Video Summary:
In this article, we will cover:
- Changing Trends in the Automobile Sector
- Craftsman and its Business Segments
- Are the Headwinds Temporary?
- What’s Driving the Aluminium Business?
- What do we like in Craftsman?
- Valuation and View
The stage seems set. Despite a global economic slowdown, India stands out as a bright spot, boasting a stronger growth rate than many of its peers. At the center of the stage stands the automobile sector, cruising nicely, thanks to a blend of tailwinds: rising disposable incomes, easy access to financing, an expanding urban population, and a wide variety of choices for consumers across vehicle segments. And let’s not forget the electric vehicle (EV) wave that’s added a whole new layer of excitement to the mix.
The Society of Indian Automobile Manufacturers (SIAM) reported a surge in India’s vehicle production, reaching 2.59 crore units in FY23 from 2.30 crore units in FY22. The spotlight shines on 2Ws, with sales of 1.58 crore units in FY23 driven by a growing middle class and huge youth population. Moreover commercial vehicles, often considered one of the backbones of economic activity clocked domestic sales of 9.62 lakh units in FY23 vs 7.16 lakh units in FY22.
A notable shift is also seen in the passenger vehicle sector. Indians are now leaning towards SUVs, moving away from the once-dominant market of small cars. SUV sales have grown to represent 48.3% of total vehicle sales in H1 FY24, up from 41.5% in H1 FY23. Resulting in automakers’ response of launching more SUVs (or the so-called compact SUVs), catering to the public’s growing demand for comfort and functionality over just price considerations.
Now coming back to the most talked about, ‘Electric Vehicles’. If you remember, 4 years back, Elon Musk’s ambition to enter the Indian market with Tesla was challenged by high import duties. Domestic players like Tata and Mahindra were against lowering these duties, while global players like Hyundai, Volkswagen, and BMW supported Musk’s stance.
Recently, the Indian government made a strategic move to boost the EV market. They’ve significantly reduced import duties on EVs priced above $35,000, from a hefty 70-100% down to just 15% for five years. However, the manufacturers must:
- Make a minimum investment of $500 million in India within three years, and
- Reach domestic value addition of 25% in 3 years and 50% in 5 years.
This decision has been met with unanimous approval from domestic players, as it aims to accelerate India’s EV ecosystem without impacting the segments where they currently operate.
Amidst the backdrop of the shifting landscape of the auto sector, there is a craftsman we are interested in, who moulds metal into parts and pieces which help run vehicles. It is Craftsman Automation Ltd., an auto ancillaries business with a diversified product portfolio ranging from automotive parts to industrial machinery and even storage solutions.
Let us now try and understand what draws our attention.
To be specific, what does Craftsman do, the management leading it, its prospects for growth, financial performance, and what sets it apart?
Craftsman Automation: An Engineering Excellence?
Craftsman is a diversified engineering company based out of Coimbatore. Known for its strong engineering skills, the company not only has the in-house capability to design and manufacture its products and processes but also the tools and machinery needed for these processes.
With 13 plants across India, craftsman ensures a widespread presence, exclusive manufacturing footprint, and proximity to its key customers.
Below is a glimpse of craftsman’s well-spread manufacturing footprint in India.
*Source: Craftsman’s FY23 Annual Report. Click on the image to enlarge.
Over the years, Craftsman has undergone a significant transformation. Initially, it was primarily focused on exports (80% of revenues in FY04). Fast forward to FY23, 92% of its revenues come from the domestic markets.
Another pillar of Craftsman’s strategy has been building and maintaining long-standing relationships with various OEMs and tier-1 suppliers. As a result, its revenue from the top 10 customers has increased over a period of time while craftsman hasn’t stopped diversifying its customer base, actively adding new clients who are in different stages of growth and collaboration. 
*Click on the image to enlarge.
Beyond its known contributions to the automobile sector, there is more to craftsman’s operations. Its business is well diversified across three key segments:
- Automotive Powertrain
- Aluminium Products
- Industrial and Engineering
*Click on the image to enlarge.
Automotive Powertrain
In the world of automobiles, the powertrain is like the heart and veins of a vehicle, generating power and transmitting it to the wheels.
