Varroc Engineering Ltd Management Discussions

Economic Overview Global Economy

The reported year recorded varied global headwinds, including persistent geopolitical turmoil, supply-chain disruptions, worldwide food and energy crisis, an inflation spike and the tightening of monetary policies. However, despite navigating these macroeconomic challenges, the global economy demonstrated resilience and achieved a growth rate of 3.2%.

According to the International Monetary Fund (IMF), most indicators for global growth are pointing towards a soft landing, avoiding the predicament of an economic downturn. With the inflation rate declining faster than anticipated in most regions, financial condition have improved. This resulted in equity values surging and increase in capital flows into most emerging market economies, aside from China. Furthermore, certain low-income nations and frontier economies have also reclaimed their position in the market.

Outlook

The global economy is expected to sustain its growth rate at 3.2% in CY 2024 and CY 2025. While emerging market and developing economies (EMDEs) are expected to record a slight downturn from 4.3% in 2023 to 4.2% in both 2024 and 2025, advanced economies will experience growth. It is anticipated that advanced economies will increase from 1.6 percent in 2023 to 1.7 percent in 2024 to 1.8 percent in 2025. Looking forward, global inflation is expected to decline steadily from 6.8% in 2023 to 5.9% in 2024 to 4.5% in 2025. Further, it is expected inflation will decline faster in advanced economies as compared to the developing economies.

Indian economy

Despite the global economy grappling with various headwinds, the Indian economy maintained a robust performance in the year under review. The Indian economy recorded gross domestic product (GDP) growth rate of 8.2%, supported by strong domestic consumption and effective Government investments, mitigating the effects of negative net foreign demand.

In FY 2023-24, the Monetary Policy Committee (MPC) mentioned that the Gross Value Added (GVA) on the supply side increased by 6.9%, facilitated by buoyant manufacturing and construction activities.

The ability of the Indian economy to withstand global economic downturn can be attributed to substantial consumer and government expenditure, a robust services sector, manufacturing sector witnessing a growth of 11.6% Year-on-Year (YoY) and six central bank rate hikes since 2022. With the global economies seeking an alternative to China, India is emerging as the preferred manufacturing hub. The Indian government is steadily aiming to increase infrastructure spending, attracting foreign investments.

Outlook

The Indian government is expected to maintain its positive growth trajectory in the forthcoming years. The Asian Development Bank (ADB) estimates Indias gross domestic product (GDP) growth for 2024-25 (FY25) to be 7%, catalysed by robust development in the services sector and increased public and private investments. Indias strategic position and proactive approach position the country for future growth. However, the Indian economy is exposed to various threats, including unforeseen global shocks that might aggravate the economic landscape.

Industry Overview Global automotive industry

The global automotive industry market size reached USD 3,564.67 billion in FY23/24 and is projected to grow at a CAGR of 6.77% from 2023 to 2033. By 2033, the market size is anticipated to achieve USD 6,861.45 billion. North America is forecasted to experience the fastest growth during the 2023-2033 period. The demand for commercial electric vehicles has risen due to favorable regulations and increased government incentives. Governments are allocating a larger portion of their budgets to upgrade road infrastructure, aiming to bolster transportation and logistics sectors domestically¹.

The global automotive study estimates that combined sales of passenger vehicles and commercial vehicles reached 92 million units in 2023 and are projected to reach 95 million units in 2024, marking a year-over-year growth of 3.1% from 2023 to 2024. In 2023, global electric vehicle (EV) sales exceeded 13.5 million units, although the EV market saw a slight decrease in year-over-year growth compared to 2022. The anticipated growth rate for EV sales in the US in 2024 is approximately 20%. The Asia-Pacific and Middle East regions dominate the sales volume of passenger vehicles and commercial vehicles combined. China holds the largest share globally, both in terms of vehicle sales and production. In 2023, Chinas sales volume of passenger vehicles exceeded 25 million units, accounting for around 50% of global sales².

Outlook³

The automotive market is expected to steadily regain its momentum in the upcoming financial year. However, the industry is exposed to various challenges. As car registrations are expected to slow down in the forthcoming years, car manufacturers face the risk of reduced profitability due to intense competition and an uncertain environment.

