Electric Mobility And Global Urbanization Will Spur Component Demand

Key Takeaways

• Varroc's strategic moves in EV components, localization, and advanced lighting position it to outperform the market and achieve robust, resilient growth despite industry volatility.
  
• Strong OEM partnerships and a diversified customer base ensure high order visibility, margin expansion, and sustainable free cash flow as mobility markets evolve.
  
• Heavy dependence on ICE components, slow EV transition, overseas losses, supply chain risks, customer concentration, and global trade issues threaten long-term growth and profitability.

Catalysts

Designs, manufactures, and supplies exterior lighting systems, plastic and polymer components, electrical and electronics components, advanced safety systems, and precision metallic components worldwide.

• Analyst consensus sees new business wins and EV exposure as drivers for future growth, but this likely understates the potential as Varroc's broadening customer base and higher content per vehicle in upcoming launches could enable it to consistently outperform market growth, fueling multi-year double-digit revenue CAGR.
  
• While analysts broadly expect overseas business to recover and modestly boost margins, the scale of turnaround is likely underestimated-once ramped, international electronics, lighting, and inverter orders can significantly expand EBITDA margins and lift consolidated ROCE well above current expectations, given the capital-light nature of these businesses.
  
• With the accelerating global transition to electric mobility and rising regulatory mandates, Varroc's first-mover investments in derisked motor designs, lighting, and electronics leave it strategically positioned to capture outsized wallet share as OEMs increasingly outsource complex component development-creating a structural uplift in both revenue and gross margin.
  
• Ongoing urbanization and the expansion of middle-class consumers in India and Southeast Asia are set to drive sustained demand for two-wheelers and small cars, and Varroc's entrenched OEM partnerships and multi-year contracts ensure high order book visibility and superior working capital efficiency, supporting stable top-line growth and free cash flow.
  
• Varroc's rapid localization efforts, vertical integration, and expansion in advanced, higher-margin polymer and lighting solutions are expected to deliver resilient earnings even in volatile environments, while scaling renewable energy sourcing to 50 percent of inputs could meaningfully reduce cost of goods sold and boost net margins.

Varroc Engineering Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Varroc Engineering compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Varroc Engineering's revenue will grow by 12.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 1.6% today to 6.3% in 3 years time.
• The bullish analysts expect earnings to reach ₹7.4 billion (and earnings per share of ₹48.31) by about August 2028, up from ₹1.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 22.5x on those 2028 earnings, down from 59.3x today. This future PE is lower than the current PE for the IN Auto Components industry at 29.0x.
• Analysts expect the number of shares outstanding to decline by 0.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.7%, as per the Simply Wall St company report.

Varroc Engineering Future Earnings Per Share Growth

Risks

• Varroc Engineering remains heavily exposed to traditional ICE vehicle components, with only 11 percent of current revenue coming from EV supply and 75 percent of new order wins still in ICE; this slow diversification could lead to declining long-term revenues as the global auto sector accelerates toward electrification.
  
• Overseas operations continue to post substantial losses at the EBITDA and PBT level, with management expecting profitability only after an uncertain turnaround in the next year or beyond, which will keep group net margins and earnings under pressure in the interim.
  
• The company faces cost challenges due to supply chain issues, especially related to rare earth magnets essential for EVs, creating disruption risks and potential revenue volatility for its rapidly growing but still nascent e-mobility segment.
  
• Varroc's strong reliance on a few large customers-such as Bajaj, which represents nearly 38 percent of new order peak revenue-exposes it to customer concentration risk and the loss or reduced order volumes from key OEMs could directly impact overall revenues.
  
• Persistent global trade tensions, protectionism, and supply localization could weaken Varroc's export competitiveness, while international legal disputes (such as with Plastic Omnium) increase the risk of higher compliance and legal costs that could erode profitability and constrain free cash flow.

Valuation

• The assumed bullish price target for Varroc Engineering is ₹725.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Varroc Engineering's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹725.0, and the most bearish reporting a price target of just ₹480.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be ₹116.7 billion, earnings will come to ₹7.4 billion, and it would be trading on a PE ratio of 22.5x, assuming you use a discount rate of 14.7%.
  
• Given the current share price of ₹519.85, the bullish analyst price target of ₹725.0 is 28.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.