Rationale

 For arriving at the ratings, ICRA has considered the consolidated financials of Varroc Engineering Limited (VEL) along with its subsidiaries/step-down subsidiaries, henceforth referred to as The Group/ Varroc. The ratings continue to reflect Varroc's established position as a leading auto component supplier in India and as an eminent automotive lighting supplier globally. The ratings factor in VEL's large scale of operations, along with its diversified revenue mix across customers, products and automotive segments (two-wheeler, or 2W, and passenger vehicles, or PVs). The ratings note its diversified business presence across geographies, including North American, European and Asian markets, which insulates Varroc from slowdowns in any specific market and provides stable revenue visibility prospects. The ratings draw comfort from its established relationship from customers such as Bajaj Auto Limited (BAL), Honda, Ford Motor Company, Tesla, Volkswagen AG (VW) and Jaguar Land Rover (JLR), among others. ICRA also expects the Group's revenue to grow at a healthy place in the medium term because of improved offtake from the existing customers, new products launched in recent times, customer acquisition in the domestic business and ramping up of operations in new geographies, such as Poland and Morocco. The ratings derive strength from the Group's financial flexibility and its recent equity infusion of around Rs. 700 crore, which has supported its liquidity during H1 FY2022. The ratings, however, remain constrained by the weakening of debt protection metrics because of elevated debt levels and decline in profitability. ICRA expects the Group's financial performance to be subdued in H1 FY2022, and the performance of the overseas lighting business (VLS) to improve gradually in H2 FY2022. However, improvement in profitability, going forward, will be contingent upon the extent and timeliness of recovery of the ongoing semiconductor chip shortage issues. Considering the weak performance and semiconductor issues, which are expected to continue longer than earlier expected, ICRA, now expects the Group's total debt/OPBIDTA (adjusted for lease liabilities) to be in the range of 3.5–4.0 times in FY2022, (against the earlier expected 2.5-3.0 times) and improve to below 2.5 times from FY2023 onwards.