Craftsman Automation opens its initial public offering (IPO) for bidding on March 15, within a price band of Rs 1,488-1,490 per share. The issue closes on March 17.
It comprises a fresh issue of Rs 150 crore and an offer for sale of 45,21,450 equity shares by the promoter and investors. The company is looking to raise Rs 823.69 crore through the IPO, of which, it has already garnered Rs 247 crore from anchor investors on March 12.
Most brokerages are in favour of subscribing the issue, citing a positive demand outlook on the commercial vehicle segment, healthy financial performance, robust growth potential in automotive aluminum as well as storage divisions. Some have raised concerns about valuations and the company's heavy dependence on the automobile segment.
"We recommend subscribe for long the term on Craftsman Automation's IPO given i) positive demand outlook on MHCV/tractor industry (that contributes over 70 percent of revenue pie), ii) healthy financial performance in tough times, iii) robust growth potential in auto aluminum as well as storage divisions and iv) expansion in ROCE led by lean capex and debt reduction plans," said Prabhudas Lilladher.
Despite around 18 percent revenue decline in FY20, the company posted margins of around 27 percent (highest across auto ancillary space), it said. While the large part of the capex cycle was now behind, ROCE (currently at around 11 percent) was expected to improve coupled with anticipated debt reduction (target D/E of around 1x by FY21-end versus 1.15x currently), it added.
"Due to revival of business cycle as it has high dependence on MHCV/tractors, we believe mid-term growth drivers will remain intact," said the brokerage. A limited offering in two and wheelers and passenger vehicles, D/E ratio of around 1.15x (one of the highest across auto ancillary space) and the company's inability to de-risk its automotive powertrain division were deterrents in the long run, it added.
Against these headwinds, Prabhudas Lilladher feels the anticipated post-IPO valuation (27-30x of FY23 EPS estimates) in the upper band of Rs 1,490 issue price looks iniquitous. It is not cheap compared to other ancillary companies such as Endurance Technologies (around 21x), Motherson Sumi Systems (around 22x) and Bharat Forge (around 26x). "While listing gains in our view looks obscure, we recommend subscribe for the long term," said the brokerage.
Founded in 1986, Craftsman Automation is a diversified engineering company that manufactures key components for automobile and industrial sectors. It owns and operates 12 plants pan India, strategically located close to its customers. The company is promoted by first-generation entrepreneur Srinivasan Ravi, a technocrat.
It is engaged in three business segments—automotive- powertrain and others, automotive–aluminium products and industrial and engineering. It is one of the leading players in the machining of cylinder blocks for the tractor segment.
The company counts all major auto original equipment manufacturers and key players in the industrial segment as its key clients. In the automotive segment, its clients include Daimler India, Tata Motors, Ashok Leyland, M&M, TAFE, Escorts, John Deere, JCB India, TVS Motors and Royal Enfield. Siemens and Mitsubishi Heavy Industries are among its clients in the industrial & engineering segments.
Its top 10 customers constituted 53 percent and 59 percent of its sales in FY20 and in nine months ended December 2020, respectively. It also has high client stickiness with over 50 percent of sales coming from clients that were associated with the company for more than of equal to 10 years, said ICICI Direct.
LKP Securities also recommended subscribing the issue despite rich FY21 valuations (based on 9M FY21 annualised earnings), citing the company's visibility of topline growth, competitive edge, superior profitability compared to peers, prudent cost management, return ratios, a sound R&D base and its technological progress.
Though the company saw a fall in topline in FY20 due to BS-6 implementation, it reported solid numbers in the 9M of FY21 despite COVID-19 pandemic. In FY19, the company posted 20.3 percent topline growth and is poised to post a robust growth again in FY21, said LKP. It enjoys highest operating margins of 27-28 percent among its peers on account of its strong cost control and diversified business.
Canara Bank Securities said the company looks expensive in comparison to its peers in terms of P/E of 48.44x (annualized) and P/B of 4.19x for 9MFY21. But considering the company's financial performance and de-risked business model, the brokerage recommended subscribe for the long term.
Majority of its business comes from commercial vehicle and tractor segments. The commercial vehicle space has been showing improvement in the last few months. Most experts expect a strong performance in the commercial vehicle segment in the coming quarters.
"Craftsman Automation is a play on revival in automotive industry, especially medium & heavy commercial vehicle (M&HCV) space. With a lumpy capex cycle behind it and the focus on debt reduction, it is well poised to clock healthy returns ratios in FY22-23. At IPO price, it is offered at reasonable forward valuations. We recommend subscribe," ICICI Direct said.
Marwadi Financial Services also favoured subscribing the IPO based on favourable valuation and good prospects due to the shift from BS-IV to BS-VI, the scrappage policy and introduction of electric vehicles.
Craftsman Automation has said it will use net funds from fresh issue for repayment of certain borrowings to the extent of Rs 120 crore.
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