Craftsman Auto a safe bet for equity investors

Craftsman: Craftsman Automation Limited is tapping the capital markets with its fresh issue of Rs 150 crore and an offer for sale of 45,21,450 shares in a price band of Rs 1488-1490. The size of the combined issue is between Rs 822-823 crore. The issue opens on Monday the 15th of March and would close on Wednesday the 17th of March. The company is a diversified engineering company having three business verticals. The first is in the automotive space where it makes powertrain and other equipment. The second is automotive aluminium products and third is industrial and engineering which also includes the storage solutions business which is currently small but a fast-growing segment. The revenues for the company were about Rs 1,500 crore for the 12 months ended March 20 of which the split has been as about half from power train, a little over a third from aluminium products and the balance from industrial and engineering. The blended EBITDA was around 30 per cent. The performance in the nine months ended December 2020, were muted with the first quarter being virtually a write-off. The revenues were Rs 1,022 crore with blended EBITDA margins about 30 per cent. The company has performed better in the second and third quarter and the trajectory shows and implies that in the year 2021-2022 they should be back on track having encountered the two major crisis of the previous two years namely, the transition of BS IV to BS VI and the effect of covid-19.

There are concerns about the powertrain business, going forward, with the likelihood of the electric vehicle becoming a reality. While the eventuality of the electric vehicle is certain, the day when every new vehicle is an electric vehicle is a long way off and may not happen in the next decade at least. Further the light-weighting of vehicles and the use of aluminium is catching up fast with the higher end of the vehicles adapting to the change faster than the mid-segment.

Craftsman makes products for the CV segment, tractors, off-highway vehicles and special utility vehicles. One key factor to note is that they have been in capex mode over the last few years and have now completed the same and therefore the returns on capital employed and other financial parameters would start showing improvement going forward. Debt-equity ratio which over the last three years remained at a level of 1.41 to 1.44 has now come down to 1.15 at the end of the nine-month period and is expected to further go down post this issue as well.

Going forward, the company would seek to leverage existing client relationships to increase the wallet share and add new clients. Secondly, they would pursue the aluminium business in a far more aggressive manner.

Some of the competitors of Craftsman include companies like Bharat Forge, Endurance Technologies and Jamna auto. The company reported an EPS of Rs 20.41 for the year ended March 2020 which was Rs 48.39 for the previous year. The fall was on account of the shift from BS IV to BS VI. At the above EPS, the PE ratio is 72.91-73. The NAV of the company is Rs 355.93 as at 31st December 2020. Going by the headline number, the PE looks expensive, but considering the fact that migration from BS IV to BS VI is once in a lifetime, benefit of doubt should be given to Craftsman. The share is likely to have a decent performance post listing and looks attractive.

(The author is the founder of Kejriwal Research and Investment Services, an advisory firm)