Varroc Engineering hits 52-week low on growth concerns; dips 18% in 1 month

The management expects the semiconductor shortage situation to affect operations in Q2 as well

Shares of Varroc Engineering hit a 52-week low of Rs 264, down 3 per cent on the BSE in the intra-day trade on Monday, on a growth concerns. The stock of the auto parts & equipment company has fallen below its previous low of Rs 270.40, touched on September 7, 2021.

The group 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 OEMs directly worldwide.

In the past one month, the stock of Varroc Engineering has underperformed the market by falling 18 per cent, after the company reported a consolidated loss of Rs 229 crore in April-June quarter (Q1FY22). In comparison, the S&P BSE Sensex is up 4.8 per cent during the same period. In Q4FY21, the company had posted a net loss of Rs 144 crore.

Revenue from operations for the quarter declined by 19 per cent quarter on quarter (QoQ) to Rs 2,914 crore; India Business revenue declined due to Covid second wave related lockdowns and the VLS revenue declined as a result of key customer OEMs shutting plants/ reducing volumes due to semiconductor shortages.

The consolidated earnings before interest, taxes, depreciation, and amortization (EBITDA) for the quarter was severely impacted by the lower revenue/ capacity under-utilization as well as increase in raw material costs. The company’s net debt increased to Rs 2,770 crore mainly as a result of disruption to working capital cycle, capex and weaker operating performance.

According to the management, the countrywide lockdowns in India during Covid second wave and severe semiconductor shortages globally, impacted the revenue and the profitability in the first quarter. "The semiconductor shortage situation is expected to continue in Q2 as well. The additional capacity for semiconductors is expected to be available in the second half and this should help stabilise the industry passenger vehicle (PV) volumes," it added.

The rating agency Icra expects the Group’s financial performance to be subdued in April-September (H1FY2022), and the performance of the overseas lighting business (VLS) to improve gradually in H2 FY2022. However, improvement in profitability, going forward, will be contingent upon the extent and timeliness of recovery of the ongoing semiconductor chip shortage issues.

"Considering the weak performance and semiconductor issues, which are expected to continue longer than earlier expected, we now expect the Group’s total debt/OPBIDTA (adjusted for lease liabilities) to be in the range of 3.5–4.0 times in FY2022, (against the earlier expected 2.5-3.0 times) and improve to below 2.5 times from FY2023 onwards," it added.

That said, despite subdued revenue growth during the past three years and near-term headwinds because of semiconductor shortages, Icra expects Varroc’s growth to be healthy in the long-term, led by improved offtake from its existing customers due to demand growth.

Moreover, Varroc Engineering is likely to benefit from the new products launched in the recent past, its customer acquisition in the domestic business and ramping up of operations in new geographies, such as Poland and Morocco. The management also expects business wins in North America to help in achieve the revenue growth targeted in Varroc, the rating agency said in rationale.