Started in 1988, Varroc Engineering Limited is Aurangabad based company and global tier-1 (tier-1 companies are companies that directly supply to original equipmentmanufacturers ("OEMs")) automotive component group. Company designs, manufactures and supplies exterior lighting systems, plastic and polymer components, electricals - electronics components, and precision metallic components to passenger car, commercial vehicle, two-wheeler, three-wheeler and off highway vehicle ("OHV") OEMs directly worldwide. From FY2016 to FY2018 company had a compound annual growth rate ("CAGR") of 12.37% in terms of revenue. VEL commenced operations with its polymer business in 1990. Company initially grew organically in India by adding new business lines, such as its electrical division and metallic division. Subsequently, they diversified their product offerings and expanded their production capacity through various investments, joint ventures and acquisitions. In 2012, company acquired Visteon's global lighting business, now known as Varroc Lighting Systems. In 2007, they acquired I.M.E.S (a manufacturer of hot steel forged parts for the construction and oil and gas industries) in Italy and in 2011 they acquired Triom (a manufacturer of high end lighting systems for global motorcycle OEMs) with operations in Italy, Romania and Vietnam. On February 13, 2018, company entered into a joint venture with Dell'Orto S.p.A., one of its customers, in India, for the development of electronic fuel injection control systems for two-wheelers and three wheelers. They are in the process of setting up one manufacturing facility in Brazil and one manufacturing facility in Morocco and intend to set up two manufacturing facilities in India. VEL has two primary business lines, namely (i) the design, manufacture and supply of exterior lighting systems to passenger cars OEMs worldwide ( "Global Lighting Business"), which they undertake through their subsidiaries forming part of the VLS group and (ii)the design, manufacture and supply of a wide range of auto components in India ("India Business"), primarily to two-wheeler and three-wheeler OEMs, including exports. Their India Business offers a diversified set of products across three product lines, namely polymers/plastics, electrical/electronics and metallic components. In addition, they have other smaller businesses, which include the design, manufacture and supply of two-wheeler lighting to global OEMs, and under carriage forged machine components for OHVs and drill bits for the oil and gas sector ("Other Businesses"). For FY2017, their consolidated revenue from operations was Rs 96.1 billion with Rs 61.2 billion from their Global Lighting Business, Rs 31.7billion from their India Business (Rs 14.8 billion for polymers/plastics, Rs 9.0 billion from electrical/electronics/lighting, Rs 5.4 billion for metallic components and the remainder from other sources) and Rs 3.2 billion from their Other Businesses. For FY2018, their consolidated revenue from operations was Rs 103.8 billion with Rs 63.1 billion from their Global Lighting Business, Rs 36.4 billion from their India Business (Rs 16.6 billion for polymers/plastics, Rs 10.6 billion for electrical/electronics/lighting, Rs 6.5 billion for metallic components and the remainder from other sources) and Rs 4.3 billion from their Other Businesses. They have a global footprint of 36 manufacturing facilities spread across seven countries, with six facilities for their Global Lighting Business, 25 for their India Business and five for their Other Businesses. Given the global presence, our revenue stream is diversified both geographically as well as across customers. In FY2018, their largest customer contributed 18.6% of their total invoiced amounts (17.0% in FY2017) and their top five customers contributed 59.9% of their total invoiced amounts (64.5% in FY2017). VLS has a diversified customer base across nearly all major automotive markets in the world, except Japan and Korea. VLS has long-term relationships with marquee auto manufacturers across the premium, mid-range and mass market pricing spectrum, including Ford, Jaguar Land Rover, the Volkswagen Group (the "VW Group"), Renault-Nissan-Mitsubishi, Groupe PSA, FCA, a European multinational car manufacturer and an American electric car manufacturer. VLS has a broad portfolio of lighting products, including Halogen, Xenon/high-intensity discharge, light-emitting diode ("LED"), Matrix LED, high definition Micro-Electro-Mechanical Systems ("MEMS") and digital micro mirror device ("DMD"), surface LED, organic light-emitting diode ("OLED") module, Flex LED, LED pixel and LED pixel headlamp, catering to the five product segments within external automotive lighting. VLS has sales offices in France, Germany and the United Kingdom and is headquartered in Plymouth, Michigan (United States of America). Within their India Business, they have 25 manufacturing facilities and five R&D centers spread across India. They have a longstanding relationship with Bajaj Auto Ltd ("Bajaj"), which has been their customer for the past 28 years. Their other key two-wheeler customers in India include Honda, Royal Enfield, Yamaha, Suzuki andHero. They also export to global two-wheeler manufacturers from their facilities in India, namely KTM and Volvo. As of March 31, 2018 they employed 14,209 full-time employees across the globe (excluding those employed at their China JV). As per financial performance,VES has posted total income/net profits of Rs. 4225.29 cr. / Rs. - (25.43) cr. (FY13), Rs. 6139.37 cr. / Rs. 42.04 cr. (FY14), Rs. 7038.46 cr. / Rs. - (79.05) cr. (FY15), Rs. 8239.52 cr. / Rs. 459.35 cr. (FY16), Rs. 9702 cr. / Rs. 217.20 cr. (FY17) and Rs. 10,417.07 cr. / Rs. 650.61 cr. (FY18). So company has posted consistent growth over last couple of years, but the bottom line remain inconsistent. Company has posted an average EPS of Rs. 32.35 and average RoNW of 16.12% for last three fiscals. Issue is priced at a P/BV of 4.61 as per NAV of 209.69 on 31.03.18. If we attribute latest earnings on fully diluted equity post issue, then asking price is at a P/E of around 29. As per RHP, industry average P/E ratio is 42.60 and listed peers comparison shown in above table. So issue looks reasonably priced. On BRLM's front, four merchant bankers associated with this issue. Kotak Mahindra Capital Company Limited has handled 22 public issues in the past three years. For recent 10 IPOs, 4 issues opened below offer price, one at par and remaining above issue price. Citigroup Global Markets India Private Limited has handled 12 public issues in the past three years. For recent 10 IPOs, 3 issues opened below offer price, one at par and remaining above issue price. Credit Suisse Securities (India) Private Limited has handled 7 public issues in the past three years. For recent 7 IPOs, one opened at par and remaining above issue price. IIFL Holdings Limited has handled 15 public issues in the past three years. For recent 10 IPOs, 4 opened below issue price, one at par and remaining above issue price. As per financials, company's growth is consistent, RoNW is 16.12% for last three fiscals and issue is reasonably priced as per latest earnings. Company is global player in automotive components and supply its products to OEMs. They are planning to set up additional productional facility world wide and this may strengthen their position as global automotive components maker. So we give SUBSCRIBE rating to this IPO as per current market scenario.
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