It is projected that new auto sales will only grow by 1.9% due to subdued consumer spending- especially in China and Europe and subpar global economic growth. However, on the other hand, electronic vehicles (EVs) remain in a relative sweet spot despite major headwinds. The sale of new EV passenger cars is anticipated to exceed 18mn in FY 2024-25, with Europe dominating the market share. Overall, the path ahead is expected to remain turbulent, riddled by geopolitical turmoil, declining demand and regulatory uncertainties.

The global market for two-wheelers (2W), encompassing motorcycles, scooters, and mopeds, has witnessed substantial growth in recent years. Driven by South Asia, APAC, and ASEAN regions, annual sales are projected to reach nearly 56.3 million units by 2028. Changing consumer preferences, such as increased demand for personal mobility solutions and growing interest in adventure motorcycles among younger demographics, are contributing to this growth. Meanwhile, established manufacturers in the 2W sector are introducing new internal combustion engine (ICE)-powered models with advanced features. Despite the ongoing popularity of ICE 2Ws, there is a notable trend towards electric two-wheelers (E2Ws). Many leading 2W manufacturers are investing heavily in new electric models⁴.

Challenges⁵

• Sustainability Targets influence policies- With the growing emphasis on developing sustainable products, the automotive market stands at a critical juncture. There is a growing emphasis on incorporating sustainable practices in daily endeavours and it is significantly influencing regulatory policies. It is imperative for the industry to adhere to these regulations to remain relevant to the evolving market dynamics.

• Technological disruptions and consumer demand- Consumer preferences and market dynamics are evolving rapidly in response to technological disruptions. The auto sector is experiencing rapid developments, including EVs, ADAS and advanced connectivity features. As the industry is aligning itself to the evolving trends, it includes substantial investment in research and development, workforce training and infrastructure. Key industry players have to remain abreast with the latest developments to ensure it can outperform their peers.

• Labor shortage to impact costs- The industry is recording a shortfall in skilled professionals. A dearth of proficient workforce increases production time and surges costs. Synergising technological abilities with a skilled workforce is essential to consistently fulfill the demands of the market.

Indian Automotive industry

The Indian automobile industry demonstrated a positive performance, with domestic sales increasing by 12.5% during the fiscal year 2024 to 2,38,53,463 units from 2,12,04,846 units in the previous year, according to the Society of Indian Automobile Manufacturers (SIAM). India aims to achieve a doubling of its automotive industry size to INR 15 lakh crore by the end of 2024. In the Indian automotive market, two-wheelers held a market share of 75.3%, followed by passenger cars at 17.6%. Small and midsized cars dominate the sales in the passenger car segment. During the fiscal year 2023-24, the total export of automobiles reached 4,500,492 units, with two-wheelers comprising approximately 76.8% of the total exports⁶.

Indian Automotive Industry includes Passenger vehicles, commercial vehicles, three wheelers, two wheelers and quadricycles. India holds a strong position in the international heavy vehicles arena as it is the largest tractor manufacturer, second-largest bus manufacturer and third largest heavy trucks manufacturer in the world. Automobiles sector resulted in 5.35% of the total FDI inflow as per the Dec 2023 DPIIT report. It is expected that the EV market will grow at CAGR of 49% between 2022 and 2030. Further, the industry is expected to create 5 Mn direct and indirect jobs by 2030. A market size of $50 Bn for the financing of EVs in 2030 is also anticipated.

Domestic Sales

Within the passenger vehicle (PV) segment, total wholesale (dispatches to dealers) rose by over 8% to 42, 18,746 units in FY24 compared to 38, 90,114 units in FY23. The growth was primarily driven by the utility vehicle (UV) segment, which expanded by approximately 26% to 25, 20,691 units in FY24 from 20, 03,718 units in FY23.

In the three-wheeler segment, domestic sales surged by 41.5% to 6, 91,749 units in FY24, up from 4, 88,768 units in the previous year. However, total commercial vehicle sales saw a marginal growth of 0.6%, reaching 9, 67,878 units in FY24 compared to 9, 62,468 units in FY23. The Passenger Vehicle segment spearheaded the growth, achieving total sales of nearly five million units, comprising 4.2 million domestic units (an increase of 8.4%) and 0.7 million units for exports. The Two-wheeler segment also continued its recovery trajectory, registering a robust growth of over 13% in domestic sales, totaling almost 18 million units⁷.