Breaking it down: engine and engine parts (cylinder block, cylinder head, camshaft), gearbox, driveshaft, and rear axle.
*Source: Craftsman’s Website. Click on the image to enlarge.
Craftsman is a leading player in the machining of critical engines and transmission of M&HCV (No. 1 Player) and tractors (among the top 5). Also, Craftsman caters to one of the largest SUV OEMs and is the single source vendor for its 2L and 2.2L cylinder blocks. Recently, Craftsman bagged orders from another SUV manufacturer who used to import from Italy.
But it’s not just the automobile sector. The company is also eyeing the off-highway segment as a key growth area. With the shifting global manufacturing landscape, India is emerging as a preferred alternative to China — a trend often referred to as ‘China +1’. This move, driven by changing geopolitical dynamics, positions India, and companies like Craftsman in a favourable spot.
In FY23, Craftsman earned the majority of its revenues in the powertrain business from commercial vehicles, followed by off-highway, tractors, and SUVs respectively.
*Click on the image to enlarge.
FY23 saw the off-highway segment as the 2nd highest revenue source for Craftsman’s powertrain business. The chart below shows us the different products under the off-highway segment:
*Source: Craftsman’s Website. Click on the image to enlarge.
In Q3 FY24, the powertrain segment experienced a slight dip, with revenues ticking down to Rs 392.45 crore from Rs 408.44 crore in Q3 FY23.
During the Q3 FY24 earnings call, the management addressed this dip, expressing confidence in the resilience of the Powertrain business. They pointed out that the slowdown is a reflection of the cyclical nature of the farm sector and typically lower volumes seen in election years. Additionally, the squeeze on margins was attributed to increased manpower costs and depreciation expenses, driven by a substantial gross block of ~ Rs 2000 crore in the segment.
Going forward, management expects high single-digit growth in FY25’s topline from the powertrain segment and double-digit growth thereafter.
Aluminium Products
Craftsman has quickly become a notable name in the aluminium products sector, particularly known for its expertise in automotive aluminium die-casting and industrial parts.
Despite the aluminium business kicking off as recently as 2016, it impressively accounted for 25% of craftsman’s revenues by FY23, highlighting its rapid growth and strategic importance.
The aluminium division is split into two main areas: Automotive Aluminium and Industrial Aluminium. In the automotive segment, Craftsman has earned a reputation for excellence in casting and machining critical auto parts like crankcases, cylinder blocks, engine & structural parts, along with gearbox housing, for 2Ws and MHCVs.
On the industrial side, Craftsman focuses on GIS power transmission components, where aluminium’s lightweight and non-corrosive properties are especially valued. Additionally, the company extends its aluminium expertise into the marine transmission and compressor components business as well.
*Source: Craftsman’s Website. Click on the image to enlarge.
Aluminium Die-Casting set for robust growth.
The global aluminium die-casting market is on a trajectory of robust growth, projected to expand at a CAGR of 7.2% from 2022 to 2030. This surge is driven by the increasing adoption of alloy wheels in 2Ws and PVs. Currently, 2Ws dominate the market, consuming a whopping 70% of aluminium die-castings, followed by passenger vehicles at 25%, and commercial vehicles with a 4-5% share.
A significant opportunity lies in the Indian PV segment, where the aluminium content per vehicle is well below the global average. 50-60 Kg vs 140-210 Kg in regions like China, Europe, and North America.
Furthermore, CVs showcase an even greater aluminium usage, averaging 120-130 kg per vehicle. This disparity highlights the potential for increasing aluminium use in the Indian automobile space.
The shift towards electric vehicles (EVs) adds another layer of demand for aluminium. EVs tend to have a significantly higher aluminium content compared to ICE vehicles (300-320 kgs vs 140-210 kgs) in Europe and North America. This is due to aluminium’s lightweight and non-corrosive properties, which are crucial for EV efficiency and longevity.
These trends collectively create strong growth opportunities, putting Craftsman at the forefront of a growing market.
Inorganic Growth Drivers!
