When we look back at 2012, what will we remember? In our public life, scams seem the order of the day starting with the 2G telecom imbroglio. A government described as being in a state of policy paralysis has passed muster on foreign direct investment in retail. An ex-bureaucrat, keen to fight for the aam aadmi, started an eponymous party.
In the automotive sector, sales fell and industry body SIAM slashed growth rates to just 1-2 percent for the car sector. Frustrated, it asked the government to extend the Automotive Mission Plan by a decade.
It was a year in which we may not be able to pinpoint, at the drop of a hat, breaking ‘automotive’ news. But that doesn’t mean there were not developments that will have a bearing on its future. The government’s EV mission has not yet been formalised but diesel prices were increased by the highest amount so far in 2012.
Automotive players continue to pursue their dreams, and write their own destinies. Last fortnight, Fiat announced plans to make its mark once gain here with the Jeep brand from its US unit, Chrysler. Audi India upped its India target for 2012 to 8,600 units; it wants to be No. 1 by 2015. Mahindra & Mahindra has brought the SsangYong brand to India. And gen-next Siddhartha Lal of Royal Enfield has turned around the iconic brand.
Tata Motors chairman Ratan Tata, who praised M&M at his company’s AGM, prepares for life after Tata while Karl Slym, an ex-GM hand, heads a new team at the carmaker, as its MD. Marc Nassif, head of Renault India, has successfully launched its fortunes-changer, the Duster SUV, and seems set to write a record of sorts even as his company’s tie-up with Bajaj Auto for a small car is now history.
UNO Minda inked a JV with Nabtesco Automotive Corporation of Japan to design and make air brake parts for CVs and clutch actuation systems for passenger vehicles. And in Aurangabad, better known to the world for its stunning Ajanta and Ellora caves, a one-time first-generation entrepreneur, who is 50 today wants to quite literally light up the road.
Global ambition takes shape
Two-and-a-half years ago, Tarang Jain, managing director of Varroc Group, told me that his target was to double his Group’s business to Rs 4,000 crore by 2012-13. Then in July last year, he got a call that was to change the destiny of its company. Ten months later, the Varroc Group, a formidable two-wheeler vendor in India, announced its acquisition of Visteon’s global lighting business.
The acquisition gives Varroc a footprint in places as far afield as Mexico and the Czech Republic. It now has 31 manufacturing locales globally and four engineering centres. This buyout has changed Varroc forever. For this clear vision, his bold leap into the future (which some may say is foolhardy) the editorial team at Autocar Professional decided to name Tarang Jain as ‘Man of the Year 2012’.
So how did the Varroc Group go about this
I travelled to Aurangabad to ask Jain what went into this decision that is, quite literally, Varroc’s global leap. “We never thought that we would become a global player,” says Jain sitting in the same location where he started Varroc nearly 22 years ago, with a small plant.
He adds, “I would like to call Varroc an auto component conglomerate.” The $92 million (Rs 500 crore) buyout of Visteon’s exterior lighting business in 2012 has catapulted it to the top three Indian component suppliers club. It ranked sixth prior to the acquisition. The move has also made OEMs look at Varroc in a new light, says Jain. “It’s a strange coincidence. I find that in this year post-Visteon, the four-wheeler OEMs, who were a bit of a struggle for us to discuss business with, are now so much more approachable,” says Jain.
Visteon’s lighting business (now called Varroc Lighting Systems) comprises manufacturing operations in Apodaca, Mexico, Novy Jicin and Rychvald, Czech Republic, and in Pune as well as associated units in Europe, USA, China and India.
With the buyout, Varroc has also acquired proprietary technology, becoming in the process, the only Indian lighting supplier to have its own technology. Of the $92 million, $20 million (Rs 109 crore) is being used to acquire Visteon’s share in a 50:50 joint venture in China, which Varroc hopes to close later this month.
As a result of the Visteon deal, Varroc now becomes a full-time lighting supplier to four-wheelers with prestigious clients like Ford Motor Company, Jaguar Land Rover, General Motors, PSA Peugeot Citroën and Volkswagen AG. Prior to the acquisition, Varroc was, and remains, a major supplier for two-wheeler manufacturers such as Bajaj Auto, Honda and Yamaha.
