Varroc Engineering

Investment case

Cyclical: 2W lighting, deleveraged

Why this business

Varroc Engineering (Aurangabad) is a tier-1 auto-component maker focused on 2W/3W lighting, polymers/plastics, electricals-electronics (including EV traction motors, controllers, chargers, battery-management) and metallic parts, with Bajaj Auto as its anchor customer; after selling its global 4W lighting business (VLS) in 2022 it is India-centric with a Romania electronics plant. EV programmes were 15.8% of Q1FY27 revenue (+87% YoY) and it targets Rs 20,000 cr revenue by FY31 (from ~Rs 8,900 cr in FY26).

What we believe

1. 01Fastest top-line growth in the auto-ancillary peer set: Q1FY27 revenue +29.9% (TTM +15%), FY27 guided +20-25%, riding Bajaj Auto's record volumes (+29% in Q1FY27) and 2W industry at a record 2.17 crore units.
2. 02EV content story: EV programmes 15.8% of revenue growing 87% YoY, e-2W volumes +91%; Rs 599 cr annualised net new business wins in Q1 with two-thirds from e-mobility.
3. 03Deleveraging done: borrowings fell from Rs 1,390 cr (Mar-24) to Rs 925 cr (Mar-26), net debt Rs 527 cr, ND/E 0.28x, finance cost -15.6% YoY; ROCE ~24% (company) / 19% (screener).
4. 04Margin recovery optionality: Q1 EBITDA margin of 8.4% carried ~1.55 pts of one-off drag (commodity under-recovery + tooling); India ops at 10.6% and Romania targeted to EBITDA breakeven by Q4FY27.
5. 05Cheaper than peers on recovery earnings: 26.1x FY28e (Buoyant) vs Uno Minda 58.6x, Minda Corp 41.7x and Lumax Auto Tech 39.8x TTM.

Why now

44.3x TTM PE is inflated by one-offs in FY26/Q1FY27; Buoyant 26.1x FY28e. Profit CAGR 32% over 3 yrs, ROE 15% (3-yr 20%) vs negative 5-yr history (VLS losses) - re-rating from a distressed past rather than an expensive one. EV/EBITDA n.m.; dividend yield 0.2%.

Market disagreement

• Uno Minda: Uno Minda is the higher-quality diversified play (ROE 19%, Q1 PAT +50%) but at 58.6x TTM / 10.5x P/B; Varroc at 44x TTM with one-offs and 26x FY28e offers similar 24-30% growth at a discount.
• Lumax Industries / Lumax Auto Tech: Lumax Industries (28.7x, ROE 22%) is a pure 4W lighting JV play with Rs 973 cr debt and a smaller Rs 5,772 cr mcap; Lumax Auto Tech trades 39.8x / 10.9x P/B. Varroc gives EV-electronics exposure and Bajaj export leverage instead of 4W-lighting concentration.
• Minda Corporation: Minda Corp is at 41.7x TTM with 14.7% ROE and ROCE 12.7% vs Varroc ROCE 19%; Varroc is growing faster (Q1 revenue +30% vs +33% for Minda but with stronger EV mix) at a lower FY28e multiple.

Position sizing

Cyclical Small cap  0.8% of the PMS on $31 Jul 2026 (August rank not in top 30). Satellite positions are owned for an asymmetry, sized up when the cycle rewards risk and reduced when it does not.

Catalysts

• Q2FY27 results (Nov-2026): margin normalisation towards 10% as tooling/commodity pass-through completes.
• Romania electronics EBITDA breakeven (targeted Q4FY27) and new EV programme SOPs from the Rs 599 cr Q1 order wins.
• Progress on the FY31 Rs 20,000 cr revenue / 20% international mix roadmap (Equirus investor meet 13-Aug-2026 follow-ups).

Risks and response

• Customer concentration on Bajaj Auto - a slowdown in Bajaj's domestic or export volumes flows straight to Varroc's 2W lighting/EV revenue.
• Margin execution: EBITDA margin has been stuck at 9-10% for three years and slipped to 8.4% in Q1FY27; Romania electronics still loss-making until Q4FY27.
• Reported PAT volatility from one-offs (FY25 PAT Rs 70 cr, Dec-2025 quarter loss Rs 11 cr) makes the TTM PE unreliable; promoter holding at the 75% cap limits float.

Thesis-break conditions

Not stated separately on this page; the risk list carries the monitoring triggers.

Review history

• 8 Sep 2026 · Yash Palod · one-pager in "Why We Own What We Own" (p59) · portfolio as of $31 Jul 2026
• 31 Aug 2026 · Classification in the August top-30: —

Source: Buoyant_Why_We_Own_What_We_Own_Sep2026.pdf (portfolio as of 31 July 2026), p59. Internal; external publication of these fields is controlled by audience policy.