Varroc rides high on auto recovery hopes

Jump in European electric car sales, better utilisation of facilities should help improve sales and profitability

The stock of auto-component supplier Varroc Engineering is up 72 per cent over the past week on expectations that a sharp recovery in automobile sales will translate into higher capacity utilisation and improving profitability. A strong order book and increasing content per vehicle, too, are expected to help improve revenue growth and gain market share.

The immediate trigger for the company is the record sales of electric vehicles in Europe, which is the biggest market by geography for Varroc Engineering. Incentives by Germany and France to stimulate demand and help automakers meet tough emission standards helped increase sales there.

Registrations for electric and plug-in hybrid vehicles crossed the half-a-million-mark in the first seven months of the calendar year and are expected to cross the one million-mark by the end of the year. Varroc’s key clients include Volkswagen, Tesla, and Renault.

Among the top-selling models, Renault’s Zoe — to which Varroc supplies lighting solutions — was the largest selling electric car this year in Europe. The continuing sales uptrend for this model and electric vehicles, in general, are positive for Varroc.

With its facilities in Morocco, Chennai, and Brazil coming on stream, the share of Volkswagen and Renault are expected to increase. Underutilised facilities were a drag on Varroc’s sales and margins, and with facilities ramping up after major capex over the last few years, operating leverage should kick in.

In addition to the lighting solutions segment, which accounts for 64 per cent of revenues and largely caters for global auto majors, the company supplies polymer, electric, and metallic parts to Indian companies. Analysts at Systematix Research expect the company to benefit from the BS-VI implementation on the back of new orders for catalytic converters, electronic fuel injection systems, and electronics. Increased sales to two-wheeler makers, such as Hero Motocorp, and diversifying client base should help it to improve market share in India.

While prospects should improve, the recent surge means the stock is now trading at 27 times its FY22 earnings estimates. Investors will need to cap their return expectations and await better price points.