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Monday, March 15, 2021 Click here for Rating Reckoner
Craftsman Automation
Set for growth ride
CM RATING46/100
Craftsman Automation is a diversified engineering company, with vertically integrated manufacturing capabilities, engaged in three business segments, namely powertrain and other products for the automotive segment (Automotive - Powertrain and Others), aluminium products for the automotive segment (Automotive - Aluminium Products), and industrial and engineering products segment (Industrial and Engineering).

The company is the largest player involved in the machining of cylinder blocks and cylinder heads in the intermediate, medium, and heavy commercial vehicles segment as well as in the construction equipment industry in India. It is also among the top three-four component players of machining of cylinder block for the tractor segment in India. The company is present across the entire value chain in the Automotive Aluminium Products segment, providing diverse products and solutions.

Its key products in the Automotive - Powertrain and other segments are highly engineered and include engine parts such as cylinder blocks and cylinder heads, camshafts, transmission parts, gear box housings, turbo chargers and bearing caps.

Key products of the Automotive - Aluminium Products segment of the company are highly engineered and include crank case and cylinder blocks for two wheelers, engine and structural parts for passenger vehicles and gear box housing for heavy commercial vehicle.

Within the Industrial and Engineering segment, it has utilized its in-house engineering and design capabilities and developed a diverse product portfolio across two sub-segments, namely, (i) the storage solutions sub-segment under which it have the complete solution for conventional/automated storage; and (ii) the high end precision products sub-segment under which it manufacture aluminium products for power transmission, high-end precision products and undertake sub-assembly, material handling equipment such as hoists, crane kits and industrial gears, manufacture gear and gear boxes, marine engines and accessories, special purpose machines (SPM), which includes metal cutting and non-metal applications such as washing and leak testing solutions and tool room, mould base and sheet metal.

The end users for its Automotive - Powertrain and Others segment products include OEMs producing commercial vehicles, special utility vehicle, tractors, and off-highway vehicles.

Additionally, it also provides machining services within its Automotive - Powertrain and Others segment. Over the years, it has been instrumental in import substitution for critical powertrain parts.

The company commenced operations in 1986 in Coimbatore, in the State of Tamil Nadu, India. Currently, the company owns and operates 12 strategically located manufacturing facilities across seven cities in India, with a total built up area of over 1.5 million sq. ft., close to some of its key customers to enable meeting its customers' just-in-time delivery schedules, allow economies of scale and logistical advantages for its customers, and to insulate them from local supply or other disruptions.

Two of its facilities, forming the flagship integrated facilities, are located at the outskirts of Coimbatore in the State of Tamil Nadu. The company also have two integrated facilities for aluminium pressure die casting, machining, and SPM manufacturing at Bengaluru in the State of Karnataka. Its other manufacturing facilities are satellite facilities located across automotive and engineering hubs in India and close to its key customers, including three manufacturing facilities located at Pune in the State of Maharashtra, two manufacturing facilities located at Ballabgarh near Faridabad in the State of Haryana, and one manufacturing facility each located at Sriperumbudur, near Chennai in the State of Tamil Nadu, Jamshedpur in the State of Jharkhand, and Pithampur near Indore in the State of Madhya Pradesh. The company recently set up a new unit in Pune with high end fully automated equipment from Italian and Swiss manufacturers. This facility, which commenced operations in 2019, enables the company to service the storage solutions market, catering to customers across India. Its manufacturing facilities include state of the art equipment, engineered layout with process controls and necessary automations for quality and productivity.

The company do not have any subsidiaries or joint ventures within or outside India manufacturing any of its products. However, it has one whollyowned overseas subsidiary (WOOS) and one JV company in India.

While the Netherland based WOOS, i.e., Craftsman Europe B.V. (formerly known as Craftsman Marine B.V.), is engaged in marketing, sales and servicing of marine engines and other associated equipment used in yachts that are manufactured or assembled by the company in India and exported under the name 'Craftsman Marine' and the India JV company, i.e., Carl Stahl Craftsman Enterprises, engaged in marketing, installation, commissioning and rendering after-sales services of material handling equipment, such as chain hoists, rope hoists and cranes kits, manufactured by it under the name Carl Stahl Craftsman.

The company also has a strategic investment in MC Craftsman Machinery, a private company majority held by the Mitsubishi group, strengthening its two decades of business relationship with the Mitsubishi group and allowing it recognition and access to customers based in or headquartered out of Japan and the East Asia region.

