Up 17% in a month! Brokerages expect this auto ancillary stock to rally another 50%

Shares of auto parts manufacturer and supplier Varroc Engineering have fallen over 29 per cent from April 2022 highs, putting the stock in the bear grip. However, brokerages have maintained their bullish stance on this counter and see over 50 per cent upside from current levels.

With a market capitalisation of more than Rs 5,500 crore, the shares are trading above the short-term moving averages of 5,10, 20, 50,100 and 200-DMA. The stock has delivered over 17 per cent return in the last one month. It had hit a 52-week high of Rs 494.60 on April 29, 2022.

ICICI Securities said the company is aiming to make a larger footing in the domestic car LED market. It is integrating its lighting and plastic business capabilities to offer headlamp assembly for cars and trucks and expand its 4W business, the brokerage noted.

Varroc Engineering is planning to target 4-wheeler electric vehicle (EV) markets -- both domestic and international -- by offering helical gears, reduction shafts etc. Thus, it would mitigate the risk of metallic valves business getting disrupted through EV transition, it said.

The brokerage firm has maintained a 'Buy' rating on the stock with a target price of Rs 529, signalling a potential upside of 51 per cent from its previous close of Rs 348.65 on Friday.

"The company is looking forward to sell-off its China JV stake in the future by restructuring the business and increasing focus on India, other than getting extra funding to acquire growth or technological capabilities. Also, going ahead, it is open to selling its Italy oil and gas forging business to realign focus on EBU and polymer parts businesses," it added.

Another brokerage Khambatta Securities has upgraded the stock from 'Hold' to 'Buy' with a target price of Rs 450. It expects EBITDA margins to improve from 7 per cent in 2Q-3Q FY22 to 7.3 per cent in FY23 and further to 8.1 per cent in FY24, driven by low double-digit EBITDA at the India business, and operating leverage from improved capacity utilisation at the global 2W lighting operations and the Romania electronics plant.

According to Trendlyne, the consensus recommendation from eight analysts for Varroc Engineering is 'Buy'. The company has low debt and is generating increasing cash from operations.

Varroc Engineering reported a net loss of Rs 284.96 crore for the quarter ended March 2022 as against a net loss of Rs 144.32 crore in the same quarter of FY21. Revenue from operations stood at Rs 1,652 crore in the March quarter of FY22 as compared to Rs 1,504.30 crore in the same quarter a year earlier.

The company has 12 operating facilities for passenger cars in the Czech Republic, China, India, Mexico, Morocco, Turkey, Poland, Brazil and Romania, and two facilities for two-wheelers.

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