New Delhi: The biggest initial public offering (IPO) of financial year 2018-19, Varroc Engineering Ltd, has made a firm stock market debut on Friday. The auto component maker was listed at ₹ 1015, up 4.6% from its issue price of ₹ 967 per share. The company’s ₹ 1,955 crore issue was open for subscription during 26-28 June with a price band of ₹ 965-967 per share. It was subscribed 3.6 times.
Ahead of the share sale analysts said that the issue was fairly valued. According to Canara Bank Securities Ltd, the issue was reasonably valued. “Varroc Engineering Ltd has an earnings per share (EPS) at ₹ 33.40, FY 2018 and at the upper end of the price band the company would trade at 28.95 times of FY18 earnings,” it said in a note on 22 June.
However, it also added that Varroc Engineering has few risks namely pricing pressure from customers, regulatory risks and geographical concentration risk as it derives more than 45% of its revenue from the European region. “Pursuing cost-cutting measures while maintaining rigorous quality standards may lead to erosion of VEL’s margins, which may have a material adverse effect on their business, results of operations and financial condition”, Canara Bank Securities said.
ICICI Securities Ltd the company is undervalued at 29 times its FY18 earnings per share (EPS) compared to some peers. “Varroc is a tier 1 auto ancillary player which has wide range of product portfolio spread across customers & geographies. Further pedigree management, strong growth opportunity and decent return ratio remains positive for the company,” the brokerage firm said.
It said that the company has a clear roadmap to sustain growth which is to focus on high growth markets for global lighting business, increase content per vehicle in India, invest in R&D and capitalize on future trends.
According to ICICI Securities, slowdown or lower than expected demand in the overall automotive space, failure to identify and understand evolving industry trends and preference are some of its risks. It also added that Brexit may adversely affect the company as its majority of revenue comes from Europe.
In terms of segments, four-wheelers comprise 63% of its revenue while two-wheelers/three-wheelers and others account for 34% and 3% respectively. It is the second largest Indian auto component group by consolidated revenue for FY2017 and a leading tier-1 manufacturer and supplier to Indian 2-wheeler and 3-wheeler original equipment manufacturer. From FY2015 to FY2018 Varroc had recorded a compound annual growth rate (CAGR) of 12.37% in terms of revenue.