IGI Logo

Craftsman Automation Ltd (CAL)’s Q2 FY24 numbers were slightly below our expectations driven by softer Powertrain business performance. Standalone revenues grew by just 6% yoy and 9% qoq to ?8.24 bn. Power train business moved up by 4% yoy on high base and softer CV & tractor growth. The segmental EBIT margins were down at 19.6% v/s 24.6% yoy and 21.9% qoq. Automotive Aluminum products business revenues witnessed a sharp rise of 19.7% yoy and 13% qoq to ?2.35 bn as the segment encountered recovery in 2W demand. At EBIT levels the margins which have always been volatile showed a solid jump at 15.1%, up from 12.6% qoq and 7.6% yoy. In the Industrial Engineering segment, revenues grew by just 1% yoy and 18% qoq to ?1.96 bn as the storage business witnessed a pause. Overall EBITDA margins came in at 20.1%, down 50 bps qoq and 210 bps yoy. Consolidated PAT grew by 29% qoq and 68% yoy at ?1.05 bn.

DRA Axion (DRA) numbers strong, to excel further

DRA’s revenues came in at ?3.5bn (~30% of consolidated revenue) during the quarter. EBITDA was at ?647 mn with margin at 18.3%. EBIT margin came in at 15.4% during the quarter. Management expects 10-15% yoy growth in this business going forward. It is expected to be driven by product mix and growth in customer base. 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. DRA’s another client Hyundai-Kia’s Talegaon plant facility capacity expansion should add 5-10% to DRA’s topline by FY 25 once the plant commissions. We believe DRA to be an important growth driver for CAL going forward and add a substantial amount of revenues and assist margin performance.

Power-train business to slow down in FY24-25E, but may grow thereafter

PT business witnessed a soft growth in Q2. Management expects the segment to grow at high single digits to low double digit over the next two years due to high base of FY 23. They expect it to start growing at a rapid pace from FY 26 as they are working with a large global customer for exports order which should start by FY 26. CAL is building up new capacities near its main plant at Coimbatore to cater to the demand for OTH segment.

Aluminum products post strong performance, expect continuity

Auto Aluminium business division posted a strong performance in Q2 as the 2W industry saw a strong recovery on the domestic side. Further, it is likely to grow due to start of orders from Stellantis in Q3 FY 25. The segment is in ramp up stage to fullfill various other order as well. All order wins over last two years are translating now. Therefore we saw a strong expansion in margins as well in Q2. We expect the strong numbers to continue going forward and to grow at 20%/17% in FY 24E/FY 25E with margins expanding as business flows in.

Industrial & Engineering business robust

Management mentioned that there was a pause in storage business in Q2, but expect a strong H2. It has an order book of ?1 bn in automated storage business. Revenue from storage business in H1 was ?1.64 bn (46% of segmental business revenues), out of which 27% came from automated storage. Management expects the automated storage business to grow faster than static/manual storage.

Capex

Capex Guidance for FY24 at ?4.8 bn (out of which ?2.6 bn was spend in H1) includes capex of ?1.5-1.6 bn towards a Greenfield plant at Coimbatore which would commence from FY 26. Incremental Greenfield capex will be ?1 bn in FY 26. The company is expecting to house all the segments – mainly powertrain and aluminium products and some backward integration.

Outlook and valuation

We believe the Power train business will be driven by expected pick up in Replacement cycle for HCVs in the medium term 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 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. However, the real demand growth may come in FY 26 only as FY 24 and FY 25 may see soft growth on high base of FY 23. New order from a global CV player also should aid growth in FY 26. Exports business (now 10% of topline) and electrification shall drive the Automotive Aluminum business. New orders from Stelantis shall provide the required fillip from H2 of FY25. Pick up in 2Ws and EVs should augur well for Aluminium business which is currently in ramp up stage. Both Storage and non-storage businesses shall lead to a strong growth in the Industrial Engg business in H2. DR Axion acquisition seems to be a strategic/synergic fit which is 30% of topline and is giving boost to the consolidated business. The increased capex guidance and 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 23%/24%/35% in the period between FY23-26E. We therefore value CAL at 20x rolled over earnings of FY 26E (currently trades at 16.7x). Maintain BUY with a target of ?5,808.

For More  LKP Securities Ltd Disclaimer  http://www.lkpsec.com/

SEBI Registration number is INM000002483