Varroc Engineering Limited — Interim / Quarterly Report 2021

Jun 4, 2021

Varroc Engineering Ltd.

Regd. & Corp. Office

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

VARROC/SE/INT/2021-22/10 June 4, 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.

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 Q4/FY 2020-21

Please find enclosed a copy of Press Release and Investor Presentation on the Audited Financial results (Consolidated & Standalone) for the quarter / Financial Year ended on March 31, 2021.

Kindly take the same on record and note the compliance.

For Varroc Engineering Limited

NSE Symbol: VARROC

Ajay Sharma Group General Counsel and Company Secretary

Encl: a/a

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 increased by 32% YoY to ₹ 36.2 billion; India business revenue growth at 44.6% YoY and VLS at 13.7% YoY (in Euro)
• Consolidated EBITDA for the quarter at ₹ 1,275 million increased by 11% YoY; India EBITDA margins improved by 360 bps while VLS EBITDA margins were adversely impacted mainly by Semi-conductor shortages and poor revenue mix
• Net Debt reduced to ₹22.5 billion from ₹27.3 billion at end-December 20, and as compared to ₹34.1 billion at end-June 20, partly helped by QIP proceeds

Pune, June 4, 2021: Varroc Engineering Ltd. (Varroc), a global tier-I auto component group, today announced its results for the quarter ended March 31, 2021

						(₹ million)
	Q4 FY21	Q4 FY20	% Change	FY21	FY20	% Change
Revenue from Operations - Reported	36192.6	27447.5	32%	113027.5	111218.7	2%
Other Income - Operating	103.4	479.4		634.5	925.7
Other Income - non-Operating	216.7	7.9		636.5	63.2
EBITDA: Reported	1275.1	1145.8	11%	4602.4	9133.6	-50%
EBITDA %	3.5%	4.2%		4.1%	8.2%
Depreciation & Amortisation	2361.8	2066.1	14%	8950.9	7318.6	22%
Finance Cost	371.5	349.4	6%	1626.3	1391.7	17%
Share of net profits of JVs under equity method	64.0	-105.5		356.3	-91.7
PBT - Reported	-1177.6	-1367.2		-4982.0	394.9
Tax	265.6	3.9		226.6	369.8
Tax rate	-21.4%	-0.3%		-4.2%	76.0%
PAT before exceptional tax asset impairment	-1443.2	-1371.0		-5208.7	25.1
Exceptional tax asset impairment				1077.8
PAT after tax asset impairment				-6286.4
Consolidated Financial Performance for the quarter•Revenue from operations for the quarter was ₹ 36,193 million, an increase of 32% over Q4 FY20.•The India Business revenue increased by 44.6% YoY. The Global Lighting Business (VLS) revenue increased
13.7% YoY in Euro terms.
•The EBITDA for the quarter was at ₹ 1,275 million (Ex China), an increase of 11.3% over Q4 FY20. EBITDA
margins declined 70 bps YoY, mainly due to weaker margins in VLS.
•The EBITDA for India business was at ₹ 1,456 million (EBITDA margin 11.9%; improvement of 360bps YoY)
while VLS reported EBITDA of (-) ₹ 171 million.
•
VLS margin impacted due to:
osemi-conductor shortages leading to key customer OEMs shutting plants/ reducing volumes withnegative impact on volumes at our established profit-making plants (Mexico and Czech Republic)
ocontinued losses in new plants – Poland and Morocco as volume ramped-up slower than expected

Summary Consolidated Financials

• Revenue from operations for the quarter was ₹ 36,193 million, an increase of 32% over Q4 FY20.

• The India Business revenue increased by 44.6% YoY. The Global Lighting Business (VLS) revenue increased 13.7% YoY in Euro terms.

• The EBITDA for the quarter was at ₹ 1,275 million (Ex China), an increase of 11.3% over Q4 FY20. EBITDA margins declined 70 bps YoY, mainly due to weaker margins in VLS.

• The EBITDA for India business was at ₹ 1,456 million (EBITDA margin 11.9%; improvement of 360bps YoY) while VLS reported EBITDA of (-) ₹ 171 million.