Outlook⁸

Indias rapidly growing auto market is poised for growth, with projections indicating it will reach USD 300 billion by 2026. This growth is fuelled by various factors, including rising income levels, urbanisation and burgeoning middle class. Indias dominance in the automotive arena is further highlighted by its status as the worlds largest manufacturer of two wheelers with over 21 million units. India progression towards electric vehicles (EVs) is also steadily gaining momentum. It is projected to become the third largest EV market by 2025, with 2.5 million vehicles expected to be on the roads. The sector presents a massive investment opportunity.

In addition to EVs, the automotive industry is also witnessing a shift in consumer preferences towards larger and more powerful vehicles across all segments. This trend is reflected in the increasing demand for Utility Vehicles (UVs) and Medium and Heavy Commercial Vehicles (M&HCVs). The industrys growth trajectory is further supported by initiatives such as Make in India, the Automotive Mission Plan 2026, and the National Electric Mobility Mission plan 2020.

Global auto-component industry

The global automotive components market was valued at USD 1,964.51 billion in 2023 and is projected to exceed USD 3,429.54 billion by 2033, growing at a compound annual growth rate (CAGR) of 5.73% from 2023 to 2033. Asia Pacific is expected to lead in growth during this period. The market has seen significant growth and innovation driven by the rise of autonomous vehicles. The advancement of self-driving technology has heightened demand for specific parts and systems necessary for autonomous driving capabilities.

Autonomous vehicles rely on various sensors such as LiDAR (light detection and ranging), cameras, radars, and ultrasonic sensors to collect real-time information about their surroundings and make decisions. Managing the vast amounts of sensor data and executing autonomous driving tasks require sophisticated algorithms and powerful processors. Moreover, technological advancements foster creativity and flexibility in design, facilitating streamlined manufacturing processes. Manufacturers now have the capability to explore new materials, shapes, and features, enabling the development of cutting-edge automotive components that cater to evolving customer and industry requirements.⁹

Indian auto-component industry

The Indian auto component sector is one of the fastest- growing industries in the country at present, recording an impressive 32.8% growth rate in FY 2023, reaching INR5.6 lakh crore. This rapid growth can be attributed to rising disposable income, increasing investment in infrastructure and more substantial financial incentives for manufacturers. The Indian automotive component business produces a vast array of parts for various vehicle types, including castings, forgings, completed and semi- finished sections, assemblies and subassemblies.

It is expected that the Indian auto component market size will increase by USD 119.79 billion at a CAGR of 25.7% between 2023 and 2028. This growth is anticipated to be supported by the growing middle-class population, surge in demand for compact SUVs and effective government initiatives and policies for easy automotive industry setup procedures.

Key growth drivers

Indias automotive industry is experiencing a surge in demand due to the increasing middle- class population in the country. It has increased the demand for car ownership, resulting in a surge in vehicle sales in India.

With consumers emphasising upon features, convenience and safety, manufacturers are responding to these demands by introducing models that are more cost-effective while still offering a wide range of features.

Increasing product launches is also an emergent trend in the market with market players constantly launching new products to gain a competitive advantage over existing companies and new entrants

Localization - The Indian automotive industry plans to invest up to $7 billion by FY28 to enhance the localization of advanced components such as electric motors and automatic transmissions. This move aims to decrease reliance on imports and leverage the strategy of multinational companies shifting away from China to other manufacturing locations¹⁰.

Export opportunity - The current export value of Indian auto components stands at USD 20.1 billion. The Indian auto component industry has achieved its highest-ever turnover, and exports from the industry are projected to increase fivefold over the next decade. This strong export growth is anticipated to be propelled by factors including competitive pricing, adherence to quality standards, and advancements in technology.

Higher technological content - The automotive sector, contributing 20.1% to the manufacturing GDP, plays a pivotal role in driving macroeconomic growth and technological advancements in India. The government of India has invested USD 11 million in technology aimed at reducing vehicular emissions by 45% and improving fuel efficiency by 30%¹¹.

