Varroc Engineering Ltd (VARROC) Q2FY27 Concall Transcript - Sep-2026 Qtr
Moderator (ICICI Securities Limited): Ladies and gentlemen, good day, and welcome to the Varroc Engineering Q2 FY '27 Results Earnings Conference Call hosted by ICICI Securities Limited. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity
Moderator (ICICI Securities Limited): ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star, then zero on your touchtone telephone. Please note that this conference is being recorded. I now hand the conference over to Mr. Ronak Mehta from ICICI Securities. Thank you, and over to you, Mr. Mehta.
Ronak Mehta (ICICI Securities): Thank you. Good evening, everyone. On behalf of ICICI Securities, we would like to welcome you all to Varroc Engineering's Q2 FY '27 earnings conference call. Today, we have with us from the management team, Mr. Tarang Jain, Chairman and Managing Director; Mr. Arjun Jain, Whole-time Director and CEO, Business Unit 1; Mr. Dhruv Jain, Whole-time Director and CEO, Business Unit 2; Mr. Mahendra Kumar, Group Chief Financial Officer; Mr. Bikash Dugar, Head IR and Finance Controller, Business Unit 2; and Mr. Vishal Dave, Group Finance Controller, Business Unit 1. We will start the call with a brief opening remarks from the management team about the quarter gone by, and then will proceed to the Q&A session. Thank you, and over to you, sir.
Tarang Jain (Varroc Engineering Ltd): Thank you, Ronak. Good evening to everyone. I am Tarang Jain here, and thank you, team, ICICI Securities for hosting the call. So to start with, just want to give you the highlights of Q2 FY '27. In Q2 FY '27 and the half one financial year '27, the Indian economy remained relatively resilient, despite elevated crude prices and supply chain concerns arising from the war. Automotive demand continued to maintain a strong momentum, with EV adoption gaining further traction. From the start of this financial year, geopolitical uncertainties have led to renewed commodity inflation, creating near-term pressure on margins. While customer recovery mechanisms are in place, there is an inherent time lag between the increase in input cost and their recovery. We are actively mitigating this impact through customer engagements, value engineering, localization, and cost productivity measures, and expect the pressure to moderate as recoveries progressively flow through. During quarter two FY '27, we witnessed strong year-on-year growth across all major automotive segments. Two-wheelers grew by 16.3%, three-wheelers grew by 23.7%, passenger vehicles by 24.9%, and commercial vehicles by 33.9%. The electric two-wheeler volumes grew by a strong 115% year-on-year. On a sequential basis, the festive season supported growth across all segments. Two-wheelers grew by 11.7%, three-wheelers by 25.1%, passenger vehicles by 14.2%, and commercial vehicles by 19% compared with quarter one of financial year '27. For half half year financial year '27, industry volumes also remained strong, with two-wheelers growing by 19.5%, three-wheelers by 30.5%, and passenger vehicles by 21%, and commercial vehicles by 24 24.7% year-on-year. I'm pleased to share that in quarter two financial year '27, the company registered another quarter of strong growth, with revenue reaching rupees 29,479 million, representing a growth of 33.6% year-on-year and 11.9% sequentially. This growth was broad-based. Our India operations grew by 29.5% year-on-year, whilst our overseas operations grew by 104.1%, demonstrating encouraging traction in our international businesses. For half year financial year '27, our consolidated revenues stood at rupees 55,822 million, representing a growth of 31.8% year-on-year. This was supported by a 29.1% growth in our India business and a 70.7% growth in the overseas business. Our EBITDA for quarter two of financial year '27 was rupees 2,611 million, representing an EBITDA margin of 8.9% compared with 8.5% in quarter one of financial year '27, and 9.1% in quarter two of financial year '26.
