Varroc Engineering Limited — Interim / Quarterly Report 2021

Nov 11, 2021

Varroc Engineering Ltd.

Regd. & Corp. Office

L-4, MIDC, Industrial Area Tel + 91 240 6653700 email : varroc.info@varroc.com Waluj, Aurangabad 431 Fax + 91 240 2564540 www.varroc.com 136, Maharashtra, India CIN: L28920MH1988PLC047335

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VARROC/SE/INT/2021-22/45

November 11, 2021

To,

The Manager- Listing The Listing Department, National Stock Exchange of India Limited Exchange Plaza, Plot No. C/1, G Block, Bandra-Kurla Complex, Bandra (East), Mumbai-400051. NSE Symbol: VARROC

The Manager – Listing The Corporate Relation Department, Bombay Stock Exchange Limited Phiroze Jeejeebhoy Towers, Dalal Street, Fort, Mumbai-400001. BSE Security Code: 541578

Sub: Press Release and Investor Presentation - Financial Results Q2 and half year FY 2021-22

Dear Sir/Madam,

Please find enclosed a copy of Press Release and Investor Presentation on the Unaudited Financial results (Consolidated & Standalone) for the quarter and half year ended on September 30, 2021.

Kindly take the same on record and note the compliance.

For Varroc Engineering Limited

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Ajay Sharma Group General Counsel and Company Secretary

Encl: a/a

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Varroc Engineering Limited

L-4, MIDC, Industrial Area Waluj, Aurangabad 431 136 Maharashtra, India CIN: U28920MH1988PLC047335 | Tel + 91 240 6653700 | www.varroc.com

Press Release

• Revenue from Operations for the quarter improved 4% YoY mainly in India (+36% YoY); VLS revenue declined 13% YoY as a result of industry wide semiconductor shortages. Capacity utilisation levels were significantly lower than expected as key customer OEMs shut plants/ reduced volumes

• Consolidated EBITDA for the quarter severely impacted by the lower revenue/ capacity utilization as well as increase in raw material costs.

• Net Debt increased to ₹30 billion as a result of weaker operating performance, capex and disruption to working capital cycle

• Order wins: ₹1.2 billion inflows in Q2 in India Business and € 46 million in VLS Business over past three months

Pune, November 11, 2021: Varroc Engineering Ltd. (Varroc), a global tier-I auto component group, today announced its results for the quarter ended September 30, 2021

Summary Consolidated Financials

( ₹ million)

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YoY %
Q2 FY22 Q2 FY21 H1 FY22 H1 FY21 % Change
Change
Revenue from Operations - Reported 30325.6 29161.5 4% 59741.6 41908.4 43%
Other Income - Operating 87.2 227.9 233.3 337.9
Other Income - non-Operating 12.0 3.6 19.5 393.6
EBITDA: Reported -60.0 2660.8 na 116.4 866.4 -87%
EBITDA % -0.2% 9.1% 0.2% 2.1%
Depreciation & Amortisation 2373.7 2270.3 5% 4565.8 4339.3 5%
Finance Cost 440.3 442.8 -1% 826.1 874.3 -6%
Share of net profits of JVs under equity method 11.5 90.2 -14.0 199.9
PBT - Reported -2850.5 41.5 -5270.0 -3753.6
Tax 121.7 429.2 -5.0 -280.0
PAT -2972.2 -387.7 -5265.0 -3473.6
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Consolidated Financial Performance for the quarter

• Revenue from operations for the quarter was ₹ 30,326 million, an increase of 4% over Q2 FY21

• India Business revenue grew by 36% YoY on a lower base in Q2 FY21, and VLS revenue declined by 13% YoY (in Euro) as a result of semiconductor shortages and key customer OEMs shutting plants/ reducing volumes

• The VLS revenue decline was severe at the established plants as key customer OEMs shut plants/ reduced volumes while the newer plants improved YoY but the utilisation levels are lower than expected

• The consolidated EBITDA for the quarter was at (-) ₹ 60 million (excluding China) The EBITDA for India business was at ₹ 1,250 million (EBITDA margin 9.9%, impacted negatively by high raw material costs); while VLS reported EBITDA loss of (-) ₹ 1,258 million

1

China JV

• China JV Revenue improved by 44% QoQ. Our share of the China JV EBITDA was at ₹ 102 Million (margin +5.9%) as higher raw material prices impacted the margins negatively.

Depreciation and Amortisation

• Depreciation and Amortisation expenses were at ₹ 2,374 million.