Role in the global value chain

India is a global powerhouse of automotive software and engineering research and development. This enormous engineering skill set coupled with government push to make in India is setting the stage for India to play an important role in the global value chain. Overall, the domestic market is poised for growth and development in the upcoming years.

Company overview

Commencing its journey in 1990, Varroc is a global Tier-1 automotive component company. Starting its operation in India, the Company has initially focused on polymer business. However, it has steadily expanded its portfolio to include exterior lighting systems, plastic and polymer components, electrical-electronics components , exterior lighting, advanced safety systems and precision metallic components. The Company has been serving OEMs across various vehicle segments worldwide.

The Companys robust research and development capabilities and strategic technological partnerships have enabled the organisation to cater to the evolving market demands. In FY 2024, the Company has achieved a revenue exceeding Rs 75,519 million. This estimation is a testament to the Companys commitment to delivering excellence and sustaining performance over three decades. Leveraging its rich legacy and expertise, Varroc has established itself as the preferred partner for leading OEMs in the automotive industry, consistently outperforming its peers over the years.

Technology

As the demand grows for efficient and environmen friendly vehicles, the Company has embraced advanced technology to maintain a competitive edge. The industry is witnessing a significant shift towards sustainable transportation, ranging from electric scooters to high- performance electric motorcycles. Concurrently, advancements in four-wheeler technology are focused on enhancing performance and safety.

Advanced driver assistance systems (ADAS) like lane departure warning and adaptive cruise control are increasingly prevalent, alongside standard features such as automatic emergency braking and blind spot monitoring. Hybrid and electric drivetrains are also gaining traction, offering reduced emissions and enhanced fuel efficiency. Overall, technology plays a pivotal role in revolutionizing the automotive manufacturing sector. Companies are investing in innovative solutions across both two and four- wheel vehicles to foster sustainability, efficiency, and heightened safety standards for all.

Technology for two wheelers

Current industrial megatrends are shaping advancements in two-wheeler technology to enable safer, smarter, connected, and sustainable mobility. Safety enhancements for two-wheelers include the adoption of LED headlights and mirrors. Connectivity and digitalization efforts encompass linked displays, TFT and sensor interfaces, and Firmware Over-The-Air (FOTA) capabilities in telematics. Customization features include distinctive lighting and foam-in-place seats. Electrification and efficiency improvements involve technologies such as traction motors and controllers, power assist Integrated Starter Generators (ISG), and e-Drivetrain energy management systems. Finally, sustainability initiatives encompass the adoption of electronic fuel injection for internal combustion engines (ICE) and BS6 catalytic converters.

Technology for four wheelers

The latest trends shaping four-wheeler technology encompass safety, customization, connectivity, and digitalization. Safety innovations include advanced driver- assistance systems (ADAS), driver monitoring systems, surround view systems, LED headlights, LCUs, and adaptive front lighting system mirrors. Customization features span signature lighting, interior systems, in-cabin sensors, interior mood lighting, and center consoles. For connectivity and digitalization, the focus is on FOTA (Firmware Over-The-Air) in telematics, video telematics, AI-powered sensor interfaces, and modules compliant with AUTOSAR standards.

Product portfolio enhancement

The expansion of the companys product portfolio involves several subcategories designed to enhance our current offerings. These include proprietary products with an ongoing emphasis on innovative, cost-competitive designs, continuous investment in R&D and product development, forging new technological partnerships to meet market demands, and leveraging Government of Indias DSIR accredited R&D facilities. In the automotive sector, the advancement of technologies for safer, smarter, more connected, sustainable, and lightweight vehicles is pivotal. Integrating these elements into automobiles enhances safety, connectivity, sustainability, and weight reduction.

2W and 3W EV capabilities

The company possesses robust capabilities in 2W and 3W electric vehicles, featuring locally designed, developed, and manufactured products such as traction motors, traction controllers, DC-DC converters, chargers, BMS, and telematics. Additionally, it maintains complete vertical integration for electrical production and operates a motor dyno testing facility dedicated to testing 2W and 3W EV components. These facilities are IoT-enabled to monitor and optimize capacity utilization effectively.

