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Weak performance marred by start-up costs

Expect consolidated net debt to decline by INR5b to INR14b in FY26

* Craftsman Automation (CRAFTSMA) reported a weak performance in 3Q, primarily due to start-up costs for new plants and integration impact of the new acquisitions. This led to a significant PAT miss at INR241m (down 67% YoY, est. INR594m).

* On the back of significant start-up costs seen in 3Q, which are likely to prevail in the near term, we have sharply lowered our FY25/FY26 earnings estimates by 32%/20%. The key monitorables from hereon include: 1) a turnaround at Sunbeam, and 2) stabilization of the greenfields. While these strategic initiatives appear to be in the right direction for the long run, they are likely to hurt returns for at least the next 12-15 months. Given the absence of any near-term earnings trigger and the execution risk of multiple projects, we maintain Neutral with a revised TP of INR4,275 (valued at 21x Dec'26E EPS).

EBITDA declined due to impact of startup cost and weak demand

* 3QFY25 consol. revenue grew 40% YoY to INR15.8b (est. INR16.99b), while EBITDA/PAT declined 10%/67% YoY to INR1.99b/INR0.24b (est. INR1.95b/INR0.6b). 9MFY25 revenue grew 18% YoY, while EBITDA/PAT declined 12%/43% YoY. Revenue growth was largely driven by its inorganic expansion.

* EBITDA margin contracted 690bp YoY/330bp QoQ to 12.6% (est. 11.5%). The significant increase in other expenses and employee cost was due to – i) start-up costs for two greenfield facilities, ii) Sunbeam-related costs, iii) inflationary pressure, and iv) weak demand.

* Further, higher interest costs and lower other income led to a sharp miss in adj. PAT at INR241m (down 67% YoY, est. INR594m).

* Revenue for standalone business grew 15% YoY. Within the standalone business: revenue for auto powertrain/aluminum/industrials grew ~3%/37%/16% YoY.

* PBIT margin for standalone business: Powertrain 11.2% (-7pp YoY. Est. 15%); Aluminium products 6.4% (-7pp, est. 12.5%), Industrials 1.6% (-4.6pp, est. 2%).

* Exceptional items of INR147.6m during the quarter represent expenses incurred by SLSPL in relation to relocation of its Gurgoon facility and transfer of control to the company.

Growth Guidance

* Revenue: It expects consolidated revenue to rise from INR55b to INR70b next year. For FY26, Craftsman expects significant contributions from Kothavadi (INR1-1.5b), Bhiwadi (INR3b), and Hosur (INR1.5b).

* EBITDA is projected to grow 29% to over INR11b, and EBIT is forecast to increase 40% to INR7b. These figures reflect the impact of recent acquisitions.

* The consolidated net debt for this FY is projected to be INR19b, with a debt-toEBITDA ratio of 2.24x. If the Gurgaon land sale had happened, the debt would have been INR16b, bringing the ratio down to 1.88x. Hopeful to sell the land in FY26. Expects the consolidated debt to decline to INR14b next year.

* The capex has been at INR8.5b for the current year, which is expected to decline by at least half that amount next year.

Highlights from the management interaction

* Sunbeam: The Gurgaon plant relocation has begun and is expected to be completed by 1QFY26, after which the land sale will be considered. About 50% of employees opted for VRS and were relieved in Nov’24, with the remaining to be settled by April-May. It is expected to turn EBIT neutral by 2QFY26 and will be EBIT positive for the full FY26.

* Kothavadi- Several samples have been supplied to customers, and production is expected to begin in 4QFY25 upon approval. For the stationary engines and machining capacity (including the Arasur plant), the expected revenue in FY28-29 is around INR8.5b.

* Hosur: The plant will be operational by 2Q FY26 and will reach its full capacity by 4Q. The combined peak capacity for the Hosur and Bhiwadi alloy wheel plants is expected to be around INR8b by FY27.

* Industrials: The order book for automated storage is full for the next year, positioning the company to benefit from increased profitability in this area.

Valuation and view

* The start-up costs were significantly high in 3Q and are likely to prevail in some segments for a while given the long gestation for execution. As a result, we have sharply lowered our FY25/FY26 earnings estimates by 32%/20%.

* Management is currently in the midst of integrating multiple projects simultaneously: 1) integration and restructuring of Sunbeam, 2) ramp-up of new plants in Bhiwadi, Kothavadi and Hosur, 3) integration of Fornburg.

* This is happening at a time when its core segments, CVs and PVs, are seeing a weak demand trend. While these strategic initiatives appear to be in the right direction for the long run, they are likely to hurt returns for at least the next 12- 15 months, by which time we hope to expect: 1) a turnaround in Sunbeam, and 2) stabilization of the greenfields. If any of these timelines are not met, it will lead to further downside risk to our earnings. Given the absence of any nearterm earnings trigger and the execution risk of multiple projects, we maintain Neutral with a revised TP of INR4,275 (valued at 21x Dec'26E EPS).

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