"Avoid" to Craftsman Automation - 'High debt level; poor return ratios'
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“Avoid” to Craftsman Automation ‘High debt level; poor return ratios’
12th Mar. 2021
Salient features of the IPO: Recommendation Avoid
• Craftsman Automation Limited (CAL) is a diversified engineering Price Band Rs1,488 - Rs1,490 per share
company engaged in three business segments include Automotive- Face Value Rs5 per share
powertrain & other products, Automotive-aluminium products and
Fresh Issue Size Rs1,500 mn
industrial & engineering products segment.
Share for Fresh Issue 1.01mn shares
• The company own and operates 12 strategically located
manufacturing facilities across seven cities of India. OFS Issue Size Rs6,737 mn
Total Issue Size Rs8,237 mn
Valuation: At higher price band of Rs1,490, the issue is valued at P/E of
46.6x (on FY21 post issue annualized EPS). Bidding Date Mar 15' 2021 - Mar 17' 2021
MCAP at Higher Price
Below are few key observations of the issue: (continued in next page) Rs31,481.2 mn
Band
• CAL, established in 1986 in Chennai, is a diversified auto ancillary & Book Running Lead Axis Capital Limited
engineering company deals in three key segments include Manager IIFL Securities Limited
automotive-powertrain & other products, automotive-aluminium
products and industrial & engineering products. Registrar Link Intime India Private Limited
• The company manufactures automotive & industrial products from its Industry Auto ancillary
12 strategically located manufacturing facilities across seven cities of
India.
• Business is diversified across end-user industries as CAL caters to the Retail application money at higher cut-off price per lot
needs of heavy commercial vehicles to two wheelers. The company
manufactures cylinders blocks, cylinders heads and transmission parts Number of shares per lot 10
which are required for tractors and trucks as well as crank cases
which are required for two wheelers. Application Money Rs14,900 per lot
• Automotive-powertrain & other products is the major business
segment accounted for 51.2% of CAL’s business as of 9MFY21. The Allocation Detail
segment includes highly engineered products such as cylinder block
and cylinder head, camshafts, transmission parts and bearing caps Qualified Institutional
50%
among others. End users of these products are OEMs producing Buyers (QIB)
commercial vehicles, special utility vehicle, tractors and off-highway
vehicles. Commercial vehicles, SUVs accounts for 30% and 42% of the Non-Institutional
15%
segment’s business, while tractors & construction equipment Investors (NII)
comprises 21% & 7%. End user customers list also include some
marquee OEMs such as Daimler India, Tata Motors, M&M, Escorts, Retail Individual
35%
Ashok Leyland among others. Investors (RIIs)
• The company is present across the entire value chain in the
Shareholding Pattern
automotive aluminium product segment which accounted for 21.1%
of CAL’s revenue as of 9MFY21. Key products under this segment Pre-Issue Post Issue
include crank cases & cylinder blocks for two wheelers, engine & Promoter & promoter
63.4% 59.8%
structural parts for passenger vehicles and gear box housing for heavy group
commercial vehicles. As the company has an entire range of Public 36.6% 40.2%
aluminium casting and product capabilities, increased usages of non- Total 100.0% 100.0%
ferrous metal like aluminium to reduce the weight of vehicles under
BS VI norms has become key growth driver for this segment. Key Source: Choice Broking Research, RHP
customers of company under this segment are Royal Enfield, M&M,
TVS Motors and Daimler India. Analyst
• Industrial & engineering segment accounted for 27.7% of revenue Satish Kumar
during 9MFY21. In this segment, company manufactures high end
(022-67079999; Ext:913,
precision products include aluminium products for power Deskphone
Mob:9167120440
transmission and storage solutions business products such as pallets,
racking, shelving among others. Email satish.kumar@choiceindia.com
1
Continued……
• CAL diversified business across segments as share of automotive - powertrain & other products reduced to 47.5%
in FY20 from 58% in FY18. Top 10 customers accounted for 53.4% of total revenue in FY20 and 59% in 9MFY21.
• CAL operated at 70% capacity utilisation (CU) level in FY20 for powertrain & aluminium segments while CU stood
at 40% for industrial & engineering segment.