The company is currently in the process of winding up of Craftsman Automation Singapore, which was set up as a strategic overseas sourcing hub especially for Aluminium in Singapore. As on December 31, 2020, Craftsman Automation Singapore was not operational. 

The company had invested Rs 1 crore in Bhatia Coke & Energy (BCEL). As BCEL is currently under the Corporate Insolvency resolution process it has valued its investment in BCEL to Nil as of December 31, 2020, and recognised it as fair value loss of RS 1 crore in the other comprehensive income for the period ended December 31, 2020.

The IPO comprise offer for sale of 4521450 equity shares and fresh issue aggregating upto Rs 150 crore.

Of the proceeds from the fresh issue (after deducting the offer related expenses to the extent payable by the company with respect to the Fresh Issue) and amount of about Rs 120 crore towards repayment/pre-payment, in full or part, of certain borrowings availed of by the company and the balance towards general corporate purposes.

Selling shareholders in the offer for sale includes promoter Srinivasan Ravi, who sells 130640 equity shares. Other selling shareholders are investors, i.e., Marina selling 1559260 equity shares, IFC selling about 1414050 equity shares and K Gomatheswaran selling 1417500 equity shares.  

On expanded equity post IPO, the shareholding of selling promoter shareholder, i.e., Srinivasan Ravi will stand declined at 49.7%. That of Marina and IFC will stand at 7.38% and 6.69%, respectively. The holding of K Gomatheswaran, the other selling shareholder, will be nil.  

Strengths

The company caters to diverse end-user industries such as commercial vehicles, two-wheeler, tractor, and other segments. The company offer comprehensive one-stop solutions to its customers including design, process engineering and manufacturing including foundry, heat treatment, fabrication, machining, and assembly facilities. The company focuses on manufacturing high quality, intricate and critical products, components, and parts. The company's revenue stream is diverse with Automotive - Powertrain and Others, Automotive - Aluminium Products and Industrial and Engineering segments account for 47.52% [domestic 45.35%; exports 2.18%], 17.27% and 35.21% [domestic 26.14%; exports 9.06%] of its revenue from operations in FY 2020.

Strong in-house process and product design capabilities: The company is present across various levels of the component value chain, providing products and services that range from product design, prototyping, tool development, manufacturing, assembly, and production of integrated components, reducing or minimizing its use of, or reliance on, externally sourced components. Over the years, it has engaged with its customers from their early product design stage and have developed extensive process and product design capabilities and domain knowledge, particularly for niche, intricate, complex,and critical automotive and non-automotive components, such as powertrain cylinder blocks and heads and camshafts, enabling it to respond to customer specifications and provide quality products and service in a timely and cost-effective manner. Its diversified presence across various levels of the component value chain and design capability is unique across the competitive landscape. It has utilized its in-house engineering and design capabilities to developed a diverse product portfolio including material handling equipment such as hoists, crane kits, industrial gears/ gear boxes, storage solutions, marine engines and accessories, tool room, mould base products and SPM (which includes metal cutting and non-metal applications such as washing/ leak testing solutions), which are available to it for captive use and application as well, and support its contract manufacturing operations, while also reducing the need for it to rely on third party component manufacturers or suppliers.

The company with its wide product portfolio has strong and established relationships with several marquee domestic and global OEMs as well as component manufacturers. Key customers for its Automotive - Powertrain and Others segment include Daimler India, Tata Motors, Tata Cummins, Mahindra & Mahindra, Simpson & Co. Limited, TAFE Motors and Tractors, Escorts, Ashok Leyland, Perkins, Mitsubishi Heavy Industries, John Deere and JCB India. Similarly, key customers for its Automotive - Aluminium Products segment include Daimler India, TVS Motors, Royal Enfield, Perkins, and Mahindra & Mahindra and that for its industrial and engineering segment include Siemens and Mitsubishi Heavy Industries. The company has been supplying its products and solutions for over 10 years for customers such as Tata Motors and Tata Cummins. The company has significant presence and customer relationships in each of its business segments and is considered as a strategic and preferred supplier by many of its OEM customers. It is also the single source supplier in certain product categories, for some of its key customers. Most of its businesses comprise direct supply to its OEM customers, under long term agreements, which are renewed from time to time. Moreover, its client base is diversified with its top 10 customers account for just about 53.41% in FY2020 and 59.15% in 9mFY2021.