Business review

The company has business mainly in India, and also operations in Europe and Asia continent. Business in India are further classified as given below

i. Electrical and Electronics (Including 4W Lighting Business in India)

ii. Polymer Business

iii. Metallic Business

iv. Aftermarket

Business in Europe and Asia are classified under various units as given below

i. Lighting (mainly 2W) in Italy, Romania and Vietnam

ii. JV in China for 4W Lighting

iii. Electronics in Romania

iv. IMES in Italy

Operational Review Indian operation Polymer and plastics segment

Varroc, a leading tier 1 supplier to major OEMs in the automotive industry, operates 13 plants and 2 research and development centers across India in polymer and plastics segment. Its infrastructure includes molding machines ranging from 250 T to 3500 T, along with captive tool rooms and fully equipped paint shops, allowing the Company to meet the demands of both domestic and global markets. Varrocs swift turnaround time for new products, driven by innovation and a customer-centric approach, positions the Company as the preferred partner for its clients.

Varroc Polymer emphasizes design-driven technology, synergising client needs with proper design aesthetics and technical expertise. The Companys comprehensive

Research and Development Center, complete with an analytical lab, addresses engineering challenges across interior and exterior systems, body parts, mirror assemblies, and advanced clean air filter solutions for various vehicle segments.

Varroc has been undertaking lightweighting initiatives, replacing large sheet metal parts with polymer and introducing lightweight micro-cellular polymers and composites in various components. They are also leveraging advanced technologies such as 2K molding and 3i technology to enhance paint finish improvement, reduce wall thickness and improve battery protection for electric vehicles.

Through the acquisition of Bangalore-based Team Concepts Pvt. Ltd., Varroc has forayed into vehicle accessories segment, anticipating the evolving needs of the industry. The Company aims to deliver innovative solutions, emphasizing on quality, cost, delivery and differentiation, positioning Varroc as a forward-thinking leader in the automotive supply chain.

Electrical-electronics (including lighting)

Varroc leverages its core strengths to design, develop and manufacture automotive components for leading OEMs in India. The Company prioritize end-user needs and incorporates feedback in product development to ensure the organization can outperform its peers. With over two decades of experience, Varrocs flexible manufacturing approach in the Electrical-Electronic sector enables them to adapt to evolving technology and market demands effectively.

Backed by world-class manufacturing facilities, including an electronics PCB facility, Varroc provides end-to-end solutions to meet customer requirements seamlessly. This has enabled the Company to earn the status of a preferred ‘Early Development Partner for OEMs, offering comprehensive solutions tailored to individual customer needs.

Varroc aims to consistently diversify its product portfolio to meet market and customer demands, steadily capitalizing on automotive trends towards greener, safer, smarter and more connected vehicles. The Companys product range include ISG, adaptive lighting, static bending, traction motor, controller, DC-DC converter, Battery Management System for Electric Mobility, and advanced telematics, addresses the evolving needs of fuel efficiency, safety and connectivity.

The automotive lighting sector in India is witnessing rapid technological advancements, driven by safety regulations, consumer preferences for energy-efficient solutions, and advancements in LED technology. As the market evolves, Varroc continues to be pioneer in innovation so as to meet the growing demand for safer, more efficient, and aesthetically pleasing lighting solutions in both two- wheelers and four-wheelers.

The introduction of the latest technology TFT Instrument cluster and strategic acquisitions of CAR IQ further strengthen Varrocs position and enables the Company to expand its capabilities in the automotive sector.

Metallic (transmission and valves)

Varroc has established itself as a leading player in the metallic business, demonstrating excellence in design, development, manufacturing and supply of high- performance and cost-effective components. The Company employs environmental-friendly practices such as Zero Liquid Discharge (ZLD) in their plants to contribute to the Companys commitment to environmental stewardship. Varroc has carved a niche for itself, becoming renowned for its precision-forged and machined parts for engines and transmissions.

