Varroc Engineering Ltd (NSE:VARROC) (Q1 2027) Earnings Call Highlights: Revenue Surges 30% on ...

Negative Points

• EBITDA margin declined to 8.5% from 9.5% year-on-year, impacted by war-related commodity price inflation (0.75% impact) and lower-margin tooling sales (0.8% impact).

• The company faced labor challenges in April and May in its own plants and supply chain, affecting EV powertrain volumes and contributing to lower-than-expected growth.

• Net debt increased by INR316 million quarter-on-quarter to INR5,268 million, driven by higher working capital (INR441 million) due to increased revenues and front-loaded CapEx.

• ASPs for EV powertrain products declined by high single digits year-on-year due to product mix changes, potentially pressuring revenue growth relative to volume growth.

• Overseas operations continue to incur losses, with Romania electronics business still not at breakeven, and the company expects to reach EBITDA breakeven only by Q4 FY27.

• The company faces ongoing risks from commodity price volatility and global geopolitical uncertainties, which could impact future margins and recovery timelines.

• Tooling sales in Q1 were significantly higher than normal, at INR70 crores, and carried lower margins, negatively impacting overall profitability for the quarter.

• The company's growth is heavily dependent on Bajaj Auto, which remains a major customer, and despite diversification efforts, the customer mix has not changed dramatically.

• Management refrained from providing specific margin guidance, citing one-time impacts and recovery timelines, which may create uncertainty for investors.

• The company's ambitious INR20,000 crore revenue target by FY31 relies on significant order book wins and execution, with no guarantee of achieving the 10% PBT margin in the medium term.

Q & A Highlights

Q: Given the strong demand momentum and the higher EV content, how should we think about growth for the domestic business this year? A: Arjun Jain, Whole-Time Director and CEO, Business Unit I - While predicting a forward number for a specific customer is difficult, if EV penetration continues to grow at its current rate, our e-mobility business will gain further significance in overall revenue, making Bajaj more salient. We also expect further customers to come on board from an EV perspective.

Q: You mentioned about 50 bps of under recovery this quarter. How much do you expect to recover from customers going ahead, and how should we think about margins for the full year? A: K. Mahendra Kumar, Group CFO - Efforts are already underway to recover the under-recovery, and we should get most of it between this quarter and the next. The one-time tooling impact should not repeat to this extent in Q2, but the inflation recovery may take 1 or 2 quarters due to the arithmetic impact on the numerator and denominator.

Q: Can you provide the split between the 4-wheeler lighting order and the e-mobility one for the INR600 crores order win this quarter? A: Arjun Jain, Whole-Time Director and CEO, Business Unit I - The bulk, roughly 2/3, is e-mobility, which is a volume expansion on existing running programs. The balance is a combination of 4-wheeler lighting business wins, with the most significant portion being the lighting win, along with smaller business wins across product groups.

Q: For your traction motor business, when should we expect the order win to flow in? A: Arjun Jain, Whole-Time Director and CEO, Business Unit I - We have already announced one business win that is expected to begin immediately in quarter 2. There are two further customers with whom we are in fairly advanced discussions, and we expect SOPs to take place within this financial year.

Q: On the overseas business, do we expect the breakeven earlier versus the previous guidance of Q4? A: K. Mahendra Kumar, Group CFO - Our message stays the same regarding the breakeven timeline. Regarding the launch mentioned for midyear, we have already had a few new launches this year in our Romania electronics location, which is why we have seen an increase in revenue quarter-on-quarter overseas. This will continue to increase in subsequent quarters.

Q: Our largest customer has taken over a global OEM KTM. Are there any potential business opportunities there? A: Arjun Jain, Whole-Time Director and CEO, Business Unit I - We already did a fair amount of direct business with KTM prior to this. Post the more complete takeover, there are incremental opportunities that arise in line with Bajaj Auto's strategy for KTM. There are definitely a couple of immediate opportunities, though it's too early to quantify given KTM's high SKU mix.

Q: With the appointment of Mr. Eric Hammond as CTO, how does the strategy change, and what new avenues are we looking at? A: Arjun Jain, Whole-Time Director and CEO, Business Unit I - The strategy does not necessarily change; Eric complements the path we have set out with his vast experience in e-powertrain. We are the e-powertrain market leader in 2- and 3-wheelers, and strengthening this core high-growth segment is a critical priority. We look to expand this capability into other market segments, such as higher voltage systems and X-in-1 concepts.

Q: Given the strong growth, what kind of expectation can we build going forward for revenue? A: Tarang Jain, Chairman and Managing Director - This year seems to be very strong for us. Though we grew 30% this quarter, we believe for the whole year we could achieve at least between 20% to 25% growth, considering the second half of last year was fairly good. K. Mahendra Kumar, Group CFO - We don't take it as guidance, but more like our ambition.

Q: On the EV powertrain products, revenue grew around 56% year-on-year, but industry volume growth has been 80% to 90%. What kind of ASP decline are we seeing? A: Arjun Jain, Whole-Time Director and CEO, Business Unit I - ASPs have declined, driven by improvement in product composition, with a high single-digit kind of decline in ASPs. Additionally, due to labor challenges in our plants and supply chain in April and part of May, we were challenged, but that has now fully recovered.

Q: Looking at the balance sheet, which has significantly improved, are we considering inorganic opportunities? A: Tarang Jain, Chairman and Managing Director - We would be keen on inorganic opportunities in electronics, e-powertrain, or aftermarket, particularly on the 4-wheeler or exports front. We are open to JVs in India or acquisitions with export opportunities. However, given the expensive acquisition environment and strong organic growth of 20% to 25%, we will only pursue inorganic options that make financial sense and can exponentially grow existing business.

For the complete transcript of the earnings call, please refer to the full earnings call transcript .