• CAL incurred significant capex particularly in FY19 to enhance the installed capacity. Though FY20 remained
challenging due to auto industry slowdown amid events like transition to BS VI norms which impacted business
adversely. Higher capex in FY19 leading to rise in debt level while slowdown in FY20 weighed on business with
increase in interest cost impacting PAT margin. D/E raised to 1.44x in FY20. Profit margin impacted as interest
cost remained high at a rate of ~15% during FY18-FY20 due to lower long term debt rating at BBB+ stable.
• Company will utilize Rs1,200 mn from fresh proceed for the repayment of debt which will modestly help to
improve profit margin (reported debt at Rs8,901 mn and D/E at 1.15x in 9MFY21). Post issue, D/E will reduce to
0.85x which still looks at higher level.
• CAL managed to keep EBIDTA level above 25% in FY20 and 9MFY21, significantly higher than peers. Though,
despite high EBIDTA margin, profitability of the business remained under pressure due to lower profit margin
(NPM) impacting by higher interest cost. Considering the BBB+ rating for long term debt, interest cost is likely
to remain high until the company gets any rating upgrade which is not likely any time soon. We also see
modest positive impact to the tune of Rs120 mn from repayment of debt from fresh issue. Moreover, RoE
remained low at 7.3% (post issue, annualized) and further improvement largely depend upon strong business
growth and NPM movement.
• If we annualize 9MFY21 performance, EPS derives at Rs32. At the higher price of Rs1,490, the issue is valued at
P/E of 46.6x. Peers valuation include Endurance Technologies at P/E of 45x, Mahindra CIE at P/E of 63.4x and
Sundram Fasteners at P/E of 55.8x.
• While CAL maintains strong operating efficiency and has also operating leverage advantage, we are concerned
over high debt level and poor RoE, the improvement on both fronts requires strong business growth and
favourable movement on NPM front. Further, the IPO issue consists a higher amount of OFS of Rs6,737 mn
which also disappoints as contrary to this or higher fresh issue size can be utilized by firm to reduce debt level
significantly.
Considering all these parameters, we assign ‘Avoid’ rating to issue
Peer comparison
CMP 6M 12M M Cap EBIDTA Mar. NPM RoE RoA
Companies
(Rs/s) (R%) (R%) (Rs mn) (%) (%) (%) (%)
Craftsman Automation 1,490 - - 31,481.2 28.1% 5.0% 7.3% 2.8%
Bharat Forge 613 33.0% 48.0% 2,85,045.0 9.3% -6.8% -7.8% -33.7%
Endurance Technologies 1,400 29.6% 44.0% 1,97,400.0 15.7% 7.3% 14.4% 7.9%
Jamna Auto Industries 70 50.0% 130.0% 28,000.0 10.6% 4.3% 7.6% 4.6%
Mahindra CIE 179 43.9% 46.0% 67,841.0 8.3% 1.8% 2.4% 11.2%
Minda Industries 547 61.9% 63.0% 1,47,690.0 10.6% 1.6% 4.0% 1.6%
Sundram Fasteners 726 72.0% 89.0% 1,52,460.0 17.1% 8.5% 13.3% 7.6%
Ramkrishna Forgings 544 144.0% 108.0% 1,740.8 15.1% -2.1% -2.6% -0.9%
P/E P/BV P/S EV/EBIDTA D/E Net
Companies (Rs mn) EV BVPS
(x) (x) (x) (x) (x) Worth
Craftsman Automation 46.6 3.4 2.3 13.3 0.9 40,071.8 9,216.1 436.2
Bharat Forge -70.0 5.5 4.8 59.4 0.9 3,30,740.0 51,960.0 111.7
Endurance Technologies 45.0 6.5 3.3 20.8 0.2 1,96,490.0 30,540 216.6
Jamna Auto Industries 77.8 5.9 3.4 32.0 0.1 28,190.0 4,720 11.8
Mahindra CIE 63.4 1.5 1.1 16.4 0.4 81,941.0 45,290 119.5
Minda Industries 189.3 7.5 2.9 29.3 0.5 1,55,470.0 19,710 73.0
Sundram Fasteners 55.8 7.4 4.8 29.0 0.3 1,58,710.0 20,560 97.9
Ramkrishna Forgings -82.9 2.2 1.7 18.2 1.3 27,698.0 8,030 250.9
*- Craftsman Automation – FY21 annualized EPS : Return ratio annualized basis, margin 9MFY21, Post issue net worth
Source: Choice Broking Research, RHP
© CHOICE INSTITUTIONAL RESEARCH
About the issue:
• Craftsman Automation Limited (CAL) is coming with initial public offering of Rs8,237 mn.