Varroc stands as one of the most preferred ‘Supplier of choice for top OEMs both nationally and internationally. The Companys transmission business caters to a wide range of applications across various vehicle categories, including 2W, 3W, 4W, CV, Off-Highway, Earthmoving and Oil Drilling. The Companys diversified product portfolio includes transmission gears and assemblies, crankpins, connecting rods, flanges, ring gears, crankshafts, camshafts, knuckles, front axle beams, hydraulic shafts, heavy undercarriage parts, drill bits and cones. The Company not only supplies these components to leading OEMs and tier 1 suppliers in India but also exports to Europe, North America and Asia.

In the Transmission division, Varroc operates four manufacturing plants and an engineering center in India, along with two manufacturing facilities in Italy, ensuring seamless production and consistent delivery to meet global demand.

The Companys Engine Valves Division is one of Indias fastest-growing engine valves supplier, having a market share of approximately 25%. Varroc, inclusive of Durovalves, is the preferred supplier of engine valves across all segments of the automotive industry. The Company has also established itself as a major player in the international market. Its robust manufacturing plants equipped with a cutting-edge technical center in India, providing development and research support to customers worldwide.

Additionally, the Engine Valve division pioneers the development and realization of high-performance technologies such as Sodium-filled valves, hollow valves and titanium valves.

Aftermarket

The aftermarket business is a significant and dynamic sector that complements the supply to original equipment manufacturer (OEM). The growth in this business for Varroc has been driven because of the various initiative taken by the Company like

• Product Quality and Range: Offering high-quality parts with a wide range of products to cater to diverse vehicle makes and models especially for 2W and 3W market.

• Brand Awareness and Marketing: Building brand reputation and visibility through effective marketing strategies to reach end consumers and service providers.

• Distribution Network: Establishing a robust distribution network with efficient logistics to ensure timely availability of parts across the country.

• Customer Service: Providing excellent customer service, technical support, and warranties to build trust and loyalty among consumers and service providers.

The Indian automotive aftermarket is poised for continued growth driven by increasing vehicle ownership, rising disposable incomes, and a shift towards vehicle maintenance and customization.

European Operation (including Vietnam in Asia)

The European operation is divided into three segments - global lighting, electronics, and metallic (IMES). With three manufacturing facilities, the global lighting segment is a leading supplier of exterior lighting systems for Two- Wheeler OEMs. The electronics segment, focuses on ADAS, Lighting Electronics (Light Engines & Light Control Units), and Electronics Manufacturing Services (EMS). We also have 2 manufacturing facilities for the metallic (IMES) segment, manufacturing hot steel forged parts for the construction and oil & gas industries. Last year, the business was sluggish due to external environment as well as our over dependency on single customer in all the businesses. We are taking efforts to reduce our dependency on single customer and diversify our customer base. These efforts will take time and thus the focus for next few years to control the cost and also do backward integration for sustaining the business.

China Market (JV)

The PV Lighting China joint venture between Varroc and TYC specializes in design, manufacture and supply of exterior lighting for passenger vehicles and aftermarket segments. Leveraging expertise in technologies such as matrix, xenon, laser and halogen, VTYC offers a wide range of headlamps and tail lamps. Geographically, VTYCs two strategically positioned facilities in Chongqing and Changzhou, ensures catering to the specific requirements of OEMs.

SWOT Analysis

Strengths

The automotive industry is undergoing continuous evolution driven by innovation and technological advancements, presenting promising avenues for growth. Varroc Engineering Limited has established and streamlined sourcing processes to ensure efficiency and strategic deployment. Technology adoption, including PO digitization, workflow management, GPS integration, E-sourcing, and Business Intelligence, enhances analytical capabilities and operational agility. Efforts in standardization, such as vendor performance management and material manuals, underscore commitment to consistent quality and efficiency. Aligning long-term suppliers with specific processes and requirements further strengthens operational effectiveness. By leveraging substantial purchasing power, Varroc achieves superior cost management outcomes. Moreover, strategic partnerships with industry leaders like Bajaj, Honda, Royal Enfield, Piaggio, Yamaha, M&M, VWSkoda etc. enable Varroc to maintain competitiveness while focusing on optimizing costs, generating free cash flow, and reducing debt.