Finance Cost

• Finance cost was at ₹ 440 million, increased QoQ as the gross debt increased during the quarter.

Project RACE

• Project RACE (Rapid Achievement of Competitive Edge) to bring VLS EBIT level in line with industry benchmarks is progressing well. In the initial phase, we have identified the improvement opportunities. The implementation of actions on quick wins has been initiated and the impact of € 75 million approximately p.a. is expected to be visible in the coming quarters.

Mr. Tarang Jain, CMD, Varroc Engineering Ltd. commented,

“ The challenging situation for the global auto sector is continuing. The severe semiconductor shortages globally have significantly reduced the Passenger Vehicle industry volumes.

While the situation is expected to persist for the next few months, we have started actions to reduce our fixed costs and implement industry best operational practices under the umbrella of Project RACE. We expect the benefits from project RACE to start showing impact in the second half of FY22. Sizable portion of the benefits will be visible FY23 onwards.

We remain confident of both of our businesses.”

About Varroc Engineering Ltd.

Varroc Engineering Ltd is a global tier-1 automotive component group, ranked 124[th] in the 2019 Fortune India 500 list. It was incorporated in 1988. The group designs, manufactures and supplies exterior lighting systems, plastic and polymer components, electricals-electronics components, and precision metallic components to passenger car, commercial vehicle, two-wheeler, three-wheeler and off-highway vehicle OEMs directly worldwide. The group revenue was close to ₹ 11,300 crore (USD 1.5 Billion) in FY21. The group employs more than 12,966 employees, has 43 global operating manufacturing facilities and has 173 patents.

Varroc Engineering Limited’s shares are listed on the National Stock Exchange (VARROC) and the Bombay Stock Exchange (541578).

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Varroc Engineering Limited Financial Results Q2 FY22

::11[th] November 2021::

Disclaimers Click to edit Master title stylemay include statements which may constitute forward-looking statements. All statements that address

This presentation may include statements which may constitute forward-looking statements. All statements that address expectations or projections about the future, including, but not limited to, statements about the strategy for growth, business development, market position, expenditures, and financial results, are forward looking statements. Forward looking statements are based on certain assumptions and expectations of future events and involves known and unknown risks, uncertainties and other factors. The Company cannot guarantee that these assumptions and expectations are accurate or exhaustive or will be realised. The actual results, performance or achievements, could thus differ materially from those projected in any such forward-looking statements. No obligation is assumed by the Company to update the forward-looking statements contained herein.

The information contained in these materials has not been independently verified. None of the Company, its Directors, Promoter or affiliates, nor any of its or their respective employees, advisers or representatives or any other person accepts any responsibility or liability whatsoever, whether arising in tort, contract or otherwise, for any errors, omissions or inaccuracies in such information or opinions or for any loss, cost or damage suffered or incurred howsoever arising, directly or indirectly, from any use of this document or its contents or otherwise in connection with this document, and makes no representation or warranty, express or implied, for the contents of this document including its accuracy, fairness, completeness or verification or for any other statement made or purported to be made by any of them, or on behalf of them, and nothing in this document or at this presentation shall be relied upon as a promise or representation in this respect, whether as to the past or the future. The information and opinions contained in this presentation are current, and if not stated otherwise, as of the date of this presentation. The Company relies on information obtained from sources believed to be reliable but does not guarantee its accuracy or completeness. The Company undertake no obligation to update or revise any information or the opinions expressed in this presentation as a result of new information, future events or otherwise. Any opinions or information expressed in this presentation are subject to change without notice.

This presentation does not constitute or form part of any offer or invitation or inducement to sell or issue, or any solicitation of any offer to purchase or subscribe for, any securities of Varroc Engineering Limited (the “Company”), nor shall it or any part of it or the fact of its distribution form the basis of, or be relied on in connection with, any contract or commitment or to be relied in connection with an investment decision in relation to the securities of the Company therefore any person/ party intending to provide finance / invest in the shares/businesses of the Company shall do so after seeking their own professional advice and after carrying out their own due diligence procedure to ensure that they are making an informed decision. Neither the delivery of this document nor any further discussions by the Company with any of the recipients shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since that date. This presentation is strictly confidential, unless distributed via a public forum, and may not be copied or disseminated, in whole or in part, and in any manner or for any purpose. No person is authorized to give any information or to make any representation not contained in or inconsistent with this presentation and if given or made, such information or representation must not be relied upon as having been authorized by any person. Failure to comply with this restriction may constitute a violation of the applicable securities laws. The distribution of this document in certain jurisdictions may be restricted by law and persons into whose possession this presentation comes should inform themselves about and observe any such restrictions. By participating in this presentation or by accepting any copy of the slides presented, you agree to be bound by the foregoing limitations.