• The issue comprises fresh issue of Rs1,500 mn and offer for sale (OFS) of 4.521 mn shares.
• At the higher price band of Rs1,490, fresh number of shares are stood at 1.007 mn. While OFS size comes at Rs6,737
mn at the higher price band.
• Promoter namely Srinivasan Ravi is selling 0.13 mn shares. Post issue, promoters’ stake will reduce to 59.8% from
63.4% pre issue.
• Other selling shareholders include 1.6 mn shares from Marina III, 1.4 mn shares by IFC and 1.4 mn shares by individual
investor K Gomatheswaran.
• Post issue Marina III stake will reduce to 7.38% from 15.5% and IFC to 6.7% from pre issue stake of 14.1%. While,
individual investors K Gomatheswaran will sell all his stake in the company.
• Issue will open for subscription on Mar 15’ 2021 and close on Mar 17’ 2021
• Not more than 50% of the net offer shall be available for allocation on a proportional basis to a qualified institutional
investors (QIIs).
• Further not less than 15% shall be available for allocation on a proportional to non-institutional investors (NIIs) and
not less than 35% of net offer shall be available for allocation to Retail Institutional Investors (RIIs).
• Average cost of acquisition for selling shareholders is Rs470 for Marina, Rs208 for IFC and Rs1.27 for K.
Gomatheswaran. Average cost of acquisition for selling promoter S. Ravi is Rs1.06.
Objective of Offer
Fresh Issue Rs1,500 mn
Repayment/ pre-payment, in full or part, of certain borrowings
Rs1,200 mn
availed by company
General corporate purposes Rs300 mn
Indicative IPO process time line:
Unblocking of
Offer Closes on
ASBA Account
17-Mar-2021
23-Mar-2021
Offer Opens on Finalization of Commencement
15-Mar-2021 Basis of Credit to Demat of Trading
Allotment Accounts 25-Mar-2021
22-Mar-2021 24-Mar-2021Company introduction:
Craftsman Automation Limited (CAL) is a diversified engineering company with vertically integrated manufacturing
capabilities, engaged in three business segments namely powertrain and other products for automotive segment,
automotive aluminium products and industrial & engineering products segment. The company own and operates 12
strategically located manufacturing facilities across seven cities of India.
CAL is the largest player involved in machining of cylinders blocks and cylinders heads in the intermediate, medium and
heavy commercial vehicles segment as well as in the construction equipment industry in India. CAL is among the top three-
four component players with respect to machining of cylinder block for tractor segment in India. The company is present
across the entire value chain in the automotive aluminium product segment providing diverse products and solutions.
CAL is a significant player in the automotive-powertrain segment with highly engineered products which include engine
parts such as cylinder blocks, cylinder heads, camshafts, transmission parts, gear box housing, turbo chargers, bearing caps
and machining services. End users of these products include OEMs producing commercial vehicles, special utility vehicle,
tractors and off-highway vehicles. Key products under automotive- aluminium product segment include crank case and
cylinder blocks for two wheelers, engine and structural parts for passenger vehicles and gear box housing for heavy
commercial vehicles. Within industrial and engineering segment, CAL developed a diverse product portfolio across two
segments namely 1) storage solution for conventional/automated storage and 2) high end precision products such as
aluminium products for power transmission, material handling equipment such as hoists, crane kits among others.
