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BACKGROUND

CAL (Craftsman Automation Ltd.) is a diversified engineering company with vertically integrated manufacturing capabilities, engaged in three business segments namely, Automotive Powertrain (48% of FY20 revenue), Automotive Aluminium Products segment (17%) and Industrial and Engineering segment (35%).

Details and Objects of the Issue

* The total issue size is Rs. 824 Cr constituting (i) Offer For Sale of up to 0.45 Cr equity shares aggregating to Rs. 674 Cr mainly by PE investors; and (ii) fresh issue of up to 0.10 Cr equity shares aggregating to Rs. 150 Cr. The Offer shall constitute 26% of the post-offer paid-up equity capital of the company.

* CAL shall utilise the proceeds from the fresh issue towards retiring debt.

Investment Rationale

* CAL is the market leader in machining of most critical value added products (cylinder blocks & cylinder heads) for MHCV & Construction Equipment segments, resulting in best in class margins.

* Auto industry is at the cusp of an upcycle after having undergone a two year long downcycle.

* Storage business is a high growth structural opportunity for CAL.

Valuation and Recommendation

CAL’s margins are well above peers on the back of its leadership position in the highest value segment amongst all engine parts of - cylinder heads and cylinder blocks. ROCE is in-line with industry peers and accordingly the P/E multiples are also broadly in line with peers.

With the auto upcycle having commenced and aggressive repayment of debt (to decline to Rs. 770 Cr by end of FY21 against Rs. 1041 Cr in FY20), return ratios are likely to witness a strong uptick. Q3FY21 ROCE has already bounced higher to 22% against 12% in FY20.

Based on (i) presence in high end machined components, (ii) upturn in auto industry having commenced (iii) rising mix of non-cyclical, high growth storage solutions business and planned entry into automated storage systems, (iv) Expansion of return ratios and (v) comparatively cheaper P/E multiple on Q3FY21 annualised earnings; we recommend to subscribe to the issue from a long term perspective.

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