With power comes responsibility
While the deal is praiseworthy, what will be crucial for Varroc, however, is the post-acquisition integration and managing the business successfully. The mature markets are in a flux, especially Europe where some of the biggies such as Peugeot are struggling. Europe’s own overcapacity means these are not the best of times. In London, Jaguar Land Rover is shining bright even as Mercedes-Benz has its fair share of challenges.
One of the key challenges for Jain is to manage the debt that he has taken on. Varroc’s current debt:equity ratio is around 1:1. But Jain’s goals are crystal-clear. Varroc Lighting Systems is to rise up to be the third largest automotive lighting business, from the current sixth place.
Jain is no stranger to Europe. Last year, the Varroc Group acquired the euro 15-16 million Italian two-wheeler lighting major – Triom. That acquisition pushed Varroc up the value curve as a major supplier to two-wheeler OEMs. In 2010, the Varroc Group top brass travelled to Thailand for its first international automotive exhibition.
Let's return to Triom. The Italian company has a two-third market share in Europe and supplies to almost every two-wheeler OEM in Europe. These buyouts present Varroc with opportunities to penetrate into them with other products in its portfolio. “We bought Triom to gain access to technology. It is also entering Vietnam and that meant we could foray into South East Asia with them,” says Jain.
Triom’s Vietnam plant has started supplies to Piaggio – its only customer in that market currently. Varroc hopes to supply to Triom’s existing Japanese OEM customers with operations in Vietnam from its plant within a year or so. This presence in Vietnam fits well with Varroc’s strategy to capture business in South East Asia. While it is not looking actively at any more acquisition elsewhere, there could be one in South East Asia. “There could be some inorganic play in two-wheelers in South East Asia. We are looking at higher level of penetration for existing customers in India and in South East Asia," reveals Jain.
But, won’t another acquisition financially stretch Varroc, which already has a sizeable debt in its books? To guard itself from any financial challenge, Varroc is set to make its first equity stake sale to a private equity fund soon. Jain plans to sell “up to 10 percent” stake in Varroc Engineering. Fifty percent of the funds raised will be used to reduce debt; the rest will be used for expansion and as buffer for any exigency.
“We are very particular that our debt-equity ratio will not go above 1:1,” says Jain. As the business progresses and the economic environment turns adequately favourable, Varroc plans to also get listed on the bourses. That can happen in three to five years.
At present, Varroc is in the process of formulating individual strategies for all three businesses. Part of the strategy is to enter “adjacent” businesses. That’s why Varroc has invested Rs 150 crore to set up a unit to make crankshafts, front axle beams and allied products for commercial vehicles.
Varroc is in talks with CV makers to supply products and has already started pilot production at Aurangabad. There are two ways that the new business can help it. On the one hand, the products from this plant will fetch better margins than two-wheeler components, and, on the other, it can help offset the slowdown in the company’s other verticals. If all goes well, Varroc expects the plant to hit peak capacity of 150,000 crankshafts in three to four years and generate Rs 300 crore annually.
However, Jain is clear that despite these new avenues, two-wheelers will remain Varroc’s core business. It is a business in which Jain says Varroc has been a strong player and which it has nurtured to its current position over 20 years.
Jain especially credits his cousin, Rajiv Bajaj, managing director of Bajaj Auto (and our Man of the Year 2005), for the opportunity to grow as an entrepreneur, and his uncle, Rahul, for giving him the first break. Bajaj Auto was Varroc’s first customer and remains its biggest so far.
Jain says he was also inspired by Vivek Chaand Sehgal (our Man of the Year 2010), chairman of the Samvardhana Motherson Group, to aim high in business.
Jain prefers to have a low-key life after work in Aurangabad, where he relocated to from busy Mumbai during the initial years of Varroc.
The next goal for Jain is to grow Varroc into a Rs 20,000 crore group by 2020. “It’s been quite a good journey so far. Of course, you need to have luck with you and we have had our share,” says Jain, who can rattle out his business goals, all at one go. By 2020, Arjun – the elder of Tarang Jain’s two sons – may join the father in growing the business. When he does so, he’ll have his own office in a plush, new corporate building slated to be inaugurated by February 2013.
• Detailed interview with Tarang Jain in the December 15 issue