Varroc sells its four wheeler lighting business to Plastic Omnium for 600 million euros

Aurangabad-based auto component maker Varroc Engineering has signed an agreement to sell its four-wheeler lightening business to France’s Compagnie Plastic Omnium SE for 600 million euros, according to company’s intimation to stock exchanges. The 600 million euro transaction will see Varroc divesting its lighting System operations in the USA, Brazil, Mexico, Poland, Czech Republic, Germany, Turkey, and Morocco.

Commenting on the development, Tarang Jain, Chairman & Managing Director of Varroc Engineering said: “Our immediate goal is to be future-ready with continued profitable growth in emerging sectors like the EV and high technology electronics. The divestment of our passenger car lighting operations in the Americas and Europe will be a win-win deal for Varroc and Plastic Omnium. For us, we unlock great value for all our shareholders, employees, and business partners as we plan for our next level of growth in the fastest-growing economies and auto sectors in the world. We will also continue to invest in our teams and people as we embark on the next phase of our growth.

The sale of VLS will enable the $1.5 billion revenue Indian company to become debt-free and sharpen its focus on the India business.

After the exit from VLS, Varroc will be left with a domestic business that supplies polymer, electrical and electronic components to vehicle makers in India, primarily two-wheelers companies. It also manufactures hot steel forged parts for the construction and oil & gas industries. In addition, Varroc will also continue to operate its China JV and other international 2-wheeler businesses in countries like Italy and Vietnam and global electronics businesses in Poland and Romania. The company is retaining its 4-wheeler lighting operations in Asia.

The company had net debt of Rs 2,604 crore at the end of December 2021, down from Rs 3,010 crore the previous quarter. Servicing of debt had been a drag on its financial performance in the past few years.

Plastic Omnium is a leading player in the car modules space and intelligent exterior systems, with a market share of 18% and 15%, respectively. It makes smart face bumpers, tailgate & spoilers and lid module. The acquisition of the lighting business will complement the company and it can offer more content per vehicle to its customers.

The largest customer of Plastic Omnium is the Volkswagen Group, accounting for 26% of the revenue. It is followed by Stellantis (17%), Daimler (11%) and BMW (9%).

The French company had posted revenue of 7.2 billion euros in 2021.

VLS is the sixth largest automotive lighting maker globally and it makes head lamp, rear lamps, and fog lamps for global passenger car makers such as Ford, Jaguar Land Rover, General Motors and Volkswagen.

The company boasts of new technologies for lightening, such as surface LED, 3D lighting, adaptive front lighting system, matrix LED and laser, which are high growth products.

The global exterior lightening market for passenger vehicles was $17 billion in 2020. VLS had a 5.6% market share in 2020.

Varroc has 12 operating facilities for passenger cars in the Czech Republic, China, India, Mexico, Morocco, Turkey, Poland, Brazil and Romania, and two facilities for two-wheeler components, according to its annual report for FY21.

Varroc had acquired the global lighting business, based in the US, for $72 million in 2012 from Visteon Corp. Over the years, the company made more than Rs 2,000 crore of capital expenditure related to new plants and upgrade of old plants. However, lower capacity utilisation of its plants due to weak sales of one of its large clients, the impact of Covid-19 and the ongoing chip shortage weighed in on the performance of VLS, also denting financials on a consolidated level.

The revenue from the older plants of VLS were significantly below normal levels and were weighing on the margin. New plants’ margins are also under pressure due to commodity price inflation and supply chain disruptions. VLS posted revenue of 258 million euros for the third quarter of FY21, which dropped to 219 million euros in December 2021.

Varroc’s revenue has remained in the range of Rs 10,000-12,000 crore during FY18-21). It reported a loss of Rs 628 crore in FY21.

In the first nine month of FY22, revenue rose 18% to Rs 9,109 crore, even as that of VLS grew just 6.9% to Rs 5,561 crore. In the first nine months, the interest cost had gone up, while operating profit dropped.

The company raised Rs 699 crore from qualified institutional investors in the last quarter of FY21 to bring down its borrowings. In the first nine months, the India business had revenue of Rs 3,431 crore with an Ebitda margin of 9.6%.

Bajaj Auto accounts for 53% of Varroc’s domestic business, followed by Honda (6.2%) and Royal Enfield (3.4%).