Varroc to cut debt, resume dividend payment

Varroc Engineering expects net cash accretion of around $168-185 million after the divestment of its global 4-wheeler lighting business. An amount of $31.56 million would be released to Varroc through an escrow account over the next two years. The company will use the proceeds to repay high-cost debt, resume dividend payments and have a liquidity buffer to invest in the electronics and EV space. 

Varroc on April 29 announced its decision to divest its four-wheeler lighting business in the Americas and Europe, along with the global R&D operations in India, to Plastic Omnium Se, France, for $631 million. Tarang Jain, MD of Varroc, said the transaction would strengthen its balance sheet and enable it to focus on emerging areas such as electric vehicle components, electronics, and connectivity in the Indian market and the global 2-wheeler lighting business. The company would have free cash of around Rs 1,600-1,700 crore. Varroc has not been paying dividends since the pandemic struck in 2020. It now plans to resume paying dividends. 

After the divestment, Varroc’s revenues will halve to around Rs 7,000 crore, but it would result in double-digit EBITDA and PAT growth with a better return on capital employed, said Jain. Post-divestment, around 85% of Varroc’s business in India will come from the 2-wheeler segment and 15% from the four-wheeler market, ICE engine-related parts, and plastic molding parts. 

EV and electronics are expected to drive revenue growth in India. “Going forward, we expect good double-digit growth in revenues,” Jain said. Varroc was among the early starters in the EV component business and is supplying Bajaj Auto’s electric scooters and three-wheelers. Talks are on with other OEMs and start-up EV makers for powertrain and component supply, Jain said. These products include motors, controllers, DC converters, telematics, onboard chargers, and cameras. 

Between 2018 and 2020, Varroc invested in new plants in the 4W lighting business and created a lot of capacities for supplying to Volkswagen, Renault, Nissan, and Mitsubishi.  This was done through QIP and additional borrowings in India, resulting in high leverage, Jain said, adding that the debt had accumulated to around Rs 2,800 crore and there was no EBITDA from the lighting business. Covid-related disruptions, shortage in semiconductor supply, and lower OEM demand impacted capacity utilization, margins, and cash flows, Jain said. Capacity utilization during FY22 was at 30% with no improvement being expected in 12-18 months.