Craftsman Automation IPO Analysis!

Craftsman Automation is set to raise up to Rs 824 crore via IPO which opened on 15th March, Monday. Here are the details:

About Craftsman Automation

• Craftsman Automation is a diversified engineering company with vertically integrated manufacturing capabilities. It is a leading player in the machining of cylinder blocks for the tractor segment. 
• Incorporated in 1986, the business operates 3 key segments namely Automotive-Powertrain and others, Automotive-Aluminium Products, and Industrial and Engineering
• The company also has wholly-owned subsidiaries Craftsman Europe B.V, Carl Stahl Craftsman Enterprises and MC Craftsman Machinery Pvt Ltd 
• The company owns 12 manufacturing facilities across 7 cities of India. Its customer base include Tata Motors, Daimler India, Tata Cummins, Mahindra & Mahindra, Royal Enfield, Siemens, Escorts, Ashok Leyland, VE Commercial Vehicles, TAFE Motors & Tractors, among others. 

Competition

• Craftsman Automation faces competition both domestically and internationally. Listed peers include Bharat Forge, Jamna Auto Industries, Ramkrishna Forgings, Endurance Tech, among others. 
• Craftsman Automation has reported better EBITDA margins in FY20, as compared to its peers. However, Endurance Tech, Mahindra CIE Auto and Sundaram Fasteners has better return ratio (RoCE).

Financials

• The company has seen a ~18% YoY decline in revenue in FY20. However, the  EBITDA margin has been robust at about ~27% in FY20 and ~29% in 9MFY21.
• A large part of the capex cycle is now behind for the company. The focus is now on debt reduction. ROCE (which is currently at ~11%) is expected to increase going forward.
• According to a CRISIL Report, Craftsman had the highest EBITDA margin for Fiscal 2019 and Fiscal 2020 across their peer group.
• A key positive is that MHCVs (Medium and Heavy Commercial Vehicle) and tractor contributes >70% of the total revenue. This segment has seen record sales growth in FY21, and the demand outlook remains healthy going forward.
• The company has a higher Debt/ Equity ratio of 1.15x as compared to its peers. The company intends to reduce D/E level to ~1x which would still be higher as compared to key peers like Bharat Forge (~0.6x) and Endurance Tech (Net cash).
• Craftsman has a diversified client base with their top 10 customers accounting for 59.15% of their revenue from operations in FY20.
• Covid-19 had impacted the company’s business to a significant extent, as operations remained shut.

About the issue

Issue open: 15th March- 17th March 2021

Price band: Rs 1,488- Rs 1,490 per share

Issue Size: Rs 824 crore (Gross)

Issue Size: The Rs 824-crore issue comprises a fresh issue of shares worth Rs 150 crore, and an offer-for-sale of up to 45 lakh equity shares by promoters and existing investors. The proceeds will be used to repay certain borrowing and for general corporate purposes.

Reservation for QIB: 50% , Retail - 35%, Non institutional Investors -15%. 

Bid lot: 10 shares, and in multiples of 10 shares

INDmoney Recommendation

At the higher end of the price band, Craftsman Automation is aggressively priced at a P/E ratio of 73 times FY20 EPS (on a pre-issue basis). However, the asking price comes down to ~46.7 times annualized 9MFY21 earnings, due to higher earnings in the Apr-Dec 20 period.

While the company has better EBITDA margins compared to peers, its return ratios and debt profile is not. On the positive side, a bulk of the capex is done, and growth prospects look good.

Given rich valuations, listing gains look unlikely. Considering robust topline growth outlook, healthy margins, marquee global customers, investors could consider it as a long-term bet.