Varroc Engineering Q2 Results Review - Inline Performance; Key Focus On Debt Reduction: ICICI Securities

ICICI Securities Report

Varroc Engineering Ltd.’s Ebitdam for Q2 FY24 stood at 10.3%, up ~80 basis points QoQ, and 70 bps higher than consensus estimate though revenue was in line. Varroc Engineering is operating at ~60-65% capacity utilisation, with margin improvement ahead being driven by operating leverage and focus on fixed cost/gross margin.

New lifetime order win in H1 FY24 was Rs 36 billion – with split of 23% / 77% in four wheeler / (two-wheeler and three-wheeler) segments. We have factored-in 13% revenue compound annual growth rate for FY23-FY25E.

Post ~40% rally in the stock price in the last three months, we downgrade Varroc Engineering to 'Add' from 'Buy' with a revised discounted cash flow-based target price of Rs 529 (earlier: Rs 406), implying ~20 times FY25E EPS.

Change in target price is led by 13% increase in FY25E EPS on the back of 75 bps higher Ebitdam, earnings rollover and better free cash flow outlook with a focus on capex management.

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