Source: Choice Broking Research, RHPBusiness Overview:
As per RHP, CAL is considered as a strategic and preferred suppliers by OEM customers and also the single source suppliers
in certain product categories for some key customers. Large portion of the business comprises direct supply to OEM
customers under long term agreements which renewed time to time. Revenue mix include automotive – powertrain &
others accounted for 51.2%, automotive- aluminium products at 21.1% and industrial & engineering segment at 27.7% of
total revenue by 9MFY21. Exports from powertrain segment accounted for 1.6% and exports from industrial & engineering
segment accounted for 9.98% of revenue in 9MFY21. CAL business was impacted in FY20 due to auto industry slowdown
with sales declined to Rs14,924.7 mn in FY20 from Rs18,180 mn in FY19. In 9MFY21, the company posted sales of Rs10,228
mn while EBIDTA margin stood at 28.1% and PAT margin at 5.0%.
Source: Choice Broking Research, RHPCompetitive strengths:
• Diversified business with a focus on providing comprehensive solutions and
manufacturing high quality, intricate and critical products, components and
parts
• Strong in-house process and product design capabilities with ability to
interchange capacity and product mix
• Long term and well-established relationships with marquee domestic and
global OEMs.
• Extensive manufacturing footprint with strategically located manufacturing
facility
• Experienced management team supported by motivated and skilled work
force
Business strategy:
• Leverage vertically integrated manufacturing and engineering capabilities
to tap growing opportunities
• Increase wallet share and acquire new business by leveraging existing
OEM relationship and adding new customers
• Growing opportunities in storage solutions
• Continue to reduce operating costs and improve operational efficiencies
Risk and concerns:
• Risk to business growth if auto industry demand revival slows
• Prevailing economic slowdown
• High commodity prices can impact margin
• High interest cost impacting NPM
© CHOICE INSTITUTIONAL RESEARCHFinancial statements:
Rs mn
Profit & Loss A/c Cash Flow Statement
Particulars FY18 FY19 FY20 9MFY21 Particulars FY18 FY19 FY20 9MFY21
Operating Revenue (OR) 15,115.3 18,180.1 14,924.7 10,227.9
Cash Flow from Operating
Cost of Material Consumed (5,916.9) (7,104.9) (5,717.0) (4,387.3) 2,827.0 3,600.0 3,053.7 2,420.6
Activities
Changes in Inventories of
Cash Flow from Investing
(2,107.4) (3,584.1) (1,370.7) (454.7)
Finished Goods, Work-in- 159.2 70.2 (150.7) 48.1 Activities
Progress
Purchase of fixed assets
(2,038.6) (3,558.1) (1,386.9) (495.0)
Employee Benefit Expenses (1,986.3) (2,168.3) (1,709.9) (1,105.9) and properties
Other Expenses (4,110.8) (4,550.6) (3,367.3) (1,908.4)
Cash Flow from Financing
EBITDA 3,260.5 4,426.4 3,979.8 2,874.4 (603.1) (182.3) (1,279.3) (2,254.0)
Activities
Depreciation and
(1,491.5) (1,761.5) (1,949.9) (1,414.7) Net Cash Flow 116.5 (166.4) 403.7 (288.1)
Amortization Expenses
EBIT 1,768.9 2,664.9 2,029.9 1,459.6 Opening Balance of Cash
244.0 359.4 193.9 598.6
Finance Costs (1,449.3) (1,405.5) (1,484.0) (772.4) and Bank Balances
Other Income 113.3 136.4 85.9 71.2
Closing Balance of Cash
