Overview

Key Financial Metrics

Analysis

Business Performance

Revenue Growth:

Q2 FY25 revenue grew by 10.3% YoY to ₹2,081 Cr, led by a 13.4% increase in India operations. Significant order wins in the EV segment (37% of new orders) indicate a strategic pivot toward future-ready technologies.

Profitability:

Consolidated EBITDA margins improved by 60 bps QoQ but face headwinds due to overseas operations and R&D costs. PBT grew 62% QoQ, reflecting operational efficiencies and cost optimization efforts.

Debt and Balance Sheet Management:

Net debt reduced to ₹827 Cr in H1 FY25 from ₹1,554 Cr in FY24, improving the debt-equity ratio to 0.5x. The company targets further reduction to ₹700-750 Cr by FY25-end.

Capex and Investments:

H1 FY25 capex of ₹1,030 Cr, with planned increases in H2 to expand EV capacity and add SMT lines for electronics. Preponing investments by six months signals strong demand, especially in EV and PCB assembly.

Growth Drivers

Electrification:

EV-related orders contribute significantly to future revenue visibility. Products like Battery Management Systems (BMS) and EV motors position Varroc as a leader in the EV supply chain. Content per vehicle for EVs (₹25,000–₹30,000) is 5–6x higher than ICE vehicles, promising robust revenue growth.

New Product Development:

Launch of high-margin products like integrated starter generators, ambient lighting, and soft-touch door panels. Increased focus on R&D to innovate in electronics and lightweight materials.

Geographic Diversification:

Expansion in Romania and new land acquisitions in South and West India to meet OEM requirements. Strong pipeline in overseas markets, with 37% of the order book tied to export opportunities.

Sustainability and ESG:

Recognition for initiatives like the Kham River restoration underlines a commitment to ESG practices, enhancing corporate reputation.

Projections

Valuation

P/E Ratio: At 18.4x, the stock trades at a discount compared to peers in the EV and auto ancillaries segment, offering an attractive entry point.

Book Value: ₹105 | Price to Book: ~6x, reflecting growth prospects.

Risks

Overseas Operations:

Challenges in Europe could dampen consolidated margins; need for stabilization in these markets.

Market Dynamics:

High dependency on Bajaj Auto (~45% of revenue) poses concentration risk.

Macroeconomic Trends:

Global economic uncertainties, inflationary pressures, and supply chain issues could impact growth.

Conclusion

Rating: BUY

Varroc Engineering is poised for robust growth, supported by strong order wins, a strategic focus on EVs, and operational efficiencies. With a healthy balance sheet, aggressive debt reduction, and investments in high-margin products, the company is well-positioned to outperform the industry average in the medium to long term.