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Industry Trends in Q2 FY22 – Drop in Global PV Volumes continues, India volumes too decline YoY ~~Click to e~~ 4.3m dit3.8m ~~Master ti~~ tle 5.2m 7.6m ~~style~~

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• PV volumes in CY22 continue to be impacted severely by the semiconductor shortages; OEMs plant shutdowns were frequent. Europe, China and North America volumes saw further significant drop – both YoY and QoQ

• Europe weakness in Q2 severe than other regions (Q0Q drop of nearly 27%).

• Domestic 2W sales volumes declined 12.3% YoY as recovery post COVID second wave was weaker than expected. PV and 3W volumes saw a small improvement YoY and QoQ

Exports of 2Ws, 3Ws and PVs showed YoY growth

Business Highlights: Q2 FY22

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• Revenue from operations for the quarter for India increased by 34% QoQ as COVID second wave restrictions were lifted. VLS revenue

decline continued as QoQ revenue was down 11% over previous quarter, primarily due to lower OEM production volumes

• Consolidated EBITDA for the quarter severely impacted by semiconductor shortages led volume drop in VLS business and the commodity inflation in India

• India Business: On a YoY comparison , revenue improved by 36%; EBITDA margin at 9.9% as commodity and Electronics price pressure impacted the RM costs

• VLS: Revenue declined 13.0% QoQ in Euro terms; EBITDA margin at (-)7.2% severely impacted by:

• Semiconductor shortages leading to key OEMs shutting plants/ reducing volumes, impacting revenue and margins at our established profit-making plants

  • Czech Republic Production revenue decline trend continued - down further (-)20.5% QoQ

  • North America volumes down 1% QoQ; helped by new program launches

• Continued losses in new plants – Poland and Morocco - as expected volume ramp-up did not materialise; Q2 volumes weak

• VLS has some of the flagship EV programs from VW, JLR currently under production; those programs continue to grow substantially

• VLS China JV: Revenue improved (+)46% QoQ however EBITDA margins continued to be weaker as RM prices continued to increase (+)5.9%

• Net debt increased to ₹ 30 billion; FCF was negative due to disruption in working capital cycle, capex and weaker operating performance

• Business wins: VLS net business wins at € 145 Million YTD and India business wins at ₹ 4.0 Billion YTD

• Project RACE: Identified potential areas for improvement; Full potential improvements, net of cost inflation around €75 million per annum; Impact in FY23 to be around 60% and 100% in FY24

Varroc Group: Financial Performance Click to edit Master title style

₹ million

Particulars	Q2 FY22	Q1 FY22	Q2 FY21	Growth (Q-o-Q)	Growth (Y-o-Y)		H1 FY22	H1 FY21	Growth (Y-o-Y)
Revenue from Operations - Reported	30,326	29,416	29,161	3%	4%		59,742	41,908	43%
Other income - Operating	87	146	228				233	338
Other income - Non operating	12	8	4				20	394
EBITDA - Reported *	(60)	176	2,661				116	866	-87%
EBITDA Margins(%)	-0.2%	0.6%	9.1%				0.1%	2.1%
Share of netprofits of JVs under equitymethod	12	(26)	90				(14)	200
Depreciation & Engineering/Intangible amortisation	2374	2192	2270	8%	5%		4566	4339	5%
Finance Cost	440	386	443	14%	-1%		826	874	-6%
PBT - reported	(2,851)	(2,419)	41				(5,270)	(3,754)
PAT - reported	(2,972)	(2,293)	(388)				(5,265)	(3,474)

EBITDA = Profit before share of net profits of JVs* _plus_ depreciation _plus_ finance cost less non-operating portion of other income**