Extensive manufacturing footprint of 12 units all strategically located close to customers. Apart from having plant at strategic location, its plant configurations are flexible, allowing it to move its machinery from one location to another to interchange capacity, product mix, including its ability to shift production lines between its various segments, based on customer and operational requirements from time to time. This enables it to offer a diverse range of products and services to its customers across a wide spectrum of industries in all three segments, thereby optimizing its machine productivity, operational efficiency, time management and de-risking its business model.

Installed capacity of its automotive-power train and others segment, automotive aluminium parts, industrial and engineering segment has increased from 6265800 numbers, 11230 tons and 10200 tons in FY2018, respectively, to 7126000 numbers, 18920 tons and 34200 tons in FY20. The company spent an aggregate capex of about Rs 808.44 crore since April 1, 2018, to December 31, 2020. The capacity utilisation of automotive-power train & others segment, automotive aluminium parts, industrial and engineering segment 71%, 70% and 40%, respectively. Having already incurred significant capital expenditure in the past few years, including setting up an entire range of facilities such as no-bake sand foundry, high pressure, low pressure, and gravity die casting capabilities for production of various types of aluminium castings for different applications for its customers, allowing it to offer a diverse product suite. With increase in volume and increase in capacity utilisation, the benefit of operating leverage will further provide margin boost.

The company's contracts with its customers provide for pass through of any variation in the raw material costs. However, its cash flows may still be adversely affected because of any gap in time between the date of procurement of those primary raw materials and date on which it can reset the component prices for its customers, to account for the increase in the prices of such raw materials.

Its diversified presence across various segments and capabilities to collaborate with OEMs right from the designing of their new products provides it with the flexibility to operate successfully across business cycles and mitigate any fluctuations in the industry.

Amongst its peers, Craftsman has the highest EBITDA margin. Its EBITDA margin at 27.4% for FY20 is higher compared to about 16% for SundramFastners, 12% for Mahindra CIE, 17% for RamkrishnaForgings and 17% for Endurance Technologies. Higher EBITDA margin for the company is largely due to strong profitability of the Automotive - Powertrain segment, which has a higher margin of about 36-38%, and about 25% - 29% for the Industrial Engineering segment. However, the Automotive Aluminium segment earns EBITDA margins of 14% - 17%. Higher margins in the Automotive- Powertrain segment is on account of critical products like cylinder blocks, cylinder heads, camshafts, transmission parts, turbo chargers etc. and diversification across end user industries like CVs, utility vehicles, tractors, and off-highway vehicles.

Strong growth in tractor demand with favourable rural economy, strong PV numbers, and steady growth in LCV demand and gradual recovery in M&HCV sales volume have been further boosted by implementation of impending scrapping policy the demand for auto sector and augur well for demand for the products of the company. Craftsman get about 50% of its business from M&HCVs.

Weakness

Cyclicality of the automotive industry, a key user industry for the company, contributing about 65% of revenue in FY2020. Slowdown in pace of recovery of auto demand may hurt the performance of the company. A sustained decline in the demand and fall in volume for product/model produced by the company's OEM customers, to which the company supplies, would directly affect the business for such products.

Changes in consumer preferences, regulatory or industry requirements or in competitive technologies may render certain of its products obsolete or less attractive. For instance, the preference shift and regulatory change to push for greater adoption of electric vehicles will make cylinder blocks and cylinder heads out of usage or some of other products/existing technologies redundant. Expected increase in growth of electric vehicles in future will need it to adapt with the technological advances which will require the company to make substantial capital investments.

The company has certain manufacturing facilities, which are either dedicated, or predominantly catering to some of OEM customers, and are in such localities to serve such customers efficiently. Any reduction in forecast volume from customers for whom the company run dedicated facilities, would materially and adversely affect its business, results of operations and financial condition. Moreover, its failure to successfully develop and produce new products, or a failure by its customers to successfully launch new programs, could materially adversely affect its prospects and results of operations.

Secured borrowings (long term and short term) of the company as end of December 2020 stood at Rs 890.112 crore. The company has sought a waiver from one of its lenders in relation to non-compliance with the current ratio required to be maintained by it but have not yet received a waiver in this regard. Thus, the company cannot assure that the lender will not accelerate payment and declare the entire outstanding amounts under these loans due and payable, and enforce their security, which has been constituted over its various assets.