• VLS margin impacted due to:

  • o semi-conductor shortages leading to key customer OEMs shutting plants/ reducing volumes with negative impact on volumes at our established profit-making plants (Mexico and Czech Republic)

• o increase in raw material costs due to commodity price increases in semi-conductors, resin etc not offset by corresponding increases in selling prices

• o exceptional items (premium freight debited by a customer etc)

China JV

• China JV Revenue recovered to normal levels in comparison to Q4 FY20 which was impacted due to countrywide shutdowns. Our share of the China JV profit was ₹ 54 Million as against a PAT loss of (-) ₹ 80 million in Q4 FY20

Depreciation and amortisation

• Depreciation and Amortisation expenses were higher due to capitalisation at new facilities.

Tax Expenses

• The overall tax expenses were positive in spite of negative PBT due to the losses in the new plants, on which we are not eligible to recognize deferred tax assets and we had to pay taxes in India where we delivered robust positive PBT.

Project RACE

• Launched Project RACE (Rapid Achievement of Competitive Edge) to bring VLS EBIT level in line with industry benchmarks with the support of a global consulting firm. The benefits of this project are expected to be visible over the next 12-18 months.

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

"We have seen a strong recovery in Two-wheeler and Passenger Vehicle volumes across in India in Q4 FY21. The global (Ex China) passenger vehicle volumes in Q4 FY21 declined mainly due to severe semi-conductor shortages. As the current demand for chips is continuing to outstrip supply, suppliers are adding capacities. This additional capacity is expected to help meet auto sector demand starting end of Q2 FY22.

During this challenging external environment, our focus will be to steadily improve the margins in our VLS business on a sustainable basis in the coming quarters. In this direction, we have launched project RACE to bring VLS profitability in line with industry benchmarks."

About Varroc Engineering Ltd.

Varroc Engineering Ltd is a global tier-1 automotive component group, ranked 124th 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 ₹ 11,200 crore (USD 1.5 Billion) in FY20. The group employs more than 14,300+ employees, has 43 global operating manufacturing facilities and has 185 patents.

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

Varroc Engineering Limited

Financial Results

::4th June 2021::

Click to edit Master title style Disclaimers 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.

Click to edit Master title style Industry Trends in Q4 FY21

E U R O P E -3.3% -4.5% +29.0% -16.2% 4.71m 3.78m 5.84m 3.61m 5.65m 0.21m 4.55m 4.38m 0.25m

2 W 3 W

• Passenger Vehicle volumes in Q4 FY21 declined albeit on a lower base (fortnight shutdown in March 20); mainly impacted by severe semi-conductor shortages
• China PV volumes saw a YoY growth on a lower base last year (mainly due to impact of COVID first wave in Q4 FY20 for China)
• Domestic sales volumes grew YoY on back of strong market recovery and lower base in Q4 FY20 (shutdowns); 2W volumes grew by 24% and PV volumes grew by 42%. 3W volumes continued to be weak - down by 34% YoY
• Exports for 2Ws and 3Ws showed YoY growth of 33% and 9%, respectively. PV exports declined by 7%.

Q4 FY20 Q4 FY21 4

4

Sources: India Data - SIAM, Global Data – Production volume, © IHS Markit, April 2021. All rights reserved. 3

