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Weakness in underlying industries dents overall performance

Weak FY25 outlook as growth in underlying industries to remain flat

* CRAFTSMA reported weak 3QFY24 results across the board as lower revenue at INR8.2b (vs. est. INR8.6b) impacted overall profitability. Moreover, the management remains cautious about the FY25 growth outlook as most of the underlying industries are expected to witness flat growth YoY.

* To factor in weak growth, we cut FY24E/25E EPS by 11%/15%. While the near-term industry outlook remains weak, we expect the company to continue to outperform the underlying industry, led by superior capabilities, the addition of new capacities, and expected benefits of import substitution. Reiterate our BUY rating on the stock with a TP of INR5,395 (premised on 22x Dec’25E consolidated EPS).

Revenue for powertrain segment declined 4% YoY

* Consol. revenues grew 51%/39%/42% YoY to INR11.3b/INR2.2b/INR0.7b in 3QFY24 (vs. est. INR12.1b/INR2.5b/INR1b). The quarter included financials of DR Axion (DRAIPL), which were not part of 3QFY23.

* In 9MFY24, revenue/EBITDA/adj. PAT grew 52%/37%/44% YoY.

* Gross margin declined 280bp YoY to 46.8% (vs. est. 46.6%). Due to higher operating expenses, EBITDA margin declined 160bp YoY (down 70bp QoQ) to 19.5% (vs. est. 20.7%).

* Adj. PAT missed our estimate due to lower other income at INR35m (vs. est. INR50m) and a high tax rate at 27.6% (vs. est. 26.5%).

* Segmental performance: Revenue for Al products/Industrial grew 27%/ 16% YoY, but auto powertrain revenue (~35% contribution) declined 4% YoY. PBIT margin improved 950bp/50bp YoY to 13.4%/6.2% for Al products/industrial, while it declined for auto powertrain by 660bp YoY to 18.2%. Value add for the segments stood at INR2.37b/0.97b/0.73b respectively.

* DR Axion- 3QFY24 performance (derived)- Revenue came in at INR3.2b (~38% of consol. revenue; vs. est. INR3.5b). EBITDA stood at INR650m (~30% of consol. EBITDA; vs. est. 631m), with margin at 20% (vs. est. 18.1%).

* Current net D/E stands at 0.86x and debt/EBITDA at 1.6x.

Highlights from the management interaction

* Powertrain- The management has guided for high single-digit growth in FY25 as end-user industries are likely to witness flat growth. However, it should see healthy double-digit growth in FY26.

* Aluminum Casting- Expects the division (including DR Axion) to grow by high teens in FY25. With the new facility coming up, FY26 growth should be over 20%. 30 January 2024 3QFY24 Results Update | Sector: Automobiles Craftsman Automation 30 January 2024 28

* Industrials- Expects the storage segment to grow by ~15% in FY25 on a low base. The storage division’s turnover stood at INR2.61b (vs. INR2.71b) due to lower investments in the warehouse industry. It is expected to recover in FY26. The company is now looking for backward integration by doing castings of more critical parts of windmill gearbox housing. The company is at an advanced stage of negotiations and should get LoA in the next few months with a sizable order.

* Setting up new plants for increasing capacity and adding new products

* Kothavadi- This is a 50-acre campus and it will house all three segments. The size of the foundry is ~2k ton. Construction activity is in line with the timeline and the company is looking to fast track the start-up production process, which was earlier expected in 24-36 months.

* NCR- Making a composite unit in the vicinity of the National Capital Region (NCR) for major customers in the auto sector and for the storage solutions segment. The company has already progressed with two clients and is under discussions with two more.

Valuation & view

* While the near-term demand outlook seems to be muted, we believe the company will continue to outperform the underlying industries. Its track record of creating and gaining market leadership organically is uncommon in the auto component industry. This has enabled the company to deliver a good balance of strong growth and superior capital efficiency.

* We estimate a CAGR of 25%/24%/30% in consolidated revenue/EBITDA/PAT over FY23-26. We reiterate our BUY rating on the stock with a TP of INR5,395 (premised on 22x Dec’25E consolidated EPS).

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