The company have undertaken joint ventures and strategic investments in the past and may continue to undertake joint ventures, strategic investments, alliances as well as inorganic growth through strategic acquisitions, in the future, which may be difficult to integrate and manage. These may expose it to uncertainties and risks, any of which could adversely affect the business, financial conditions, and result of operations. In JV company its joint venture partner may not perform its obligations satisfactorily and its interests may differ from that of the company, which could have an adverse effect on the business and results of operations of it.

The company has given interest free loans to its subsidiary, Craftsman Europe B.V. Further, a portion of the loan granted to Craftsman Europe B.V. has been converted into equity by way of investment in the equity capital pursuant to a resolution passed by the Board of Directors on August 20, 2019. There is no assurance that the company will be able to fully recover such loans from its subsidiary or that they will settle such loans in a timely manner or at all.

Valuation

Consolidated sales of the company for FY 2020 were down by 18% to Rs 1492.47 crore, impacted by general slowdown in auto sector in major part of FY20 further aggravated by coronavirus pandemic-led lockdown in latter part of March 2020. But with operating profit margin expanding by 240 bps to 26.7%, the fall of operating profit was restricted at 10% to Rs 397.98 crore. The PBT before share of profit from associate was down by 55% to Rs 63.18 crore hit further by lower other income, higher interest, and depreciation. With share of profit from associate being a loss of RS 0.02 crore compared to a profit of Rs 0.40 crore in the corresponding previous period, the PBT before EO was down by 55% to RS 63.16 crore. The EO expense was higher at Rs 5.77 crore compared to nil in corresponding previous period. Thus, the PBT was down by 59% to Rs 57.39 crore. Eventually, the PAT was down by 58% to Rs 41.07 crore, with taxation stand lower by 62% to Rs 16.32 crore.  

Consolidated sales and PAT for 9mFY 2021 stood at Rs 1022.79 crore and Rs 50.66 crore a growth of -9% and +64% on annualised basis.  

On post issue equity, the EPS for FY2020 stood at Rs 21.4. The upper price of Rs 1490, discounts the FY20 EPS by about 69.6 times. In comparison companies that have significant casting business or supplies cast and machined products to auto OEMs such as Endurance Technologies, Mahindra CIE, Nelcast, Ramkrishna Industries and SundramFastners quote at a PE of 35 times, 62.4 times, 15.7 times, 181.3 times and 48.1 times of their FY 2020 consolidated EPS, respectively. AliconCastalloy quotes at a PE of 27.6 times of its consolidated FY 2020 EPS.

And the upper price band discounts the annualised 9mFY2021 EPS by about 46.6 times. The Endurance Technologies and SundramFastners quotes at a PE of 43.5 times and 53.8 times of its 9mFY2021 annualised EPS. Mahindra CIE, Ramkrishna Forgings and AliconCastalloy have reported loss for 9mFY2021.

Craftsman Automation: Issue Highlights
SectorAuto Ancillary
Fresh Issue (in Rs. Crore)150.00
Offer for sale (in Rs. Crore)
in Upper price band673.7
in Lower Price Band672.8
Price band (Rs.)
Upper1490
Lower1488
Post-issue equity (Rs crore)
in Upper price band10.56
in Lower Price Band10.56
Post-issue promoter (including promoter group) stake (%)
in Upper price band59.76
in Lower Price Band59.76
Minimum Bid (in nos.)10
Issue Open Date15-03-2021
Issue Close Date17-03-2021
ListingBSE, NSE
Rating46/100

 

Craftsman Automation: Consolidated Financials  
1803 (12)1903 (12)2003 (12)2012 (9)
Sales1479.091818.011492.471022.79
OPM (%)19.924.326.728.1
OP293.60442.64397.98287.44
Other income11.3313.648.597.12
PBIDT304.93456.28406.57294.56
Interest112.48140.55148.4077.24
PBDT192.45315.73258.17217.32
Depreciation149.15176.15194.99141.47
PBT43.30139.5863.1875.84
Share of profit from Associates (SoPA)0.250.40-0.020.08
PBT before EO & After SoPA43.55139.9863.1675.93
EO Exp0.000.005.770.00
PBT after EO43.55139.9857.3975.93
Tax12.0142.6216.3225.27
PAT31.5397.3741.0750.66
EPS (Rs)**14.946.121.432.0
** on post issue equity on Upper price band of Rs 10.56 crore. Face Value: Rs 5
EPS is calculated after excluding EO and relevant tax
# EPS can not be annualised due to seasonality in operations
Figures in Rs crore
Source: Capitaline Corporate database

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