• Click to edit Master title style Business Highlights: Q4 FY21 • Revenue from operations for the quarter increased by 32% YoY to ₹ 36.2 Billion
• Consolidated EBITDA for the quarter at ₹ 1,275 Million increased by 11% YoY
• India Business: Revenue increased by 44.6% YoY, ahead of industry growth; EBITDA increased by 106.6% YoY and EBITDA margin continues to be strong at 11.9%, an improvement of 360 bps YoY
• VLS: Revenue grew 13.7% in Euro terms as against (-)2.7% YoY PV industry (Ex-China) volumes; EBITDA margin at (-)0.7% severely impacted by:
  • semi-conductor shortages leading to key customer OEMs shutting plants/ reducing volumes with negative impact on volumes at our established profit-making plants (Mexico and Czech Republic)
  • continued losses in new plants Poland and Morocco as volume ramped-up albeit slower than expected
  • increase in RM costs due to commodity price increases in semi-conductors, resin etc not offset by corresponding increases in selling price
  • exceptional items (Customer debits and higher scrap etc)
• VLS China JV: Revenue at normal level in comparison to Q4 FY20 which was impacted due to countrywide shutdowns
• Net debt reduction to ₹ 22.5 billion (from ₹ 27.3 billion at the end of Dec 2020); helped by QIP proceeds while Q4 FCF was negative due to weaker operating performance at VLS business
• Business wins encouraging; VLS net business wins at € 210 Million and India business wins at ₹ 13 Billion in FY21
• Launched Project RACE to bring VLS EBIT level in line with industry benchmarks with the support of a Global Consulting firm

Click to edit Master title style						₹ million
Particulars	Q4 FY21	Q4 FY20	Growth(Y-o-Y)	FY21	FY20	Growth(Y-o-Y)
Revenue from Operations -Reported	36,193	27,447	32%	1,13,028	1,11,219	2%
Other income -Operating	103	479		634	926
Other income -Non operating	217	8		637	63
EBITDA -Reported *	1,275	1,146	11%	4,602	9,134	-50%
EBITDA Margins (%)	3.5%	4.2%		4.0%	8.2%
Share of net profits of JVs under equity method	64	(105)		356	(92)
Depreciation	2362	2066	14%	8951	7319	22%
Finance Cost	372	349	6%	1626	1392	17%
PBT -reported	(1,178)	(1,367)		(4,982)	395
PAT -reported	(1,443)	(1,371)		(5,209)	25
PAT -post exceptional tax asset impairment				(6,286)

Particulars	Q4 FY21	Q4 FY20	Change
Net Debt (Excl. Impact of Leases: Ind AS 116)	22,527	27,315	(4,788)
Net Debt to Equity (Excl. Impact of Leases: Ind AS 116)	0.7	1.1

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

Click to edit Master title style Varroc Group: Business Wise Performance Q4 FY21

₹ million

	Q4 FY21			Q4 FY20
SBU	Revenue	EBITDA	% EBITDA	Revenue	EBITDA	% EBITDA	Revenue ChangeYoY
India Business	12,249	1,456	11.9%	8,471	698	8.2%	44.6%
VLS	23,513	(171)	-0.7%	18,789	433	2.3%	25.1%
Others (IMES)	577	(11)	-1.9%	478	6	1.3%	20.7%
Elimination	(147)	1		(291)	8
Total	36,193	1,275	3.5%	27,447	1,146	4.2%	31.9%
China JV -50%	1,594	125	7.8%	861	(6)	-0.7%	85.2%
Total (Incl. pro-rata JV share)	37,787	1,400	3.7%	28,308	1,140	4.0%	33.5%

Euro Performance for VLS

	Q4 FY21
SBU	Revenue	EBITDA	% EBITDA	Revenue	EBITDA	% EBITDA	RevenueChange YoY
VLS -Euro	267.4	(1.9)	-0.7%	235.1	5.4	2.3%	13.7%

Exchange rates : ₹/ € Average for Q4 FY21 = 87.9; ₹/ € Average for Q4 FY20 = 79.9

VLS: QoQ		performance by plant
	Click to edit Master title style			€	million except otherwise mentioned
Region			Production Revenue		Q-o-QChange %
			Q3 FY21	Q4 FY21
North America			41	33		-19.3%
Czech			152	146		-3.6%
Poland			13	16		29.9%
Morocco			12	15		23.0%
India			6	7		16.2%
Brazil			2	2		10.6%
SL2W			20	23		16.4%
Eliminitions			(11)	(10)
Production Revenue			236	234		-0.8%
Tooling			17	26		50.4%
Engineering			8	8		4.0%
Total Reported Revenue			260267			2.7%
				New plant financial performance (€ mn)
		Poland			Morocco
	Q3 FY21	Q4 FY21	FY21	Q3 FY21	Q4 FY21	FY21
Revenue	14.5	19.2	44.0	14.9	17.8	47.3
EBITDA	(4.0)	(2.9)	(11.4)	(2.7)	(3.5)	(10.1)
EBITDA %	-28%	-15%	-26%	-18%	-19%	-21%
PAT	(5.3)	(5.7)	(17.8)	(4.9)	(7.3)	(19.1)

