2012 Western India Special: Varroc works on organic growth strategy

Tarang Jain, the managing director and promoter of the Aurangabad-based Varroc Group, missed being at home for Dussehera this year. That’s because he had to be in Italy for a board meeting of Triom, a company that Varroc acquired in 2011. It's a price he has to pay to meet the demands of his expanding business. The coming times may get busier as he has set an ambitious target of reaching the $4 billion (Rs 21,428 crore) mark by 2020.

Private equity route

Towards meeting the investment needs and also to reduce the company’s debt level, the promoters will dilute “up to 10 percent” stake in Varroc Engineering to raise funds. This is the first time that Varroc is taking the private equity placement route to raise funds. The company is in talks with three private equity fund players currently. The deal is expected to be signed before end-2012. “Out of the amount we will raise, 50 percent will be used to reduce the debt levels, and the balance 50 percent could be used for expansion. We also want to keep some as buffer because as you know, the external environment at the moment is unpredictable,” says Jain.

Once the economic environment is stable and business grows to an even higher level, Jain is looking at listing Varroc in the bourses. “Maybe within three to five years,” he says.

Jain and his team hope to finalise the strategy to reach the stated goal for 2020, in the next three to four months. After two back-to-back acquisitions of Triom and Visteon’s lighting business, it will be organic growth till 2020, unless some attractive opportunity presents itself to Varroc. So, which segments will drive the business towards the 2020 goal? “I would say a billion dollars out of the four will come from the exterior lighting business in the next seven to eight years. Two billion will be from Varroc Engineering largely in India, including the crankshaft plant. And the rest one billion will be from Varroc Polymers,” explains Jain.

Focus on non-two-wheeler business

Varroc’s strategy includes reduced dependence on business from two-wheeler OEMs. The commercial vehicle crankshaft plant, which will be commissioned soon, will be key to expand business from new customers. The company plans to earn Rs 300 crore annually from the plant once it reaches full capacity, which may take about three years.

“There has been a delay of six months but we are here for the long term. We find this to be a very attractive segment to be in. It offers better margins. In all our product groups, we want to be a part of the truck segment,” says Jain. Varroc will offer a range of products like crankshaft, front axle beams and some allied products for trucks.

Chinese business

Varroc, which got catapulted to a leading position in the auto lighting business with the acquisition of Visteon's lighting division, will get a foothold in the Chinese market by acquiring Visteon’s stake in a Chinese JV. The deal, worth $20 million, was part of the overall acquisition. “We are looking at closing the deal by November-end,” says Jain.

The long-term business strategy also made Varroc exit the JV with French plastic component major Plastic Omnium. Autocar Professional broke the news in its September 1 edition this year.

Varroc, which was a minority stakeholder in the JV, gained technology know-how from its French partner by participating in the JV. “But other than that, we realised that we’re firstly a minority player. From a long-term angle, it’s better to focus on our interior plastics. So we said decided it was okay to give up the exterior plastics,” says Jain. So no exterior plastic components at least for five years, because the exit clause doesn’t allow Varroc to produce any component that competes with Plastic Omnium’s product range.

Business expansion, a business exit, new equity partner, new plant… there’s a lot going on in Varroc’s boardroom. It will be interesting to see how they play out in the marketplace.