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Craftsman Automation Ltd (CAL)’s Q2 FY23 numbers were strong at the top-line despite a challenging environment. Revenues grew by 36% yoy and 14.7% qoq to ?7.76 bn. Power Train business expanded 29.5% yoy despite weakness observed in the farm segment. This growth was driven by the CV industry, which grew at a good pace during the quarter. The segmental EBIT margins were reported at 24.6% v/s 29.4% yoy and 27.4% qoq. This drop can be attributed to salary & power inflation and lower capacity utilisation driven by weaker farm sector demand. Automotive Aluminum products business has grown by 74.4% yoy and 14.6% qoq to ?1.96 bn as the company gained new businesses. At EBIT levels the margins were at 7.6% v/s 11.9% qoq and 6.6% yoy. Here the margins came down due to 10% drop seen in Aluminium prices globally on a qoq basis. In the industrial Engineering segment, revenues moved up by 21.3% yoy and 27.8% qoq to ?2.02bn as both the storage business as well as the non-storage businesses grew well, while the margins grew significantly high at 12.8% v/s 7.4% yoy and 7.8% qoq as on growth in the low capital intensive storage business was observed. Overall EBITDA margins came in at 22.2%, down 210 bps yoy and 290 bps qoq on led by margin fall at Power train and Aluminium divisions. PAT grew by 25% yoy and 10.2% qoq

Power-Train business to bounce back on revival in the farm sector and further fall in commodity prices

The power-train business (49% of topline and 70% of EBIT margins in Q2 FY23) is driven mainly by the CV OEMs who are 53% at the end of Q2. With rise in CV industry and thereby sales of CV OEMs, CAL’s Power-train business saw a healthy growth in the quarter at 29.5% yoy. Margins came in at 24.6% v/s 27.4% qoq. However, there was in fact an increase in Value Addition (Gross Profit) at ?2.32 bn v/s ?2.23 bn sequentially despite shrinkage observed in FES business (17.2% of segmental revenues). We are observing strong trends in the underlying CV industry in the current fiscal. We believe this to happen quite comfortably as we expect the CVs to grow at mid-to high teens this year. Also FY23 has not started on a good note for the farm sector, we expect tractor revenues to come back on track in the current fiscal on above normal monsoon in most of the states of the country, thus to assist growth in this division. We bake in 30%/20% growth for this segment in FY23E/FY24E

Automotive Aluminum products business to get a fillip from new business wins

Backed by the recovery seen in the 2W industry this quarter, CAL’s Aluminium products business performed well in the quarter as other clients like M&M, Daimler and foreign clients as well supported the business. In April 2022, the company won a big order from a client for whom they had to urgently increase their capex to ?2.75bn from earlier target of ?2.25 bn. This business should ramp up in FY24 and add ?1.5 bn in FY25E according to the management. Electrification in Europe is also leading to a good demand for the light-weighted Aluminum products of CAL. The company is also in talks with a North American company for long lasting business over there. The PSA opportunity at ?2-2.5 bn is quite big and will pour revenues over the medium to long term as its production should start by Q3 FY24. PSA is still in testing phase before giving green signal to CAL. Management expects 40% of the order to be done by FY24E. Management expects 20% growth in the Value Addtion of this business which stood at ?6.8 bn in Q2. We expect this business to grow at 60%/40% in FY23E/FY24E with margins expanding as business flows in

Industrial & Engineering business margins expanded as storage business flourished

Revenues in this segment grew by 21.3% yoy aand 27.8% qoq on the back of strong surge in storage revenues (55% of segmental revenues) which were at ?1.11 bn in Q2 v/s ?0.88 bn yoy in Q1. This expansion led to margin surge of the segment at 12.8% in Q2. The Value Addition in the segment also expanded to ?760 mn from ?420 mn qoq. Management believes storage business will expand and assist margins at 12-15% at least in the coming years. Continuous positivity in the FMCG, Pharma and e-comm businesses should lead to strong profitable growth in this business in the ensuing years. The non-storage business (exports to North America, Europe and Japan) revenues also expanded very well during the quarter from ?698 mn to ?906.2 mn qoq despite slowdown in these geographies

Outlook and Valuation

We believe the Power Train business will be driven by expected pick up in Replacement cycle for HCVs in the coming quarters and also fresh demand risen by movement in the investment capex cycle of the country. Dieselization demand from all over the world and localization of diesel vehicle demand should lead to strong demand of >20% for Power Trains. Rising infrastructure growth, construction, mining, agri-commodities transportation, increasing freight rates etc will all lead to a very strong growth in the CV industry. CAL being predominantly driven by CVs and Tractors makes for comfortable investment argument. Exports business (now 10% of topline) and electrification shall drive the Automotive Aluminum business. New orders from the latest undisclosed one along with PSA, Daimler and geographies like Brazil, Japan etc shall diversify the business risks. Both Storage and non-storage businesses shall lead to a strong growth in the Industrial Engg business. We believe margin strength will come back in this business with the commodity prices falling, new businesses and utilisation rates moving up. CAL is expanding its business at a manageable capex of just ?2.75 bn maintaining its low D/E of just 0.58x. CAL has met our target and we have seen both DII & FII add the stock during the quarter. We expect the valuation multiples to expand given the exciting growth prospects going forward. We therefore value CAL at 17x FY24E earnings as it currently trades at 14.3x. Maintain BUY with a target of ?3,333.

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