Tarang Jain (Varroc Engineering Ltd): 0.3% in quarter one of financial year '27 and 4.1% in quarter two of financial year '26. The sequential improvement in profitability is encouraging, particularly considering that our margins continue to be impacted by commodity inflation and under recovery from customers. For half one of financial year '27, our company reported an EBITDA of Rs. 4,838 million translating into an EBITDA margin of 8.7%. Profit before tax, before JV and exceptional items was Rs. 2,532 million, or 4.5% of revenue, an improvement of 40 basis points year on year. In half one of financial year '27, the under recovery from the customer has impacted the EBITDA by 0.4%, and recovery agreed with the customer has not been fully realized in cash in half year of financial year '27 is over Rs. 1,140 million, which has adversely impacted our cash flow generation and increased our net debt slightly by in by Rs. 15 599 million. We will continue to focus on recovering commodity inflation, improving contribution margins, increasing productivity and maintaining our discipline on fixed costs. One of the particularly encouraging aspects of our performance is our increasing participation in electric mobility. Revenue from products supplied to EV models reached approximately 19% of our quarter two financial year '27 consolidated revenue compared with approximately 16% in quarter one of financial year '27 and EV-related gr- revenue gr- grew by a significant 130% year on year. Our E-Mobility Solutions business itself recorded revenue of of of approximately Rs. 2,773 million in quarter two of financial year '27 compared with Rs. 1,941 million in quarter one of financial year '27. This reinforces our confidence in the investments and capabilities we have been building in electric mobility and advanced electronics. Our overseas operations recorded a revenue growth of approximately 138% year on year during the quarter. Advanced Electronics is benefiting as new business wins progressively convert into revenue. The overseas business also benefited from an engineering income and lower R&D losses due to a little higher capitalization. We remain focused on improving the performance of our overseas businesses through higher capacity utilization, disciplined cost management and conversion of the recently secured programs into revenues. During half one of financial year '27, the company secured net new business wins with an annualized peak revenue of Rs. 10,127 million. Importantly, more than 48% of these annual peak revenue wins relate to supplying to EV vehicles. This provides further confidence in the sustainability of our growth trajectory and demonstrates that our product portfolio is increasingly aligned with the industry's transition towards electrification and higher electronic content. Our continuous focus on technology and intellectual property is also showing results with the company having filed more than 140 patents so far. During the quarter, we have also taken two important strategic decisions aimed at strengthening Varroc's long-term competitiveness and creating a sustainable value for our stakeholders. First, we have decided to restructure our two-wheeler lighting manufacturing operations in Italy. And second, we are proceeding to acquire a stake in Force Power India, a company focused on battery pack systems. The Italy restructuring is intended to preserve customer programs and technology, while relocating manufacturing to our facilities in Romania and Vietnam. The objective is to eliminate the burden of an underutilized manufacturing footprint, improve the fixed cost absorption and plant utilization, and create a stronger earnings and a cash generation model. The restructuring involves one-time shutdown costs whose payback will be three years.
Tarang Jain (Varroc Engineering Ltd): our approach of continuously reviewing our portfolio, allocating capital to businesses where we see attractive long-term opportunities, and taking decisive actions where structural changes are necessary. Our consolidated net debt at the end of September 2026 stood at rupees 5,547 million, compared to rupees 4,952 million as of March 31st, 2026. The increase compared with March was primarily attributable to capital expenditure, increasing capital expenditure. Our net debt to equity ratio remained at a comfortable 0.29 while our net debt to annualized adjusted EBITDA stood at 0.57 times at the end of September 2026. We remain committed to maintaining balance sheet discipline while ensuring that adequate capital is available so to support organic as well as selective inorganic growth opportunities. As we look ahead, our strategic priorities remain very clear. We will continue to pursue revenue growth while sustainable sustainably improving contribution margins through economies of scale, revenue management, and cost efficiencies. We expect improving contribution margins, combined with disciplined growth in fixed costs, to create an operating leverage and support PBT growth. At the same time, our focus remains on converting growth into profits and into free cash flow, reducing leverage, and redeploying capital prudently into organic and inorganic opportunities capable of generating attractive returns. In this volatile, new normal environment, we will continue to strengthen Varroc through disciplined decision making and meticulous execution. Our endeavor remains to grow profitably, improve margins, control our fixed costs, generate free cash flows, and enhance return on capital across all our businesses. With this, I will now ask MK, our group CFO, to walk you through the presentation and provide more insights into our financial performance. Thank you.
