Fortune Scrip     

Published: September 30, 2024
Updated: September 30, 2024

Craftsman Automation

Q1 dip won’t dampen its growth: Fortunes are sure to rebound

Eyebrows are sure to be raised by our selection of Craftsman Automation Ltd, a Coimbatorebased, well-diversified engineering company, as the Fortune Scrip for this fortnight.

The reason: the company has put up a disappointing financial performance during the first quarter of the current fiscal. Though sales turnover has increased 10.94 per cent to Rs 1,151 crore, the operating profit margin has declined from 20.65 per cent to 17.14 per cent, resulting in a 7.8 per cent drop in operating profit to Rs 197.33 crore. Furthermore, the profit at net level has moved down by 28.58 per cent to Rs 53.19 crore. Whether the promoters’ stake has any connection with this poor performance is not known, but this stake has decreased from 54.99 per cent as on June 30, 2023 to 48.70 per cent as on June 30, 2024.

This discouraging Q1FY25 show is being attributed to a weak performance in the aluminium segment, where margins were impacted by weak demand in personal vehicles and a sharp rise in input costs. Both these negative factors are expected to continue in Q2. Little wonder then that Motilal Oswal, a renowned name among Indian brokerage houses, has slashed its FY25/26 EPS projection by 20%/10%.

We have taken note of this weak performance, but feel that Craftsman’s prospects going ahead are highly promising, and that the share price — which has fallen from the high of Rs 7,100 to Rs 6,410 — can shoot up to new all-time highs during the next few years.

3 BIZ SEGMENTS

This well-diversified engineering company has three business segments: (a) the automotive power train segment which contributes 51 per cent of revenues; (b) the automotive aluminium products segment which accounts for around 21 per cent of revenues, and (c) the industrial engineering segment which brings in around 28 per cent of revenues.

The company had put up an excellent performance till last year, with sales turnover during the last eight years spurting around four times, from Rs 1,102 crore in fiscal 2017 to Rs 4,452 crore in fiscal 2024, operating profit also advancing by almost four times, from Rs 228 crore to Rs 879 crore, and the profit at net level jumping more than four times, from Rs 80 crore to Rs 337 crore. Craftsman’s financial position is extremely strong, with reserves at the end of March 2024 standing at around Rs 1,647 crore – almost 150 times its tiny equity capital of Rs. 11 crore. Thus, its weak performance during Q1FY25 is only a small blip, and tis future prospects remain robust. Consider:

• Its core competence in machining and assembly of industrial and engineering products has helped the company establish itself as a significant player in the automotive powertrain and other segments. It has leveraged its long presence in developing aluminium products for precision components to establish and grow the automotive aluminium products segment. The company expects a strong uptick in the aluminium products segment from Q3 FY25, indicating that the aluminium die-casting business is on a promising upward trajectory, with orders secured and leading to tangible outcomes.

SEGMENT STRENGTH

• The storage segment has shown good growth even in a challenging Q1. The management also anticipates strong performance in the non-storage business, supported by a rebound in the construction equipment (CE) and farm equipment segments. As castings requirements are increasing in the country, the company is well-placed to benefit, given its strong position in the industrial engineering business.
• Craftsman is in expansion mode through both routes – organic and inorganic. It has set up two new greenfield manufacturing facilities at Bhiwadi in Rajasthan and Kothawadi in Tamil Nadu, both of which will commence operations commercially during the next 12-15 months. The Bhiwadi plant will focus on producing structural AI parts for two-wheelers, including alloy wheels and engine components. The Kothawadi plant will ramp up operations which will enable the powertrain segment to start seeing healthy growth from fiscal 2027 onwards.

PURCHASE ROUTE

• As far as inorganic expansion is concerned, the company has resorted to acquisitions which are synergical to its business operations. (A) To begin with, it took a 76 per cent stake in the Indian subsidiary of Korean company DR Axion, and has now acquired the balance 24 per cent. DR Axion's Indian subsidiary is now a stepdown subsidiary of Craftsman. DR Axion India is not capital-intensive and requires only marginal maintenance capex. Craftsman has retained the eight-member Korean management team. The three existing customers of the Korean company remain on board, while at the same time export operations have been added and there is new business coming in for Hyundai's Talegaon (Maharashtra) plant.
  (B) Going ahead, Craftsman has acquired 100 per cent equity stake of INOS 24-004 GmbH (a German holding company). The German company has a wholly owned subsidiary, INOS 24-003 GmbH. The German holding company is now a wholly owned subsidiary of Craftsman.
  (C) The company proposes to acquire Fronberg Guss Immobitien GmbH, Germany, which is a high-tech foundry for large engines used in industrial applications. The deal cost is 5.5 million euros (3.5 million euros for the purchase of assets and 2 million euros for working capital). Another 0.5 million euros will be in debt. The management will invest another Rs 600 million to further improve efficiencies. The company, located in Schwondort-Fronberg, Germany, comprises a non-casting foundry and specialises in iron casting solutions, serving a broad variety of markets and leading customers globally.

HOME PURCHASE

• (D) At home, the company has signed an MoU and due diligence has been completed to take over Sunbeam Lightweighting Solutions, which specialises in automotive aluminium die-casting and focuses on producing aluminium components for two-wheelers and passenger vehicles. It is a wholly-owned subsidiary of Mumbai-based private equity firm Kedara Capital. The Competition Commission of India has given the green signal for the acquisition. CRISIL Rating expects Craftsman's revenues to increase by 20-25 per cent upon completion of the Sunbeam acquisition. Again, this acquisition will give the company an entry to the US market, in addition to complimentary and mutually beneficial capabilities.

TRYST WITH 2026

• Once the new facilities (at Bhiwadi in Rajasthan and Kothawadi in Tamil Nadu) ramp up and the acquisitions are integrated, the company is expected to start delivering growth momentum from fiscal 2026. Motilal Oswal estimates a CAGR of 14%/15%/31/% in consolidated revenue/ EBITDA/net profit over fiscals 2024/2025/2026. The rationale behind the acquisition of the German company is to get a critical foothold in the larger engines segment in the industrial powertrack business where there are only six large customers globally in developed regions. Given the adverse geopolitical situation, the management expects this acquisition to provide a strong base for exponential growth in the long run.
• Craftsman has an enviable list of marquee clients like Daimler India, Tata Motors, Tata Cummins, Mahindra and Mahindra, Simpson & Company, Ashok Leyland, Escorts, TAFE, Motors & Tractors, Mitsubhishi Heavy Industries, John Deere, Perkins and JCB India. The company also has well-establisheds relationships with marquee domestic and global OEMs.
• The company's financial position is very strong, with reserves at the end of March 2024 standing at Rs 1,647 crore -- almost 149 times its tiny equity Rs 11 crore. It is in the process of reducing its borrowings and paid back Rs 700 crore last year.

SHARES SCARCE

There is very good demand for the shares of the company. The floating stock is very small and existing shareholders don't want to sell their shares as they anticipate a very bright future after 2026. The share price has dropped from Rs 7,100 to around Rs 6,433. But as the company is expected to grow strongly after 2026, expert analysts have set a target of Rs 7,500 within the next 3-4 years and Rs 10,000 in the long run.