Varroc Engineering Q1 Review - Sub-10% Ebitda Margin Trend Continues; Downgrade To Hold: ICICI Securities

ICICI Securities Report

Varroc Engineering Ltd.’s Ebidtam stood at 9.2%, down ~30 basis points YoY, and 100 bps lower than consensus estimate in Q1 FY25. Margin decline YoY was due to startup costs for two new plants in Maharashtra and higher employee cost (annual wage increase).

Revenue growth was 6% YoY, with 11% YoY growth in India operations partially offset by negative growth in overseas operations.

We have factored-in 9% revenue compound annual growth rate and ~10.7% average Ebitda margin for FY24-26E.

We have cut our FY25/26E EPS by 8%/10% due to-

1. weak revenue growth (underperforming domestic industry growth), and subsequently,

2. weak margins, consistently below 10%.

We downgrade Varroc to HOLD (from Buy) with DCF-based revised target price of Rs 595 (earlier: Rs 738), implying ~22 times FY26E earnings per share.

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