Established plants* production revenue impacted mainly due to Semi-conductor shortages. Overall revenue growth mainly driven by Customer Funded Tooling (CFT) and newer plants; newer plants improving in revenue, but profitability is still a challenge

	Click to edit Master title style								Plant shutdown days
VLS Region		Customer wiseImpact details							JanuaryFebruaryMarch202120212021
	Sept -Nov	Average monthly production Revenue (€ mn)Jan-March	% change	Customer	Sept -Nov	Average monthly production Revenue (€ mn)Jan-March	% change	Key CustomerPlant (VLS Supply)	Comments / shutdown days
				C	6.2	2.1	-67%	USA	Customer decided to focus on newermodels for which we are not the suppliers,in preference to models, where we supply;Models with our lamps were believed to bedown by ~85%YoY
North								Canada	JanuaryFebruaryMarch(15 days)(0 days)(5 days)
America	16	11	-30%	D	4.7	2.9	-39%	Other plants	Slower than normal activity at other plants
				A	2.2	2.0	-8%	No know plantshutdowns	Normalisation of volumes in Q4 FY21 asOEMs were overproducing in Q3 to to makeup for earlier in the year lost revenue dueto COVID
CzechRepublic	51	46	-11%	A	12.3	6.0	-51%	Germany(P1)Germany(P2)	JanuaryFebruaryMarchP1= (0 days)P1= (4 days)P1=(18 days)P2= (0 days)P2=(16 days)P2=(10days)
				F	17.4	15.9	-8%	No known plantshutdowns	Production for some of the models havebeen slowed

8

Notes: (1) The revenue shown above is only production revenue. Total Revenue = Production Revenue + Tooling + Engineering revenue

(2) Customer A is an American multinational car manufacturer, Customer B is a large British car manufacturer, Customer C is an American electric car manufacturer, Customer D is an international automotive manufacturer, customer E is a large European car

manufacturer & customer F is a global automotive manufacturer headquartered in Europe.

December month has quite a few holidays; to remove impact of these holidays, we have removed December for the prior period and added September to make the appropriate comparison

Revenue by Customers and Order Wins

VLS(FY21)	Overall Net Business Wins of € 210Mn;-New Business wins -€ 162 Million net of givebacks/ cancellations-Re-wins -€ 48Million net of losses	Pipeline ~€ 70millionOrdering activity is picking-up gradually and some of the potentialorders will add to the already strong visibility for the VLS business
IndiaBusiness(FY21)	Overall Net Business Wins of ₹ 13 billion(New ₹10.8 billion)Bajaj: Business of ₹5.2 billion for various products across businessesHMCL: Various Polymer and Electrical & Electronic product orders of₹1.8 billionHMSI: Various Metallic and Polymer product orders of ₹1.2 billionRoyal Enfield: ₹0.8 billionVarious ordersfrom customers (VW, Yamaha, MG Motors, andMahindra & Mahindra etc.) for ₹4 billion	In discussion with major customers for Electrical products, TractionMotor and Controller, Telematics, lighting, Catalytic Convertor andPolymer products.Active engagement with new customers for couple of more productcategories for BSVI engine and EV products

Notes: (1) Based on management information system database (2) Total Revenue break-up in Euro excl VTYC; Customer A is an American multinational car manufacturer, Customer B is a large British car manufacturer, Customer C is an American electric car manufacturer, Customer D is an international automotive manufacturer, customer E is a large European car manufacturer & customer F is a global automotive manufacturer headquartered in Europe. 9

