In this comprehensive interview with Autocar Professional's Sumantra B Barooah, Tarang Jain, Managing Director, Varroc Engineering talks about new growth strategies, potential risks, opportunities from new megatrends, and the guiding principles behind leading the nearly Rs. 11,000 crore company which was set up with the sole investment till date of Rs 29 lakh by the promoter family in 1990.
Varroc Engineering has come a long way. From a turnover of Rs 1 crore in 1990 to Rs 11,000 crore in FY2018 and the latest company to go public.
Going public is a huge milestone event for us. We have been a private company for many years but things do change as a company goes public and the company sees pressures of quarter-on-quarter reporting and the previous year’s quarters to the current quarter. We have always been a very professionally driven company and believe in corporate governance, proper data integrity, and financial discipline. I think that it is a little bit of change in life but for us, we have been pretty comfortable going public and we are looking forward to it.
Talking about growth, 2006 onwards you started taking inorganic growth steps. How do you plan to take the inorganic growth story forward? We believe you have recently acquired a company in Turkey. Can tell us about that a little bit?
We started our operations in 1990 in Aurangabad and till 2006 we have been largely more of an India-centric player with maybe some exports from India. In 2005, we felt that we should grow across borders, not just by exporting but by also having a manufacturing facility overseas. So we made our first acquisition not from a strategic point of view, but mostly from the growth point of view of a company doing large forgings in Italy.This was followed when we bought a company called TRIOM (2011), which was part of our core business of two-wheeler lighting, for technology reasons and for the two-wheeler lighting segment as they also had a footprint in Vietnam. We have made the acquisitions but I would say today we have a very clear strategy, which we didn’t have in 2006.
Today our strategy centres around two core companies – the local and global business. The local (Indian) business is more of two- and three-wheeler parts, where we are the most diversified auto component group in India, having 16 products across three divisions, and a very strong player in the two- and three-wheeler industry supplying to all the marquee distinct customers.
Here we don’t really see much of a possibility for M&A growth going forward, as we already enjoy a good market share and a good level of cross-selling that is happening YoY. Where we see a lot of M&A activity is in our second and the largest core business of global exterior lighting. That is where we have around 4 percent market share of the global vehicle market, which is about 90 million cars. So obviously, we are looking at the market share growth and where we have been growing since took over the business in 2012-13.
We have grown about 14-15 percent CAGR (lighting business) and 13-14 percent (overall group) for the past five years. In the lighting business, we are No. 6 globally, so we need to move forward and increase our market share.
That explains the latest acquisition.
We are looking at opportunities in the lighting space for cars but there are not too many available. But some do come by and that’s something we are very alert about. We are on the lookout for acquisitions and that is going to be other than just organic play, wherein the lighting space we will be growing faster than the market. But that is not enough for us to grow market share. To an extent, we will have to look at M&A globally, and it will not be for the technology; we are already among the top 10 players in the world who possess the relevant technology for today and tomorrow in the global lighting space – it will be for market share growth.
There is a small acquisition that we made in Turkey. It is still not closed so I can’t name the company. It is something we will take over from July onwards. I think it will be a part of our lighting entity. Turkey is an important market with around 1.7 million car sales (local and exports to Europe and other regions). It is a very good market and entering this market through the M&A route goes well for us. Some of our existing passenger car customers are also very happy about the acquisition.
Global megatrends like safety, electrification, autonomous driving and connected vehicles will not adversely affect your business because you are not part of the conventional IC engine business. But do these megatrends offer new opportunities to Varroc?
As you correctly said, 84 percent of our business is engine agnostic. Having said that, 16 percent which is engine driven is largely in India in the two- and three-wheeler space, and a little in the passenger vehicle component space. Where I see huge possibility because of the megatrends is, for instance, when we talk about India, the disruptions that are happening or rather the opportunities that we are getting due to the disruptions happening on the safety and the emission norm side (BSVI).
There are huge opportunities because what is happening out of the products (16) that we have in the two- and three-wheeler segments. Some of the products are going to see large content growth, like electronic dashboards which will go full electronic; we see three times content growth there. And there will be huge content growth in LED penetration in two-wheeler lighting. When it comes to emissions disruptions, the catalyst that we do will also see content growth. Plus, we are also entering into the all-important electronic fuel injection space in partnership with an Italian player. That is the 17th product that we are adding.
When do you plan to enter into that space?
We will enter the space around 2020 when BSVI norms kickin and when we will also be a supplier. We won’t be a significant supplier in the space but we will make an entry there, which is very important for us. We see a lot of opportunities for revenue growth, because of these disruptions that are happening in India.