Varroc Group: Business Wise Performance Q2 FY22 Click to edit Master title style

₹ million

SBU	Q2 FY22	Q2 FY22	Q2 FY22	Q2 FY21	Q2 FY21	Q2 FY21	Revenue Change YoY
	Revenue	EBITDA	% EBITDA	Revenue	EBITDA	% EBITDA
India Business	12,686	1,250	9.9%	9,329	1,257	13.5%	36.0%
VLS	17,302	(1,258)	-7.3%	19,788	1,502	7.6%	-12.6%
Others (IMES)	596	(53)	-8.9%	421	(84)	-19.8%	41.5%
Elimination	(258)	(0)		(377)	(15)
Total	30,326	(60)	-0.2%	29,161	2,661	9.1%	4.0%
China JV - 50%	1,716	102	5.9%	1,188	206	17.3%	44.4%
Total (Incl. pro-rata JV share)	32,041	42	0.1%	30,350	2,867	9.4%	5.6%
Euro Performance for VLS
SBU	Q2 FY22			Q2 FY21			Revenue Change YoY
	Revenue	EBITDA	% EBITDA	Revenue	EBITDA	% EBITDA
VLS-Euro	198.2	(14.3)	-7.2%	227.9	17.4	7.6%	-13.0%

Exchange rates : ₹/ € Average for Q2 FY22 = 87.36; ₹/ € Average for Q2 FY21 = 86.94

VLS: QoQ performance by plant € million except otherwise mentioned Click to edit Master title styleQ-o-Q

Region North America Czech Poland Morocco India Brazil SL2W Eliminitions	Production Revenue Q-o-Q Change % YoY change %	Production Revenue Q-o-Q Change % YoY change %
	Q2 FY21 Q3 FY21 Q4 FY21 Q1 FY22 Q2 FY22 49 41 33 31 31 -0.6% -36.7% 120 152 146 116 92 -20.5% -23.4% 7 13 16 16 14 -14.8% 98.8% 8 12 15 16 15 -3.5% 103.7% 6 6 7 5 9 73.0% 54.4% 2 2 2 2 3 27.4% 80.5% 16 20 23 22 19 -12.2% 17.1% (6) (11) (7) (9) (5)
Production Revenue	201 236 237 199 178 -16.0% -11.8%
Tooling Engineering	18 17 26 15 15 -39.7% -19.2% 8 8 8 5 6 -36.2% -34.5%
Total Reported Revenue	228 260 270 220 198 -18.8% -13.0%
	New plant financial performance (€ mn)
	Poland	Morocco
	Q2 FY21 Q1 FY22 Q2 FY22	Q2 FY21 Q1 FY22 Q2 FY22
Revenue EBITDA EBITDA % PAT	8.6 19.5 17.7 (3.4) (5.1) (3.7) -39% -26% -21% (4.5) (6.8) (5.9)	11.6 17.6 15.3 (2.2) (2.5) (4.0) -19% -14% -26% (3.8) (5.0) (8.0)

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Semiconductor shortages

continue to impact Established plants* production revenue negatively, albeit at a pace even more severe than the previous quarter.

Newer plant profitability still not

up to expectations due to slower ramp up in volumes

Revenue by Customers and Order Wins India Revenue Split by Customer Click to edit Master [(1)] t VLS Revenue Split byplit bylit byy Customer itle style

VLS Revenue Split byplit bylit byy Customer[(2)]

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Q2 FY 22 % Q2 FY 22, %
Revenue in Europe declined
Customer A by 17.6% QoQ on top of
Bajaj 16.6%
29.7% 21.8% Customer B 17.3% QoQ reduction in
Honda
Royal Enfield 8.2% Customer C previous quarter
53.7% Yamaha 6.9% Customer DE
2.3% 4.5% Revenue in Americas
3.1%3.4% Mahindra & Mahindra Customer F improved over previous
Customer G
Others 12.4%
29.6% quarter by 4.5% QoQ as new
7.9%
Others
programs started
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Business New Business wins: VLS / Recent orders: India	Business New Business wins: VLS / Recent orders: India	Business New Business wins: VLS / Recent orders: India	Near term potentials	Near term potentials
VLS (YTD Oct 22)	Overall Net Business Wins of	€ 46 **Million in Q2 / YTD Oct **	€ 145 million	Ordering activity is picking-up gradually and the current challenging environment is leading to some slowdown in ordering activity.
	- New Business wins -€83 Million net of givebacks/ cancellations - Re-wins -€62 Million net of losses
India Business (Q2 FY22)	Overall Net Business Wins of			In discussion with major customers for Electrical products, Traction Motor and Controller, Telematics, lighting and Polymer products. Active engagement with new customers for couple of more product categories for EV products, BSVI products and forging products