Opportunities

The automotive component market is expanding rapidly driven by trends such as premiumization, regulatory shifts, and the integration of next- generation vehicle features. Varroc Engineering Limited is well-positioned to capitalize on these opportunities. With a robust team of over 660 engineers in R&D spread across 7 technical centers, Varroc is poised to capitalize on this opportunity. The company aims to enhance its competitiveness both in India and globally by advancing its portfolio with world-class products and services.. These initiatives aim to strengthen Varrocs market position, drive innovation, and meet the evolving demands of the automotive industry effectively. Varroc will strengthen and utilize its global presence, leveraging its status as a global company deeply rooted in India.

Weakness

Varroc Engineering Limited has faced challenges in achieving industry-standard profitability from its operations. These challenges include complexities in effectively managing organizational changes. Addressing these weaknesses is crucial for Varroc to enhance operational efficiency, improve financial performance, and align more closely with industry benchmarks for profitability and sustainability.

Threats

Varroc Engineering Limited confronts significant threats stemming from escalating input costs influenced by supply chain disruptions exacerbated by the Russia-Ukraine conflict, potentially impacting its financial performance. These challenges include the unpredictable effects of geopolitical dynamics, concerns over the financial stability of suppliers, reliance on a single source of suppliers, vulnerabilities in IT systems affecting price transparency, and difficulties in retaining skilled employees. Addressing these threats requires proactive measures to enhance supply chain resilience, diversify supplier bases, strengthen IT security measures, and implement robust talent retention strategies to mitigate risks and sustain operational stability in a volatile market environment.

Outlook

Looking ahead, Varroc Engineering Limited is strategically positioned to leverage growth opportunities driven by key industry megatrends such as the rising adoption of electric vehicles and stringent safety standards like BS-VI compliance. Our mission includes doubling profitable growth by 2030 through a steadfast commitment to operational excellence. We are focused on consolidating our run rate business by prioritizing FSS projects, conducting thorough business case evaluations, and executing a targeted investment strategy. Additionally, we aim to strengthen our portfolio in functional products, including Advanced BTP Products (2K, Functional and deco), while enhancing our Full System Supplier i.e. FSS capability infrastructure and expanding our presence in high-volume business segments. Emphasizing advanced technologies, we are dedicated to driving value-driven business initiatives, reallocating significant investments, and exploring strategic acquisitions through collaborative partnerships.

Financial Overview

Abridged Consolidated Profit and Loss (Continuing Operations)

(Rs in Million)

Particulars	FY 2024	FY 2023	YoY
Revenue from Operations	75,519	68,912	9.6%
Raw Material Cost including change in Inventories	47,333	44,305	6.8%
Employee Cost	8,092	7,173	12.8%
Other Expenses	12,504	11,685	7.0%
Finance Cost	1,939	1,903	1.9%
Depreciation & Amortisation (D&A)	3,368	3,367	0.0%
Share of Profit/(Loss) from the Joint Ventures	444	53	737.7%
Profit (loss) before Tax	3,149	829	279.9%
Profit after Tax	5,530	388	1,325.3%

Revenue from operations

The Companys consolidated revenue from operations changed to Rs 75,519 million in FY 2024 up 9.6% from Rs 68,912 million in FY 2023.

Raw material

Raw material cost (cost of material consumed+ changes in inventories of work in progress and finished goods) for operations has changed by 6.8% to Rs 47,333 million in FY 2024 as compared to Rs 44,305 million in FY 2023

Employee cost

In FY 2024, the employee benefit expenses was at Rs 8,092 million as compared to Rs 7,173 million in FY 2023, recording a change of 12.8%

Finance Cost

Finance Cost has increased by 1.9% as to Rs 1,939 million in FY 2024 as compared to Rs 1,903 million in FY 2023

Depreciation and Amortisation (D&A)

The change in depreciation and amortization was 0.0% from FY 2023 to FY 2024. The absolute depreciation and amortization was Rs 3,368 million for FY 2024 as compared to Rs 3,367 million in FY 2023

Other expenses

The other expenses have changed from Rs 11,685 million in FY 2023 to Rs 12,504 million in FY 2024

Profit/(loss) before tax for operations (PBT)

The PBT was FY 2024 was Rs 3,149 million as compared to Rs 829 million in FY 2023

Profit/(loss) after tax for operations (PAT)

In FY 2024, the group reported profit after tax of Rs 5,530 million as business operation across improved and also impacted favorably by deferred tax credit as compare to profit reported in FY 2023 of Rs 388 million.