Click to edit Master title style Varroc Group: Business Wise Performance FY21

	FY21				₹ millionRevenue
SBU	Revenue	EBITDA	% EBITDA	Revenue	EBITDA	% EBITDA	Change YoY
India Business	36,466	4,052	11.1%	38,105	3,917	10.3%	-4.3%
VLS	75,514	722	1.0%	71,692	5,101	7.1%	5.3%
Others (IMES)	1,918	(171)	-8.9%	2,291	100	4.4%	-16.3%
Elimination	(870)	(1)		(869)	15
Total	1,13,028	4,602	4.1%	1,11,219	9,134	8.2%	1.6%
China JV -50%	5,858	751	12.8%	3,981	230	5.8%	47.1%
Total (Incl. pro-rata JV share)	1,18,885	5,353	4.5%	1,15,200	9,364	8.1%	3.2%

Euro Performance for VLS

	FY21				Revenue
SBU	Revenue	EBITDA	% EBITDA	Revenue	EBITDA	% EBITDA	Change YoY
VLS -Euro	872	8	0.9%	909	65	7.1%	-4.1%

Exchange rates : ₹/ € Average for FY21 = 86.2; ₹/€ Average for FY20 = 78.5

Click to edit Master title style Launched Project RACE to bring VLS EBIT levels in line with best-in-class industry benchmarks

Industry and internal challenges leading to sub-optimal EBIT in VLS: As widely known, our industry is going through one of the toughest times with significant issues across demand (e.g. uneven demand due to Covid) and supply (e.g. semi-conductor /chips availability, plants operations continuity, etc.). At the same time, we have also been facing several challenges internally in our VLS business such as higher raw material costs, lower productivity, underutilized equipment, higher overheads and many more. The combined impact of these market and internal challenges has led to our VLS EBIT margins drop.

Launch of an Integrated Turnaround Program (Project RACE) with support from a reputed consulting firm: In recent years, we have launched several initiatives internally to address these challenges. While we have seen a mixed success in specific areas (e.g. improved customer and geographical diversification and increase in our overall market share within global PV lighting), we realize the need to start a more holistic program which goes into the details of every aspect of our VLS business and launches targeted initiatives to turnaround the performance. We have partnered with a highly respected consultancy firm with substantial experience in transformations to support us in this journey. The consulting firm is amongst the top tier-1 consulting firms globally and in recent years has led several similar turnarounds in Europe and globally. The consulting partner will work closely with a dedicated VLS teams for next 12 months to enable the turnaround of VLS business, especially in Europe.

Target industry level EBIT margins in next 12-18 months : Project RACE will focus on both topline and operational excellence levers. On topline, we intend to optimize our product/customer/pricing mix, while on operations, we will evaluate levers across VLS cost structure, i.e. raw materials cost optimization, productivity improvement, OEE improvement, overheads optimization, footprint optimization, etc. We plan to cover all key plants of VLS in Europe (Czech, Poland, Morocco) to start with, but apply the learnings across other geographies subsequently. With this program, we hope to bring VLS EBIT levels in line with best-in-class industry benchmarks over the next 12-18 months.

More details and early results to be shared in future quarterly updates: The project has been just launched and will identify the key value creation levers over the next few weeks, while also rolling out in parallel targeted quick-win initiatives. We will share more details on Project RACE in future quarterly investor updates.

We have partnered with a global consultancy firm with substantial experience in business transformations to support us in this journey

Click to edit Master title style Update on Current Business Environment

• Current Situation in India and VLS

• India revenue impacted negatively by customer shutdowns in May and June
• April and May– Semiconductor issue impacting Europe and North America volumes of key customers
• Soft schedules as a result of semi-conductor shortages till August 2021
• Overtime and premium freight costs in control
• Outlook for rest of the year
  • India business: we continue to believe that the business will recover strongly once lockdowns are lifted
  • VLS Revenue growth driven by end customer demand but constrained by semi-conductor shortages
  • Focus on cost optimization, positive free cashflow and debt reduction to continue
    • Launch of project RACE with a reputed global consultant help achieve industry level profitability
    • Control over Capex and working capital
  • Focus on maintaining adequate liquidity support to business

Click to edit Master title style