Mahendra Kumar (Varroc Engineering Ltd): Thank you, Tarang. Good evening, everyone. Our CMD explained most of the highlights already. So, I'll take you to the consolidated financial slide in our presentation. So, 2,948 crores was the revenue which we reported for Q2, which marked almost close to 34% year-over-year growth, got translated into EBITDA of 8.9% versus 8.5% that we reported for last quarter, and 9.1 that we reported for the previous year Q2. PBT was at 4.7 versus 4.1. And the exceptional items was about for 63 crores. Like how our CMD explained, this is needed because of the strategic decision which we took in Italy to exit manufacturing in Italy and also to settle some of the old tax disputes. So, that resulted in a PBT of 78 crores after exceptional items, which appears to be low. But if you eliminate the exceptional items, we're talking about 140 crores of PBT before exceptional items compared to 91 crores that we did last year. And like how we explained in the previous call, this quarter also continued to face the pressure because of war recoveries. So, we are making various efforts to recover them from customer. So, those efforts will continue in the near future anyway. Coming to the H1 numbers, 5,582 crores was the revenue reported, which again marked a 32% growth year-over-year. EBITDA came in at 8.7% compared to 9.3 last year. And PBT helped by operating leverage benefits increased to 4.5% compared to 4.1. Exceptional items like how I explained, this time it is because of the strategic decisions which we took in Italy for Italy. But last year because of the China JV exit, we had actually a positive surprise of 61 crores good news in exceptional items. So, with this we are reporting a PAT of 111 crores for H1 of FY27. The next slide, we gave the usual break up between different packages of businesses. The India business of course continues to do well despite the war-related pressures.
Mahendra Kumar (Varroc Engineering Ltd): would have been far better without this warring impact. But so that's the thing that's the impact we're trying to manage now. Overseas business also periodically there has been steady improvement. Of course this was also helped by some engineering or design income recovery during the quarter. And in the last box we are showing the overall R&D related spending. As again of course in line with the accounting rules we are also capitalizing some of the R&D efforts wherever possible, wherever needed. The next slide of course we gave the net debt journey, of course the trend downward trend continues, but as we explained in the previous calls also, this year is going to be a capex heavy year. On top of that there are about close to 114 crores of cash which we still need to collect from customers towards war recoveries. So because of that there is a there is some kind of increase in the overall debt which should get moderated, but we don't expect a significant reduction to happen between now and end of the year. We will try to maintain it around these levels in the coming quarters. Following slide of course we gave the revenue breakup with Bajaj revenue contributing Bajaj contributing to 46% of our total revenue and overseas growing to 13% now. In terms of vehicle segments, two-wheeler and three-wheeler constitute about 75% of the total. The following slide we're also showing the the order order intake data. So we started the year with the 3,509 crores of order book. We added in the 6 months close to 1,000 crore plus and we also took 823 crores to start a production already. So that leaves about close to 3,700 crores of order book by end of H1. Interesting point here is of course EV portfolio continues to be strong in this order intake with EV related orders adding up to 48%. And Bajaj also is coming to 55% and then two-wheeler and three-wheeler adding up to 73% of the total orders. The next two slides talk about those strategic initiatives which our CMD talked about. Of course the acquisition of 4C is is an important milestone for us to expand our content per vehicle in the EV models plus it also gives complements it also complements our strengths and creates a scalable platform across multiple vehicle categories. So that's a significant advantage for us. So we will be starting with a controlling stake of 45%, but with an option to scale it up by another 6% in the coming months or years. And the last one relating to Italy restructuring, again this will enable us to overcome the low capacity utilization issue in Italy. Plus it also enables us to move from move manufacturing from a high cost country to low cost countries like Vietnam and Romania. So that strengthens our overall cost structure. It gives us the long term benefits. So as our CMD explained, within 3 years we will be able to recover whatever we are investing in terms of the closure related cost. So let me stop here. We will be happy to take your questions. Thank you.
Moderator (ICICI Securities Limited): Thank you very much. We will begin with the question and answer session. Anyone who wishes to ask a question may press star and one on their touch tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Ladies and gentlemen, in order to ensure that the management is able to address questions from all the participants in the conference, please limit your questions to two per participant. The first question is from the line of Jyoti Singh from Haitong Securities Private Limited. Please go ahead.
Jyoti Singh (Haitong Securities Private Limited): Thank you for the opportunity and, sir, congrats on a good execution on the top-line. So, basically, first question around EBITDA margin, that somehow we are having the impact and another thing that India EBITDA margin was about 10.6% in Q1 and then 10.3 in Q2. Again
Jyoti Singh (Haitong Securities Private Limited): 11.5% a year ago. So why did India margin fall Q on Q while consolidate margin improve? So is it because of overseas only the reason or any other reason?
190 more turns of this transcript: log in to Stocksigma to read the full call.