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Craftsman Automation Ltd (CAL)’s Q1 FY24 numbers were in line with our expectations. Standalone revenues grew by 12% yoy and declined by 3.8% qoq to ?7.56bn mainly on growth seen in Power Train and Aluminium Products segments. Power train business expanded 10% yoy riding on PV resilience. The segmental EBIT margins were reported at 21.9% v/s 27.4% yoy and 23.6% qoq. Automotive Aluminum products business revenues witnessed a sharp rise of 21% yoy and 5% qoq to ?2.07bn as the segment encountered decent 2W demand. At EBIT levels the margins which are off late in double digit continued to do so by coming at 12.6%, up from 11.4% qoq and 11.9% yoy. In the Industrial Engineering segment, revenues showed a muted growth to ?1.66bn as the storage business was seasonally weak. Overall EBITDA margins came in at 21.6%, up 30 bps qoq. PAT de-grew by 23% qoq and 4% yoy at ?541mn in a seasonally weak quarter.

DRA Axion (DRA) margins report strong growth; bright prospects ahead

CAL consolidated DRA’s numbers in Q4 post the acquisition of the Korean company which is a strong player in supplying cylinder blocks and cylinder heads to PV players such as M&M, KIA and Hyundai in India. The acquisition cost was at ?3.75bn. DRA’s revenues came in at ?2.81bn (~27% of consolidated revenue) during the quarter. Derived EBITDA was at ?509mn with margin at a whopping 18.1% up from 10.7% qoq. EBIT margin came in at 14.4% (up from 7.3% qoq) during the quarter.

Management expects 10-15% yoy growth in this business in FY24. It is expected to be driven by product mix and growth in customer base. EBITDA margin for Q1 FY24 was way above 12.6% of the Aluminium products standalone margins in which DRA is merged, and is likely to be in the range of 16-17% in FY24 as guided by management. DRA’s key client M&M (40% of revenue) is anticipated to outperform the underlying industry, led by robust order backlog and its dominance in the growing SUV market. The merger is not only expected to be operationally beneficial, but add strongly to the bottom-line from the first year of the acquisition, and its full benefits are expected to reflect from FY24 onwards. DRA has won good orders from its existing clients and is in talks with other players in India for new client acquisition.

Power-Train (PT) business to be buoyant in H2

PT business witnessed a 10% yoy growth in topline. CV business was muted in Q1 on the back of OBD-2 implementation, however, management expects H2 FY24 to be a strong period for CV and construction equipment sector. Farm sector is expected to perform well if the monsoons this year are good. The business has been performing at ~75-80% utilization rate, which has further headroom for expansion with higher volumes. Margin recovery (21.9% in Q1) is expected to follow with operating leverage.

Aluminium products post strong performance, expect continuity

Auto Aluminium business division posted a strong performance in Q1 as the 2W industry saw a strong recovery on the domestic side. Further, it is likely to grow due to ramp up in order from Stellantis in Q3. Also the company is going through the validation phase for supply of a critical part for one of the domestic SUV that is likely to start soon. Management targets 20% growth in the topline of this business. We expect the strong numbers to continue going forward and to grow at 25%/18% in FY 24E/FY 25E with margins expanding as business flows in

Industrial & Engineering business to improve as the year passes by

Revenues in this segment were muted in the quarter as storage business (47% of business revenues) posted a soft growth. The revenues grew by 5% yoy and fell by 16% qoq to ?1.66bn v/s ?1.97bn qoq and ?1.57bn yoy. This led to a margin contraction of the segment at 6.6% in the year. Management believes storage business will expand and assist margins in the earlyteens level at least in the coming years. Positivity in the FMCG, Pharma and Auto businesses should lead to strong profitable growth in this business in the ensuing years. Also the nonstorage business is expected to perform well in FY24 on traction expected in the construction equipment sector and farm business in H2 FY24.

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 rising 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 decent 8-10% growth in the CV industry. CAL being predominantly driven by CVs followed by tractors makes a very comfortable investment argument. Exports business (now 10% of topline) and electrification shall drive the Aluminium products business. New orders from Stelantis and an SUV player shall provide the required fillip. The bounce back seen in the 2W industry shall provide a kicker for this business. Both storage and non-storage businesses shall lead to a strong growth in the Industrial Engg business post a muted Q1. DR Axion acquisition seems to be a strategic/synergic fit which has already started yielding results and is boosting the consolidated numbers. The debt raised for acquisition may result into some pressure on the financials in the short term. However, robust cash generation stemming from strong operational performance shall lead to comfortable financial leverage. Improvement in FCF and return ratios in line with strong operational efficiencies along with track record of creating and gaining market leadership organically is uncommon in the auto component industry. We estimate the consolidated revenues/EBITDA/PAT to grow at a CAGR of 32%/33%/43% in the period between FY23-25E. We therefore value CAL at 22x FY 25E earnings as it currently trades at 19x. Maintain BUY with a target of ?5,338.

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