Craftsman made a strategic move in Q4 FY23 by acquiring a 76% stake in DR Axion India Pvt. Ltd. (DRAIPL), a leading player in producing aluminium cylinder heads and blocks for PVs. This acquisition was a calculated step to diversify and strengthen Craftsman’s aluminium business.
Before the acquisition, Craftsman’s aluminium operations primarily focused on 2Ws and CVs, whereas DR Axion specialized entirely in PVs. Furthermore, Craftsman’s expertise was in high-pressure casting, contrasting with DR Axion’s specialization in gravity and low-pressure die-casting techniques.
By bringing DR Axion to the table, Craftsman not only diversified its product offerings across different vehicle categories but also achieved a better balance in its aluminium business through process synergies.
An added bonus of this acquisition is access to new customers as DR Axion’s key customers are world #3 in PVs and #2 in EVs in the US. Its, revenues grew at 30% CAGR from FY19-22 to reach Rs 715.9 Cr.
The below chart gives us a glimpse of how its sales volume has grown in volume terms:
*Source: Craftsman’s Acquisition Report. Click on the image to enlarge.
In Q3 FY24, Craftsman witnessed a significant boost in its aluminium business, primarily fueled by the recent acquisition. Its revenue in the aluminium business grew to Rs 544.28 crore, a substantial increase from Rs 175.85 crore in Q3 FY23.
Despite the acquisition playing a key role in this growth, it’s important to note that Craftsman’s core aluminium business also continued to perform strongly. Looking ahead, the management is optimistic, projecting a topline growth in the high teens or even around 20% in the upcoming years.
Industrial & Engineering
The Industrial and Engineering segment of Craftsman is essentially a non-automotive business vertical. This segment can be further classified into 2 sub-segments:
- High-End Sub-assembly & Contract Manufacturing.
- Storage Solutions
*Click on the image to enlarge.
High-End Sub-Assembly & Contract Manufacturing
The High-End Sub-Assembly & Contract Manufacturing of products includes multiple categories such as:
- Assembly & sub-assembly of engineering components.
- Gears and gearboxes.
- Material handling equipment.
- Tool room, mould base, sheet metal, and marine engine parts.
- Special purpose machines.
- Contract manufacturing of precision heavy parts.
The majority of revenues for this segment comes from contract manufacturing, followed by material handling and gear sections. The special and general-purpose machine manufacturing is primarily a backward integration to support its powertrain and aluminium businesses.
In FY23, Craftsman forayed into manufacturing components for windmills and heavy machinery, marking its entry into new industrial territories. With an eye on reinforcing its foothold in these sectors, the company has plans to enhance its capabilities through its upcoming plant in Kothavadi, which we will discuss later.
The segment is poised for strong growth, driven by an uptick in capital expenditure. The management is keenly focused on localization or import substitution (particularly gears and gearboxes), where imports meet 35% of demand. Additionally, significant opportunities lie in the machining of renewable energy components and capital goods, pointing to a promising future for this segment.
Storage Solutions
The Storage Solution business taps into the increasing consumption economy in India, catering to sectors like e-commerce, retail, consumer durables, automobiles, pharmaceuticals, and FMCG. Despite being a relatively new player, Craftsman has quickly become one of the top three in the conventional storage segment.
What distinguishes Craftsman in this competitive field?
The company has developed an in-house product, ‘VStore’, a fully automated storage solution that maximizes warehouse space by utilizing vertical height. Its USP is the flexibility it offers, it can be quickly dismantled and relocated on very short notice.
However, the Storage Solutions segment has encountered challenges in FY24, primarily because investments in warehousing have slowed amidst weaker economic conditions. Additionally, competitive pricing has put pressure on margins.
Despite these hurdles, Craftsman managed to secure about 95% of its 9M FY23 revenue in 9M FY24. Looking ahead, the management expects growth rates of around ~15% in FY25 for the industrial and engineering segment due to a lower base.
Greenfield Expansion: Adding Capacity and New Customers
Craftsman is setting its sights on greenfield projects to increase its capacity and attract new customers. The company is focusing on two new sites: one in Kothavadi and another in the NCR. For FY24, the management has marked CAPEX plans of Rs 500 Cr.