Share of profit from JV 2.5 4.0 (0.2) 0.8 360.4 193.1 597.6 310.5
and Bank Balances
Exceptional Items 0.0 0.0 (57.7) 0.0 Financial Ratios
PBT 435.4 1,399.8 573.9 759.3 Particulars FY18 FY19 FY20 9MFY21
Growth & Margin rations
Tax Expenses (120.1) (426.2) (163.2) (252.7)
Revenue Growth Rate (%) 20.3% -17.9%
PAT 315.3 973.7 410.7 506.6 EBITDA Growth Rate (%) 35.8% -10.1%
EBITDA Margin (%) 21.6% 24.3% 26.7% 28.1%
EBIT Growth Rate (%) 50.7% -23.8%
Balance Sheet EBIT Margin (%) 11.7% 14.7% 13.6% 14.3%
Particulars FY18 FY19 FY20 9MFY21 Adjusted PAT Growth Rate (%) 208.8% -57.8%
Reported PAT Margin (%) 2.1% 5.4% 2.8% 5.0%
Share Capital 100.6 100.6 100.6 100.6 Turnover ratios
Reserves and Surplus 5,866.0 6,732.0 7,088.4 7,615.5 Inventories Turnover Ratio (x) 5.0 5.6 4.6 3.0
Trade Receivable Turnover
Net Worth 5,966.6 6,832.6 7,189.0 7,716.1 7.5 8.7 7.7 4.8
Ratio (x)
Long Term Borrowings 5,746.0 8,502.5 7,963.8 7,334.2 Accounts Payable Turnover
4.2 5.5 5.3 3.4
Ratio (x)
Long Term Provisions 6.8 2.1 Fixed Asset Turnover Ratio (x) 1.2 1.2 1.0 0.7
Short Term Borrowings 2,720.9 1,350.1 2,442.7 1,566.9 Total Asset Turnover Ratio (x) 0.8 0.8 0.6 0.5
Working Capital Turnover
Trades Payables 3,627.3 3,312.1 2,817.8 3,016.2 Ratio (x)
-8.8 -13.7 -22.4
Other Liabilities 1,573.0 2,799.8 2,222.1 2,264.4 Operational ratios
Current Ratio (x) 0.8 0.8 0.8 1.0
Short Term Provisions 40.9 51.5 18.3 28.7
Debt to Equity (x) 1.4 1.4 1.4 1.2
Deferred tax liabilities (Net) 319.7 405.4 370.9 534.3 Total Debt (Rs.) 8,466.8 9,852.6 10,406.5 1,148.25
Net Debt (Rs.) 7,980.1 9,586.8 9,690.1 8,379.4
Other liabilities 0.0 0.0 0.0 0.0
Net Debt to EBITDA (x) 2.4 2.2 2.4 2.9
Total Liabilities 19,994.3 23,254.0 23,031.4 22,462.9 Net Debt to Equity (x) 1.3 1.4 1.3 1.1
Return ratios
RoE (%) 5.3% 14.3% 5.7% 7.3%
Tangible Assets 12,447.4 14,764.5 14,267.0 14,130.7 RoA (%) 1.6% 4.2% 1.8% 2.8%
Intangible Assets 149.6 143.4 106.3 78.7 RoCE (%) 15.1% 17.4% 13.4% 9.7%
RoIC (%) 11.8% 12.9% 10.4% 6.8%
Capital Work In Progress 243.1 906.1 888.2 274.3 EV 39,580.8 41,138.8 41,290.1 40,071.8
Non-current tax assets (net) 44.4 0.0 11.0 0.0 EV/Sales (x) 2.6 2.3 2.8 3.9
EV/EBIDTA (x) 12.1 9.3 10.4 13.9
Other Non Current Assets 1,113.3 1,329.1 1,479.3 1,198.2 Per share ratios
Inventories 3,004.6 3,233.1 3,256.2 3,399.2 EPS 14.9 46.1 19.4 24.0
BVPS 282.4 323.4 340.3 365.2
Trade Receivables 2,016.9 2,100.3 1,943.2 2,142.0 OCF/sh 133.8 170.4 144.5 114.6
Cash and Bank Balances 367.2 195.0 597.6 310.5 FCF/sh 0.0 312.8 217.6 82.7
Valuation ratios
Other bank balances 119.6 70.8 118.8 211.2 P/E (x) 99.8 32.3 76.6 46.6
Other Current Assets 463.4 488.0 349.9 715.1 P/BVPS (x) 5.3 4.6 4.4 3.4
P/S (x) 2.1 1.7 2.1 2.3
Total Assets 19,994.3 23,254.0 23,031.4 22,462.9
EV/EBITDA (x) 12.1 9.3 10.4 13.3
Source: Choice Broking Research, RHP
© CHOICE INSTITUTIONAL RESEARCHEquity Research Team
Name Designation Email id
Sundar Sanmukhanis Head of Research - Fundamental sanmukhanis@choiceindia.com
Satish Kumar Research Analyst satish.kumar@choiceindia.com
Rajnath Yadav Research Analyst rajnath.yadav@choiceindia.com
Ankit Pareek Research Associate ankit.pareek@choiceindia.com
Yug Tibrewal Research Intern yug.tibrewal@choiceindia.com
Disclaimer
es
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