optimization and backward integration. Additionally, Varroc Engineering’s investments in renewable energy are expected to help lower its electricity costs.
The company managed to reduce its net debt by INR 413 million in Q3, bringing it down to ₹790 crore. However, the reduction in debt has been limited in recent quarters due to subdued growth and margins. Varroc Engineering recently received the arbitration verdict for its China JV and is set to sell its stake for approximately INR 3.3 billion (net realization).
We maintain a Hold rating on Varroc Engineering with a DCF-based revised target price of ₹536 (previously ₹595), implying a valuation of about 18x FY27E EPS.
Published on February 11, 2025.