The groundwork for the Kothavadi facility is already underway, with efforts being accelerated to begin operations by FY26, which was earlier expected to take 24-36 months. This 50-acre site will be a comprehensive hub, housing all three business segments.
Located near Coimbatore, the Kothavadi plant will be within a 45 km radius of the existing facilities, creating operational efficiency. The site will feature a substantial ~2,000-ton foundry, specifically aimed to address the powertrain and industrial segments of the business. Initially, the focus will be on the aluminium business, with the management targeting sales of ~ Rs 200 Cr in the first year of operations.
Now coming to the NCR, the management plans to come up with a composite unit, which will be within 100 km of major customers in the auto sector. The storage solutions segment is also expected to see a reduction in logistics costs. The company has already made headway with two clients and is currently in discussions with two more.
Steady Leadership, Solid Growth
Craftsman was founded in 1986, in Coimbatore, by first-generation entrepreneur, Mr. Srinivasan Ravi who also serves as the chairman and managing director of the company. Mr. Ravi has a bachelor’s degree in mechanical engineering with more than 35 years of experience in the automobile industry. Mr. Ravi holds 49.7% of the company’s shares.
During Q1 FY24 there was a promoter stake sell in Craftsman which reduced its promoter holding from ~59% to 55%. This sell was done by Mr. Murali S (Part of the promoter group) who is Mr. Ravi’s brother and had resigned as the director of the company back in 2010.
Institutions like Goldman Sachs, Axis Mutual Fund and Tata Emerging Asia Liquid Fund bought this stake.
In FY23, the remuneration to management personnel amounted to Rs. 18.19 Cr which comes to around 7% of the year’s profit.
The management team, under Mr. Ravi’s guidance, so far has had a successful track record in not only creating and gaining market leadership organically, which is a rarity in the auto components business but also demonstrated financial strength, with its ROE climbing from 13% in FY19 to 19% in FY23.
Financial Overview
*Click on the image to enlarge.
Craftsman has demonstrated steady revenue growth, rising from Rs 1,818 crore in FY19 to Rs 3,183 crore in FY23 at 15% CAGR. Post the decline in FY20 due to COVID-induced weakness, the company rebounded impressively, growing at ~40% CAGR from FY21 to FY23. In 9M FY24, its revenues have already surpassed its previous year’s revenues majorly on the back of the acquisition in the aluminium business segment.
Let us now see if their profits share a similar story-
*Click on the image to enlarge.
Its EBITDA has grown at a similar rate of ~14% CAGR from FY19-FY23. The company has successfully maintained its margins above 20% in the last 5 years. Yet, it recently faced a squeeze on its margins decreasing from ~27% in FY21 to ~21% in FY23 due to factors like a rise in raw material prices, lower volumes, muted farm sector and price wars in the storage solution space.
*Click on the image to enlarge.
Craftsman has experienced significant growth in net profit, achieving a 25% CAGR from FY19 to FY23. During this period, profit margins improved from 5.57% to 7.85%, boosting net profits from ~Rs 100 crore to ~Rs 250 crore in FY23.
*Click on the image to enlarge.
Craftsman has successfully reduced its Debt/EBITDA ratio from FY19 to FY23, indicating improved financial health. The management has expressed its comfortability with the current level of 1.48.
Going forward, the company is open towards more mergers and acquisitions and sees debt financing as a cheaper option, instead of raising equity as it will dilute the EPS.
What’s Interesting?
Greenfield expansion:
The ongoing capex for the Kothavadi Plant and plans to set up a composite unit in Delhi-NCR as discussed above comes as a welcome move. With plans for the Kothavadi facility (housing all three segments), to become operational by FY26, these developments are set to fuel further growth.
Increase in aluminium usage:
Demand for aluminium castings is set for robust growth with increasing penetration of alloy wheels in 2Ws as well as PVs. As discussed above, India’s cars use less aluminium than the global norm, offering a big chance to use more. Also, electric vehicles, which use much more aluminium than ICE due to their lightweight and resistance to rust, are pushing up demand. Together, these factors place Craftsman in a prime position to benefit from the market’s growth.
