Target: ₹536
CMP: ₹525.60
Varroc Engineering’s (VAR) EBITDAM stood at 9 per cent, down about 110 bps q-o-q (vs. Consensus 10.3 per cent). Margin decline was due to a one-time impact from higher tooling costs and inventory correction. Revenue growth was 10 per cent y-o-y, with 10 per cent y-o-y growth in India operations and flattish growth in overseas operations. The company expects a gradual recovery in growth of its overseas operations over the next 1–2 years, with recent order wins.
We have factored-in an 8 per cent revenue CAGR and about 10.3 per cent average EBITDA margin for FY25–27E.FY26. correction. In the medium term, the company would focus on improving EBITDAM by reducing costs through working capital optimisation and backward integration (VAR’s renewable energy investments may aid in lowering its electricity cost).
The company reduced net debt by INR 413 million in Q3 to ₹790 crore; however, quantum of debt reduction has been limited at these levels since the last couple of quarters due to lower growth and margins not picking up. VAR has received the arbitration verdict for its China JV, and accordingly would sell its stake for ~INR 3.3 billion (net realisation).
Maintain Hold with a DCF-based revised target price of ₹536 (earlier ₹595), implying ~18x FY27E EPS.
