Craftsman Automation IPO | 6 Point Analysis

6 Point Analysis of Craftsman Automation IPO

Introduction

• The Indian stock markets are boiling with IPO fever like never before. There are 8 IPOs lined up for this month. Craftsman Automation is one of the companies who have proposed an IPO of Rs.824. Craftsman Automation is a diversified engineering company present across the entire value chain in Automotive Powertrain, Aluminum products, Industrial & Engineering Solutions.
• At present the grey market premium stands at a paltry 8%-10%. If market sentiments are pessimistic on listing day, shares of Craftsman Automation might get list at par or discount to the issue price.
• Let’s dig deep and analyze the company.

Detailed Review of Craftsman Automation IPO

IPO Details

• Total Issue size is Rs. 823.7 crore, out of which Rs. 150 crore is fresh issue and the remaining Rs. 673.7 crore is an offer for sale.
• Promoter Srinivasan Ravi, Marina III (Singapore) PTE, International Finance Corporation (IFC) and K Gomatheswaran are offloading shares in the offer for sale. Rs 247 crore has already been raised from 21 anchor investors on 12 March, 2021. 
• Post issue the promoter stake will shrink to 59.8% from the earlier 63.4%.
• The company has a total debt of Rs. 890 crore and the proceeds of the fresh issue will be utilized for – repayment of borrowing fully or partially as well as general corporate purposes.
• Craftsman Automation had filed draft papers with SEBI in June 2018 and received the regulator’s approval for floating an IPO. However, the company couldn’t launch the IPO due to unfavorable market condition.
• Particulars of the IPO are mentioned below –

Company Overview

• Craftsman Automation is a diversified engineering company. They are present across the entire value chain in the automotive-aluminium products segment, providing diverse products & solutions.
• India’s largest player in the machining of cylinder blocks and cylinder heads in the heavy, medium and intermediate commercial vehicles segment as well as in the construction equipment industry.
• They own 12 state-of-the-art manufacturing facilities across 7 cities of India as well as 10 satellite units.
• Their client base includes marquee automotive companies like Mahindra & Mahindra, Royal Enfield, Siemens, Escorts, Ashok Leyland, Tata Motors, Daimler India, Tata Cummins, etc.
• The whole auto sector has been through a lackluster phase from 2019 onwards, however robust recovery is underway and things are making a turnaround for the better.
• Craftsman Automation started the journey in the year 1986 as a small scale industry in the southern Indian city of Coimbatore and has grown over the years to become a leader in precision manufacturing in diverse fields.

Craftsman Automation Business Overview  

• Their main products include crankcase and cylinder blocks for two-wheelers, engine and structural parts for passenger vehicles and gearbox housing for heavy-commercial vehicles.
• Their sales volumes over the last 3 years are as follows –

Financial Performance

Revenue

• Revenue growth has been sluggish mainly due to the down cycle since FY19. It’s clearly evident in the numbers. Revenues have sharply declined from Rs. 1,818 crore in FY19 to Rs. 1,493. 9MFY21 revenue from operations stands at Rs. 1,023.
• In terms of revenue mix, as per 9MFY21 Craftsman Automation draws a mammoth 51.2% of its revenues from Auto – Power trains, 21.1% from Auto – Aluminum products and a decent 27.7% from Industrial & Engineering segment.
• An inherent concentration risk exists because the company’s top 4 clients account for a whopping 59% of revenues, while top 10 clients contribute 43% as per 9MFY21. They should focus on diversifying their client base further to reduce heavy dependence on their top 4 customers.

Profitability

• Craftsman Automation has long term relationships with several global OEMs, contribution of exports to revenue has been soaring like a eagle over the last 3 years. As on 9MFY21, exports make up 9.8% of total revenue from operations i.e. Rs. 100.7 crore.  
• The company undertook tremendous capital expenditure of Rs. 455.9 crore in FY19, due to which their debt to equity ratio shot up. A majority portion of the fresh issue will be utilized in downsizing debt.
• Despite sluggish growth in EBITDA, EBITDA margins for the company buck the trend and have been on an upward trajectory. 9MFY21 EBITDA stands at Rs. 287 crore and EBITDA margin is at 28%. This is the highest margin among all the players in the industry. With recovery in the industry, Craftsman Automation will start reaping the benefits of operating leverage in the coming years.’
• With the industry in a down cycle phase and robust capex, company’s PAT more than halved from Rs. 97.4 crore in FY19 to Rs. 41.4 crore in FY20. PAT margins are tepid due to high debt on the company’s books.

Return Ratios

• The above trend is replicated in RoCE and RoE numbers which have declined from their peaks of 11.8% and 15.2% in FY19 and at present are at 5.8% and 6.8% for 9MFY21. With the growth slowly returning to its zenith, both RoCE and RoE could be double digits in the coming years.  

Key Strengths

• Leading diversified engineering company manufacturing high quality intricate and critical products.
• Vertically integrated and strategically located manufacturing facilities.
• Strong in-house product design capabilities with the ability to interchange product mix and capacity.
• Long-term relationships with renowned global and domestic OEMs.
• Healthy financial performance & experienced management.

Key Risks

• Powertrain and allied businesses are prone to electric vehicle risk.
• High capital expenditure due to technological changes.
• Lack of exclusive arrangements or long term contracts with suppliers.
• Policy and regulatory changes.

Peer Comparison

Craftsman Automation’s competitive advantage lies in the fact that their EBITDA margin is the highest across the aboard. None of the peers even come near to the company.

Valuation

Because of the low profitability in the industry owing to a down cycle, all stocks are trading at premium valuations.

Conclusion

As per the valuation, Craftsman Automation seems to be overly priced. Looking at the financial performance, company seems to be struggling with revenue, operating profit and  margin, PAT & PAT Margin,etc, but the same represents the path of improvement in the current financial year. As of now, listing gains seems a possibility with grey market premium (GMP) around Rs.90-100. This translates to listing gains to the tune of 70-75%.