DR Axion Acquisition:
The acquisition of DR Axion is yet another plus in the aluminium business. The acquisition is benefitting craftsman in terms of process synergies( high-pressure die castings vs gravity/low-pressure castings), strengthening its presence in PVs(100% PV play) and key customer additions (World #3 in PVs and #2 in EVS in the US).
Expanding its footprint in Off-Highway and Industrial Segment
Craftsman has identified the off-highway segment of its powertrain business as a key growth area for the future. Additionally, the company has made significant progress in broadening its reach into manufacturing precision components for windmills and heavy machinery, signaling a strategic expansion of its sectoral footprint.
Current Outlook and Valuation
Recently, Craftsman’s Powertrain and Engineering & Industrial segments have faced challenges, with the Powertrain segment grappling with a sluggish farm sector, reduced volumes, and increased costs, and the Engineering & Industrial segment experiencing difficulties in a weak storage solutions market.
Contrastingly, the aluminium business has seen significant success, driven by rising demand for aluminium die-casting and bolstered by the strategic acquisition of DR Axion.
As a result, the revenue in 9M FY24 surged by 51.94% YoY, primarily due to the performance of the aluminium business, including the impact of acquiring DR Axion.
Presently (1st April, 2024), Craftsman’s Enterprise Value (EV) stands at Rs 10,315 Cr (Market Cap: 9,191 Cr + Debt: 1,152 Cr – Cash: 27.3 Cr). Meanwhile, its FY23 EBITDA is Rs 676 Cr giving an EV/EBITDA of 15.3 times.
Considering this growth trajectory and based on management’s insights across different segments, the company’s EBITDA is expected to grow to ~Rs 1,200 Cr by FY25, which reduces its EV/EBITDA to ~9, presenting an attractive investment opportunity.
The real test, however, lies in whether Craftsman can fulfil these projections, a question that only time will answer.
Considering the current challenges in the Powertrain and Engineering & Industrial segments as temporary, expectations are set for a normalisation by FY26. This scenario positions Craftsman as an appealing prospect for investors.
Potential Risks
Cyclical Trends of End User Industries
Craftsman majorly caters to industries like auto, farm equipment and construction, which are highly cyclical. To mitigate these risks, they have already forayed into non-automobile businesses like aluminium castings for power transmission and storage solutions.
Faster adoption of EV in CVs/Tractors
While the expanding EV market presents growth opportunities for Craftsman, a rapid shift towards EV adoption in CVs and tractors could significantly challenge its powertrain segment.
Shrinking Margins in Near Term
Craftsman’s margins could be impacted in the near term due to headwinds like lower CV volumes, high fixed cost and price wars in the storage solutions space.
Volatile Raw Material Prices
Craftsman’s operations are closely tied to the cost of its primary raw material, aluminium, which has experienced significant price volatility recently, with an increase of ~50-60% in FY22 and FY23, followed by a decrease in FY24.
Summary
- Craftsman is well positioned for significant growth, driven by trends such as the expanding aluminium die-casting market, the rise of electric vehicles (EVs), increasing demand in the SUV sector, and overall economic expansion.
- Headwinds in the powertrain and the industrial and engineering segment is expected to be transitionary and shall normalise by FY26.
- Craftsman is ramping up its capacity with the construction of the Kothavadi plant and a composite facility in the NCR, aiming to meet the anticipated increase in demand.
- The management describes Craftsman’s debt situation as comfortable, with a Debt/EBITDA ratio of 1.4. No immediate plans for equity dilution.
- Valued attractively at an EV multiple of ~9 FY25E, depending craftsman fulfills its projections.
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Disclosure: I, Sidhanth Paul, Research Analyst, author, and the name subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific view(s) in this report.
Research Analyst or his/her relative or Capitalmind Research LLP does not have any financial interest in the subject company. Also, the Research Analyst, his relative, Capitalmind Research LLP, or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or Capitalmind Research LLP or its associate does not have any material conflict of interest at the time of publication of this research report.
Also, Craftsman Automation is not a part of our Capitalmind Premium Portfolios. This article is intended solely for informational purposes and should not be considered as an investment recommendation.
Capitalmind Research LLP is a SEBI Registered Research Analyst having registration no. INH000014003.
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