Craftsman Automation Ltd: Business Analysis

Summary

Craftsman Automation is a diversified engineering company with integrated manufacturing operations. Its core competence in the powertrain segment includes its machining abilities, wherein it is the largest player in machining of cylinder blocks and cylinder heads for the M&HCV and construction equipment space in India. It is also one of the top players in the manufacturing of aluminium castings for the automotive industry. In order to diversify its revenue base, Craftsman has forayed into Industrial & Engineering segment where it develops storage solutions for clients besides offering aluminium products for power transmission industry.

Overview

Craftsman Automation is a diversified engineering company, engaged in three business segments, namely powertrain and other products for the automotive segment (Automotive- Powertrain and Others), aluminium products for the automotive segment (Automotive – Aluminium Products), and industrial and engineering products segment (Industrial and Engineering).

It manufactures several components and sub-assemblies on a supply and job-work basis according to client specifications in the automotive, industrial, and engineering segments. Main product offerings of the company include power train products, cylinder blocks, cylinder heads, cam shafts, and crank cases for commercial vehicles, sports utility vehicles, two-wheelers, farm equipment, and earthmoving and construction equipment.

Product Offerings

Automotive - Powertrain and Others: Products offered include engine parts such as cylinder blocks and cylinder heads, camshafts, transmission parts, gearbox housings, turbochargers, and bearing caps

Automotive - Aluminium Products: Offering includes crankcase and cylinder blocks for two-wheelers, engine and structural parts for passenger vehicles and gearbox housing for heavy commercial vehicles.

Industrial and Engineering: It has two sub-segments –

(i) the storage solutions sub-segment having a complete solution for conventional/automated storage; and 

(ii) the high-end precision products sub-segment manufacturing aluminium products and undertaking sub-assembly, material handlings equipment which includes metal cutting and non-metal applications such as washing and leak testing solutions and tool room, mould base and sheet metal.

Segment Wise Business Breakdown

·       Powertrain: Powertrain and Others segment is highly engineered and require advanced manufacturing processes to maximise end user performance. The company machines critical engine components such as cylinder blocks, cylinder heads, camshafts, transmission parts, gear box housing, turbo chargers and bearing caps under the automotive powertrain vertical. It has established deep relationships with key clients under this segment which has led to regular business from OEMs like Tata Motors, Daimler India, M&M, Tata Cummins, Simpson & Co., TAFE, Escorts, Ashok Leyland, Perkins, Mitsubishi Heavy Industries, John Deere etc. Craftsman is a single source supplier of machined components for a number of its clients. 

·       Automotive Aluminum Castings: Castings refers to shaping of molten metal by pouring it into molds. Craftsman is engaged in manufacturing various types of aluminum castings such as crank cases and cylinder blocks for two-wheelers, engine and structural parts for passenger vehicles and gear-box housings for heavy commercial vehicles. This segment has clients like TVS, Royal Enfield, M&M etc. Major share of revenue comes from two-wheeler manufacturers under this segment. As OEMs are exploring new ways to light weight the vehicles, non-ferrous metal castings have appeared as a suitable alternative to the ferrous castings. This has the potential to increase the wallet share Craftsman has of its customers.

·       Industrial & Engineering Segment: This segment offers solutions across –

Storage: The company caters to warehousing and industrial sectors with offerings such as stationary racks for warehouses, V-store, toll-form products and automated storage and retrieval systems. It has developed a vertical storage system with tray extractor arrangements operated by a console, marketed under the brand name “V-Store”. During FY21, the company developed a 1-ton V-Store for a customer in India and delivered more than 100 V-Stores to clients for various industries.

The company also offers aluminum products for power transmission, chain hoists, wire rope hoists, grab hoists etc. for material handling industry among other products.

Dominant Market Position Due to Diversified Capabilities

Craftsman is the largest player in the machining of cylinder blocks and cylinder heads in the intermediate, medium and heavy commercial vehicles segment as well as the construction equipment industry and is also among the top 3-4 players in machining of cylinder blocks for tractor segment in India. The dominant position has been achieved due to capabilities across design, process engineering and manufacturing including foundry, heat treatment, fabrication, machining and assembly facilities. Coupled with the in-house process and tool design, it also assists customers to optimize product and process design for better manufacturability and cost optimization.

Strategically Located Manufacturing Facilities

The company operates 12 strategically located manufacturing facilities across 7 cities in India with a total built up area of over 1.5 million sq. ft. These plants are located close to some of the key customers of the company to enable meeting their just-in-time delivery schedules, allow economies of scale and logistical advantages for the customers. The company’s plant configurations are flexible, allowing it to move the machinery from one location to another to interchange capacity, product mix, including the ability to shift production lines between various segments, based on customer and operational requirements from time to time.

Major Capex Undertaken Over the Past Few Years

Craftsman has spent 1500 crores between FY17-22 on modernizing its manufacturing facilities, infrastructure, machines, equipment and technology. These upgradations were undertaken to enhance the machining and manufacturing capacities and to meet the growing demand for Automotive Powertrain and Others and Automotive – Aluminium Products from customers and to expand into new segments, based on revenue visibility. The focus of the company has now turned towards increasing the capacity utilization and capex runrate of 100-120 crores per year in the near term will mainly be for maintenance and debottlenecking.

Long Standing Relationship with Customers

Craftsman supplies to a number of tier 1 OEMs such as Tata Motors, Tata Cummins M&M, Royal Enfield, Mitsubishi Heavy Industries, Siemens India, Escorts etc. It has been supplying to several of its customers for more than 10 years and has developed intricate relationships with them. Craftsman is the single source supplier in certain product categories for its customers. Over the last fours years, its top 10 customers have accounted for ~55% of the total revenues.

Peer Comparison

The casting and machining industry is competitive with several players competing for wallet share of the OEMs. Craftsman is one of the few players which has a presence across 2W/3W, construction equipment, tractors, PVs and CVs.

Raw Materials Procurement

Craftsman does not enter into long-term contracts with its suppliers. It primarily purchases aluminium ingots, as well as steel, castings and other raw materials at spot rates. Under powertrain machining, the customers provide the castings to the company, for which it only does the machining while for other segments, it procures raw material from market. For customers with long term arrangements, Craftsman is provided with forecasts of annual business volumes, which enable it to predict the volume of raw materials that it needs to procure.

Risk from EVs

The company faces risks from sustained EV adoption as products such as cylinder blocks and cylinder heads are only utilized in ICE based vehicles. Craftsman, however, has major presence in M&HCV segment which, unlike the 2W and 3W segments, has not faced much pressure from EVs as the unit economics isn’t competitive yet.

Financials and Valuation

Craftsman has grown sales/net profit at a CAGR of 15/16% for the last 5 years. The company has been delivering ~25% EBITDA margin for the last 5 years which reflects its strong business positioning. Being an auto anc, it has to deal with significantly larger customers and maintain variety of SKUs which is reflected in the working capital intensity of the business. Debt has been stable around 800cr for the last 2 years with Debt/Equity currently at 0.65x. With strong ~300cr of operating cashflows, it shouldn't have any problems in servicing its debt obligations. 

A snapshot of its financial performance (source - sharescart.com):

Craftsman is currently trading at 31x its TTM earnings which is quite a steep valuation to pay for an auto anc. Given the strong uptick across the auto sector especially on the commercial vehicles side, the stock has run up and can be looked at after some correction.