Business New Business wins: VLS / Recent orders: India	Business New Business wins: VLS / Recent orders: India	Business New Business wins: VLS / Recent orders: India	Near term potentials	Near term potentials
VLS (YTD Oct 22)	Overall Net Business Wins of	€ 46 **Million in Q2 / YTD Oct **	€ 145 million	Ordering activity is picking-up gradually and the current challenging environment is leading to some slowdown in ordering activity.
	- New Business wins -€83 Million net of givebacks/ cancellations - Re-wins -€62 Million net of losses
India Business (Q2 FY22)	Overall Net Business Wins of			In discussion with major customers for Electrical products, Traction Motor and Controller, Telematics, lighting and Polymer products. Active engagement with new customers for couple of more product categories for EV products, BSVI products and forging products

EV	Click to edit Master title business in India: Highlights & Updates	style Industry product price expectations	Total @ Installed	Expected revenue in FY25 for current
	Component	based on	Capacity	business based on SOB
		Investec Research (Rs	(Rs Crs) #	and industry price
		per 2W) *		(Rs Crs)
2W	Traction motor Controller	11,000 5,000
	DC-DC converter	1,400	700	529
	Telematics	3,000
	Battery Management	4,500
	Other Products (VCU, On-board Charger, Switch and Polymer products etc)	13,000
	Total per vehicle (A)	37,900	700	529
	# constrained by the lowest capacity product; some of the product at Varroc will have much larger capacity; This is based on certain volume assumptions for existing business wins
	*Research report published by Investec on 27th July 2021 titled "Electric Vehicles – the electrification of auto ancillaries"
	Component Traction motor	Product price expectations (Rs per 3W)	Total @Installed Capacity (Rs Crs)	Expected revenue in FY25 for current business based on SOB (Rs Crs)
3W	Controller DC-DC converter Telematics	46,000	367	306
	Battery Management
	Other Products (VCU, On-board Charger, Switch and Polymer products etc)
	Total per vehicle (B)	46,000	367	306
	Total Varroc current business (A+B)		1067	835

Varroc Group: Business Wise Performance H2 FY22 Click to edit Master title style

₹ million

SBU	H1 FY22	H1 FY22	H1 FY22	H1 FY21	H1 FY21	H1 FY21	Revenue Change YoY
	Revenue	EBITDA	% EBITDA	Revenue	EBITDA	% EBITDA
India Business	22,166	1,978	8.9%	12,306	1,004	8.2%	80.1%
VLS	36,806	(1,801)	-4.9%	29,251	(43)	-0.1%	25.8%
Others (IMES)	1,336	(61)	-4.6%	823	(94)	-11.5%	62.3%
Elimination	(567)	0		(473)	(0)
Total	59,742	117	0.2%	41,908	866	2.1%	42.6%
China JV-50%	2,886	155	5.4%	2,486	423	17.0%	16.1%
Total (Incl. pro-rata JV share)	62,628	272	0.4%	44,394	1,289	2.9%	41.1%

Euro Performance for VLS

SBU	H1 FY22	H1 FY22	H1 FY22	H1 FY21	H1 FY21	H1 FY21	Revenue Change YoY
	Revenue	EBITDA	% EBITDA	Revenue	EBITDA	% EBITDA
VLS -Euro	418	-20	-4.9%	336	0	-0.1%	24.2%

Exchange rates : ₹/ € Average for Q2 FY22 = 88.10; ₹/ € Average for H1 FY21 = 86.94

₹ Billion

D/E

Debt Situation Status Update and Outlook for FY22

1 Click to ~~edit Master title~~ Working capital style

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1
Working capital 33
27.7 change, -2.3 30
29
25
5.2 ~1.2x
22.5
Capex, -1.7
0.8x
Forecast Forecast
inv. in Intangibles , -0.6
Forex impact, -0.5
March 2021 June 2021 September 2021 December 2021 March 2022
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March 2021

December 2021 March 2022 Forecast Forecast Forecast Forecast

Debt Reduction is challenged due to -

• Extension of the current challenging situation around semiconductor supplies and lower capacity utiliation

• • Continuing Capex & working capital

Update on Current Business Environment • Current Situation Click to edit Master title style

• India business revenue performance lower than normal in October as demand during festival season not as strong as expected as well as supply constraints

• VLS October / November – Semiconductor shortages continuing -

  • Soft schedules as a result of semi-conductor shortages. North America volumes improving as new programs starting

  • Overtime and premium freight costs under control

• Outlook

• India: We expect that the business will see a strong growth in coming months on the back of strong traction in EV business

• VLS Revenue growth driven by end customer demand but constrained by semiconductor shortages

• Focus on cost optimization, positive free cashflow and debt reduction to continue

  • Launch of project RACE to help achieve industry level profitability

  • Control over Capex and working capital

• Focus on maintaining adequate liquidity support to business

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