Verdict: Perfect Play on Capex Cycle Revival
Rs. 824 cr IPO
Craftsman Automation IPO, opening between Mon 15th Mar to Wed 17th Mar 2021, has a price band of Rs. 1,488-1,490 per share. 82% of the IPO comprises OFS by 2 PE and an individual investor and a small portion by promoter, while fresh issue component is Rs. 150 cr for part debt repayment. IPO represents 26% of post-issue capital and will list on 25th Mar.
High Value-Add Auto Component and Engineering Company
Company undertakes high value add business, reflected in ~58% gross margin over 20%-45% for other auto component makers. This partially protects its 3 business divisions from input price risk.
- Automotive Powertrain (51% of 9MFY21 revenue): #1 maker of cylinder blocks and heads for M&HCV and CE and #4 for cylinder blocks for tractors. M&HCV accounts for 50% of this division’s revenue and 10% is derived from passenger vehicles. Adoption of EV may not be as fatal as feared, since M&HCV may be the last adopter of electric against passenger vehicles.
- Automotive Aluminium Castings (21% of revenue): Capacity up 70% in past 3 years, highly scalable business, growing demand from need to reduce vehicle weight, especially in EVs.
- Industrial Engineering (28% of revenue): Capacity up 2x on volume basis. 2 units - high end precision products, sub-assembly and warehouse storage solutions, witnessing high demand post GST and e-commerce boom.
Q3FY21 PAT surpasses FY20 net profit
BS-VI emission norms suppressed FY20 revenue by 18% YoY to Rs. 1,492 cr, while PAT fell 58% YoY to Rs. 41 cr. However, thanks to operating and financial leverage kicking in (Rs. 200 cr annual depreciation and Rs. 100 cr interest burden), Q3FY21 PAT alone jumped to Rs. 44 cr on Rs. 485 cr revenue. As net margin strengthened to 9% in Q3FY21 (from 2.8%/5.4% in FY20/FY19), Q3 EPS stood at Rs. 22 over Rs.25 for 9MFY21, Rs. 22 for FY20 and Rs. 48 for FY19. Gross debt as at 31.12.20, of Rs. 890 cr is high, but is down by Rs. 130 cr in 9mFY21, due to strong cash profit generation and will further reduce to Rs. 760 cr post Rs. 120 cr repayment from IPO proceeds.
Rs. 800 cr Capex Complete
With massive Rs. 800 cr capex behind the company, these capacities are still under-utilised by up to 30%. Company would be the biggest beneficiary of revival in domestic capex cycle. India’s largest CV maker expects 30% growth in FY22 on a low base, partly aided by government’s infra push in the budget. Thus, outlook for Craftsman for FY22 remains very positive, despite margins peaking in Q3FY21. Expected FY22 topline and EPS stand at about Rs. 1,900 cr and Rs. 75 respectively.
At Rs. 1,490, company’s market cap will be Rs. 3,150 cr, with EV of Rs. 3,870 cr, leading to FY22E PE multiple of 20x, which is at a discount to peers like Endurance, Bharat Forge, Jamna and Minda Industries, quoting anywhere between 23-30x. Company’s strong fundamentals are reflected in (i) Peer out-performance during challenging phase of covid and BS-VI (ii) good quality management with a hands-on technocrat promoter (iii) PE investors Marina and IFC selling half their holding with 18-20% CAGR returns (iv) small equity of only Rs. 10.6 cr (face value Rs. 5) even post dilution.
Expected revival in capex cycle, high gross margin business, quality management and discount valuation to peer, make this IPO attractive. Hence, we recommend a subscribe to the IPO.
Grey Market Premium (GMP) of Craftsman Automation: Grey Market Premium of Craftsman Auto is an unofficial figure, against guidelines of SEBI and we are strongly against it. To know how it operates, read our article ‘grey market premium’.
Disclosure: No Interest.