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Softness in powertrain division dents overall performance

Announced incremental capex of up to INR2.6b for greenfield by FY26

* CRAFTSMA’s 2QFY24 results were below our estimates as EBITDA margin came in at 20.1% (est. 21.5%). The weakness was largely attributable to underutilized capacities in the powertrain division and repair expenses for the refurbishment of old equipment. However, margins are likely to recover to 21%+ in the coming quarters, led by utilization improvement across businesses and reductions in other costs.

* We maintain our FY24/FY25 EPS estimates. Retain our BUY rating on the stock with a TP of INR5,800 (based on 22x Dec’25E consolidated EPS).

Revenue growth muted in powertrain segment

* 2Q consolidated revenue/EBITDA/adj. PAT grew 53%/40%/56% YoY to INR11.8b/INR2.4b/INR945m (est. INR11.6b/INR2.5b/INR993m). 1HFY24 revenues/EBITDA/adj. PAT grew 53%/35%/45% YoY.

* Consol. 2Q revenue grew 53% YoY (14% QoQ) to INR11.8b (in line). Revenue for Auto powertrain/Al products grew 4%/20% YoY; however, the Industrials & storage segment remained flat YoY.

* Gross margin declined 200bp YoY (down 70bp QoQ) to 46.8% (est. 47.3%) due to underutilized capacities in the powertrain division.

* Further, higher-than-estimated other expenses led to an EBITDA margin decline of 190bp YoY (down 50bp QoQ) to 20.1% (est. 21.5%).

* PBIT margins improved 750bp YoY (250bp QoQ) to 15.1% for Al products but declined for auto powertrain/industrial and storage solution by 490bp/180bp YoY to 19.6%/10.3%.

* Cashflows compared on the standalone basis: There was a cash outflow of INR824m in 1HFY4 (vs. inflow of INR528m in 1HFY23) mainly on account of lower CFO of INR1.6b (vs. INR2.3b in 1HFY23) and higher capex of INR2.5b (vs. INR1.8b in 1HFY23).

* DR Axion’s 2QFY24 performance (derived): Revenue came in at INR3.55b (up 26% QoQ and ~30% of consol revenue; vs. est.INR3b). EBITDA stood at INR648m (~27% of consol EBITDA; est.511m), with margin at 18.3% (est.16.9%).

Highlights from the management interaction

* Powertrain business: Expects the segment to grow in high single digits to low double digits over the next two years due to a high base of FY23. It should start growing at a rapid pace in FY26. It is working with one of the largest customers globally for export orders, which would start in FY26. Utilization improved to 70% (vs. 60% in 1Q). It is also building in more capacities to cater to demand for the off-highway segment.

* Aluminum die-casting: The company is in a ramp-up phase. All orders win over the last two years are translating now. Utilization stands at 80% for the SA business and ~85-90% for DRAIPL.

* DR Axion- Finalized a new order for Hyundai for its new Talegaon plant, which is going to be operational by FY25. This will add another 5-10% to revenue growth for DRAIPL.

* Industrials- There was a pause in the storage solution business in 1HFY24, but 2H is looking strong. It has an order book of INR1b in automated storage. Revenue from the storage division for 1HFY24 was INR1.64b, of which 27% came from automated storage.

* Capex in 1HFY24 stood at INR2.6b. It has guided for full-year capex of INR4.8b, including INR1.5-1.6b for greenfield. Incremental greenfield capex would be INR1b in FY26. It is looking to house all the segments, mainly powertrain, aluminium and some backward integration.

Valuation & view

* CRAFTSMAN’s 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 31%/31%/38% in consolidated revenue/EBITDA/PAT over FY23-25. We reiterate our BUY rating on the stock with a TP of INR5,800 (premised on 22x Dec’25E consolidated EPS).

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