From the dominance of geared scooters to the rise of automatic scooters, the industry has been evolving. Now, with the emergence of electric vehicles (EVs), there’s a notable shift toward sustainable and eco-friendly transportation.

This dynamic landscape presents both, challenges and opportunities for auto ancillary companies.

While some companies may face massive risks due to their limited ability to adapt, others like Craftsman Automation have demonstrated high-skill and prowess to transform themselves from traditional auto component manufacturers to automotive technology solutions providers.

Craftsman Automation: Focusing on Innovation and Diversification

Craftsman Automation is a leading auto ancillary and engineering company in India. It manufactures precision components for the automotive, industrial, and engineering sectors.

The company operates in three primary business segments, two of which cater to the automobile segment.

The largest (51% revenue for financial year 2023) is the powertrain segment that manufactures precision components for powertrains, such as gears, shafts, and bearings.

This is followed by the aluminium product segment (25% of financial year 2023 revenues), which manufactures aluminium components for automotive applications, such as engine blocks, cylinder heads, and transmission housings.

The third is the industrial and engineering segment (24% of financial year 2023 revenues), which manufactures a wide range of precision components for industrial and engineering applications, such as gearboxes, storage solutions, and special-purpose machines.

The well-diversified business has allowed the company to support growth and sustain profit margins.

Financials and Valuations

Over the years, the business has expanded to become a major supplier to global customers.

This explains the phenomenal growth in sales and net profit over the last few years. Between 2019-2023, the sales and net profit have grown at a CAGR of 16% and 49.4%, respectively.

 

The return on equity and return on capital employed have been strong, with a 5-year average of 12.8% and 9.3%, respectively.

This massive growth comes on the back of developing long-term relationships with top passenger vehicle OEMs across the globe.

Craftsman Automation enjoys a wide market presence with a diverse and extensive customer base spanning the globe, including major players in the automotive and industrial sectors.

This global outreach not only provides stability but also signifies the company’s competitiveness on an international scale.

Moreover, the relentless focus on cost management, fiscal prudence and value engineering has further added impetus to the business.

However, the growth in the business has been funded with a mix of debt and internal accruals. The debt to equity in financial year 2023 stood at 0.7x with the interest coverage ratio of 4x.

The growth in the business is well reflected in the company’s stock price.

In the past one year, the stock has rewarded shareholders well, up 46%, from ₹3,328 in December 2022 to ₹4,883 in November 2023.

Craftsman Automation Share Price in 2023

The stock is currently trading at a PE of 34.5x, a slight premium to its 2-year median PE of 32.3x.

Expanding to Meet the Growing Demand

To meet the growing demand for its products, Craftsman Automation is setting up a greenfield project which aims to consolidate all three segments of our business, with a primary focus on bolstering the powertrain and aluminum segment.

The anticipated total capital outlay will be close to a whopping ₹4.8 bn for financial year 2024, including capacity enhancements at the existing plants.

Recently, the auto ancillary company bought a 76% stake in DR Axion, a South Korean company, to expand its product portfolio in the aluminium segment.

DR Axion manufactures aluminium cylinder heads, a critical auto component used in passenger vehicles and the outer shell of internal combustion engines.

This will allow DR Axion to expand its global presence and India is a key market for the company. It will help Craftsman Automation gain access to DR Axion’s technology and expertise in aluminum manufacturing.

The Way Forward

Craftsman Automation is well-poised to grow briskly from the burgeoning Indian auto component industry.

The auto-component industry in India is to grow 4x to reach US$ 200 bn by 2026, with passenger vehicle components accounting for 45% of the market.

Apart from this, the structural trend of light-weighting, led by stringent emission norms and an increasing electric vehicle (EV) mix, is likely to spur the usage of aluminium in the ICE and EV segments.

Despite India’s status as a major auto producer, its utilisation of aluminium in the automotive sector lags behind global standards.

Developed markets typically use between 140-210 kilograms (kg) of aluminium per passenger vehicle and 120-130 kg per commercial vehicle.

However, India’s average aluminium usage in these categories is only 50-60 kg. This bodes well for the company’s growing aluminium segment.

The industrial segment is experiencing favourable headwinds owing to the China-plus-one strategy gaining momentum and the significant increase in the cost of operations in developed economies.

Additionally, the power transmission segment is expected to grow, driven by the increasing share of GIS switchgear.

With a promising outlook for the Indian automotive industry and a strategic focus on innovation, Craftsman Automation is a stock to watch out for in the coming years.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com