Also, there is going to be more focus on lightweighting in India; we are already a significant player in the plastic moulding space. We see more opportunities coming up in plastic moulding, more parts getting converted from aluminium, metal to plastic, which will also lead to revenue growth for us. And with the EV penetration that is going to happen in India, more so maybe in the two- and three-wheeler space, is where we want to play, we want to be part of the electric powertrain. That is another business that we are exploring. Being a significant player at two- and three-wheeler markets in India, which is the largest market in the world, we cannot be left out of the segment. ‘
On the global lighting business, when it comes to EVs or non-EVs we are the No. 6 in the overall lighting market with 4 percent market share. But in the EV space for lighting which is full LED, we have a 20 percent market share.
And where does it put you in the pecking order?
We are the No. 2 in the EV space, but as the base is quite small (EVs) maybe 1 or 1.5 million cars out of the 90 million, it is growing. For us it is not just EVs or non-EVs. I think the LED lighting penetration overall is growing very fast. For instance today, the global market for LED headlamps is only at 10-12 percent levels, the rear lamps are close to 30 percent penetration levels. What I understand is in the next 3-4 years, the penetration in the case of headlamps be close to 30 percent for LEDs globally and in the case of the rear lamps will almost be almost 70 percent. That kind of penetration is helping revenue growth. The car market going forward will not grow more than 2 percent, the lighting market generally lamps will not grow more than four-and-a-half percent but because of the content growth, it will lead to higher revenue growth for us.
Future mobility trends (connected, shared and autonomous) are something that would happen and very exciting for the lighting players who possess the right kind of technologies. For instance, the integration in lamps of LiDAR or more sensors, more light detection, which also means further higher revenue streams. So all those ugly things are going to be packaged into the lamps, which is a very attractive thing/product. We see huge possibilities, irrespective of the passenger market growth globally. We foresee huge growth in the global lighting segment.
Where do you see some challenges as an industry player?
Competition is there whether it is India or abroad, but the good part for us is that we are very strong when it comes to product technology. Today, I would say on a global basis, we possess the relevant technologies for today and tomorrow. This is a very important thing for any auto component player to have, we cannot be dependent on somebody else.
Secondly, what we have done well over the years is the QCD, cars for customers. That is something also which we are very strong in, the one area that we have because of the strong growth rates we have. One area that we would have to be more sensitive and cognisant of is the new launches. Because of the kind of growth rates that we have enjoyed in the past, if want the same or higher growth rates, then the launches we do need to be flawless. The risk is that it could hit EBITDA margins, in case if it was not launched in the right manner and also could be a little bit of risk for some loss of some platform or something.
Thus far, we have done a good job, but this is something which we have be sensitive about. The other thing would be acquisition of new talent in the business. If you are growing at the rate that we want to grow, then you have to be able to acquire good talent. So, acquisition of talent and development of talent within the company becomes extremely important.
What have been Varroc’s EBITDA margins?
In FY2018, we were close to about 9.78 percent overall, with PAT around 4.34percent. It is also focus for us, growing margins going forward. As a company, from the financial side, it is not only the margins that we look at. Yes, we should have double-digit margin, we should have EBITDA margin of around 12-13percentoverall, that is the stated target. For us what’s equally important is ROCE (Return of Captial Employed). Last year, ROCE was close to at around 18 percent. And going forward, our benchmark is 20percent, something that we would realise in the near future. We look at balancing the ROCE with the margins. We don’t really look at only one aspect, because both the ratios are important to us.
On the four-wheeler business (lighting, plastic polymers), things have not moved as planned in the domestic market. Is it because of the competition in the market or is any other factor at play?
Till we acquired Visteon’s lighting business in 2012, our focus was largely on the two- and three-wheeler parts, that was the only core business that we had. Becoming a global player, that became our second core business and our biggest business (lighting) that we had. What has happened, in India we are playing in the four-wheeler lamps sector and in the four-wheeler interior parts for cars and trucks. We are also playing in engine valves, forgings and machine parts in the powertrain. That is something that we would continue to grow. I think there is a good business case for us.
We did not focus on our plastic interiors, valves, gears, forgings or machine businesses. Where we are not showing that much of focus and should show more focus is our four-wheeler lighting business. The reason was that when we acquired Visteon, we had to focus more on the developed markets of North America, Europe and China. We couldn’t really focus much on India. But now I think when we know that we are quite stable in these developed markets, and would like to have more focus on the four-wheeler lighting business in India.
How much of Varroc's business could be adversely affected by the disruptions in the industry, especially e-mobility?
84 percent of our overall business is engine-agnostic. As regards our dependence on the engine side, it is more on to the two- and three-wheeler parts space; a certain percentage of some of the electronic component parts, transmission parts and engine valves businesses will be impacted. But overall as a company it won't be much, even in India. I still feel that there is a longway to go, there is still time left for engines in India and we will see it at least around for the next 20 years. There will be disruptions from EVs and I still think that we are going to be the last man standing, when it comes to the engine parts, because of our scale and size.
(Read the full interview in Autocar Professional's 1 July Maharashtra special issue)