Net Debt

Net debt for FY 2024 was Rs 9,828 million as compared to Rs 12,779 million in FY 2023

Net worth

Net worth of the Group in FY 2024 was Rs 15,262 million as compare to Rs 10,042 million in FY 2023

Key financial ratios (consolidated continuing operations)

Particulars	March 31,2024	March 31,2023
Debtors Turnover Ratio	13.87	12.36
Inventory Turnover Ratio	7.04	6.89
Interest Service Coverage Ratio	4.36	3.21
Current Ratio	0.79	0.62
Gross Debt Equity Ratio	0.79	1.63
Operating Margin	5.8%	3.5%
Net Profit Margin	7.3%	0.6%
Return on Net worth	36.2%	3.9%
Return on Capital Employed	20.3%	11.9%

Research and Development

The Group understands the pivotal role played by innovation to enable the organisation to stay ahead of the curve. The Group prioritises research and development to facilitate diversification of the product portfolio and ensuring progression towards a better future. As a prominent entity in the automotive sector, the Group has strengthened its in-house research and development capabilities across various global locations including India, China, Italy, Romania and Poland. With 7 technical centers and over 100 patents granted worldwide, the Group is consistently exploring avenues to advance mobility solutions.

The automotive industry is poised for remarkable growth in the forthcoming years, driven by evolving consumer preference, technological advancement and increasing Government expenditure. To capitalise on emerging growth trends, the Group is committed to improving its engineering and software development capabilities to deliver cost-effective products tailored to key automotive markets. The Group aims to leverage its core strengths to cater to the evolving needs of end-users and establish itself as the preferred partners for national and international businesses alike. As the preferred ‘early development partner for OEMs, the Group offers comprehensive solutions to ensure seamless integration and delivery of end-to-end solutions.

Human Resource

Varroc Engineering recognizes the relentless initiatives undertaken by its proficient workforce in driving the company to new heights of success. As of March 31, 2024, the company boasts a workforce of over 7,000 employees, whom it regards as one of its most valuable assets. To promote overall safety and well-being, Varroc implements various programs aimed at enhancing the employee experience.

Last year, the company participated in the Gallup employee engagement survey, which identified key areas for improvement. In response, Varroc took swift action to boost employee engagement and foster a thriving workplace. These efforts led to the company getting certified as a "Great Place to Work" in Sep23. The company encourages the development of a diverse talent pool, supported by a culture of collaboration, excellence, high standards, and psychological safety. Emphasizing innovation, Varroc cultivates an environment that promotes both personal and professional growth.

Leadership development is a critical focus, with efforts to identify future leaders and ensure their proper grooming for organizational effectiveness and growth. Varroc is dedicated to providing an exceptional employee experience, addressing holistic well-being through best-in- class practices.

Internal Control system and adequacy

The company maintains robust internal controls and systems tailored to their size, scale, and complexity to support their operations effectively. The Internal Audit function takes a proactive approach to identify key areas for review, enhancing operational efficiency and resource utilization. The company assesses the processes for compliance with relevant laws and regulations. The Audit Committee approves audit plans, allowing flexibility for timely support through management audits. Every function and plant receives sufficient coverage, with diligent monitoring of audit observations and prompt reporting of status updates to management. Significant audit findings and corrective actions are presented to the Audit Committee, along with updates on their closure status.

Cautionary statement

The content within this document pertains to forecasts regarding future events and financial outcomes for Varroc Engineering Limited and should be viewed as forward- looking. Given the nature of such statements, they are based on certain assumptions and are subject to inherent risks and uncertainties. Theres a notable risk that these assumptions and predictions may not prove accurate. Readers are advised against placing excessive reliance on forward-looking statements as various factors could lead to differences between the assumed and actual future results and events. Therefore, this document is subject to a disclaimer and is qualified in its entirety by the assumptions, qualifications, and risk factors outlined in Varroc Engineering Limiteds Annual Report for FY 2024.