Brokerage firm Motilal Oswal Financial Services has initiated coverage on the stock of Craftsman Automation with a 'buy' rating, pegging a target price of ₹3,925, implying a 19 percent potential upside.
Over FY23-25, Motilal Oswal expects a 13 percent CAGR in standalone revenues, 17 percent CAGR in standalone EBITDA and 37 percent CAGR in standalone PAT for Craftsman Automation.
The brokerage firm believes with a cyclical recovery in commercial vehicles (CVs) and two-wheelers (2Ws), along with new order wins in other segments, there will be linearity in revenues and earnings of the company over the next few years.
On the other hand, faster electrification in CVs and tractors, lower than anticipated growth in underlying industries, and macro headwinds in developed markets are the key risks for the company that Motilal Oswal highlighted.
The stock has clocked strong gains in the last one year. It hit a 52-week high of ₹3,709.95 on BSE on December 30, 2022.
Craftsman Automation is a Coimbatore-based diversified engineering company with vertically integrated manufacturing capabilities.
It is engaged in three business segments: (a) Automotive Powertrain (52 percent of revenues), (b) Aluminum Die Casting (25 percent), and (c) Industrial and Engineering (23 percent).
Investment rationale of Motilal Oswal
Engineering DNA crafts new opportunities and consistent growth: Motilal Oswal pointed out that over the last two decades, the company has been nurturing its businesses to scale organically, attaining market leadership in the powertrain segment and in storage solutions.
The brokerage firm underscored that Craftsman Automation has a balanced exposure between autos (nearly 62 percent in FY23E) and non-autos (almost 38 percent in FY23E).
The company has been able to increase its wallet share with key customers, as reflected in its increasing share of revenues from top-10 clients (from 53 percent in FY18 to 58 percent in FY22). This is despite the fact that new customers as a share of the revenue from long-standing relationships (more than 10 years) has declined to nearly 59 percent in FY22 from nearly 78 percent in FY18, Motilal said.
The auto powertrain is beyond cyclical recovery: Motilal pointed out that Craftsman Automation is a leading player involved in the machining of cylinder blocks and cylinder heads for medium and heavy commercial vehicles (number one player) and tractors (among top-5). The company also serves off-highway original equipment manufacturers (OEMs).
Motilal believes in the CV business (nearly 56 percent of segmental revenues), apart from growth in the domestic market, Craftsman Automation would benefit from the increased sourcing from India, which is expected to continue (like the recent order win from global CV OEM) and is working with several tier-1 companies.
The complexity involved in the machining of engine parts such as cylinder blocks and cylinder heads results in very high-value add (gross margins) of 65-70 percent and EBITDA margins of over 30 percent. This coupled with the benefit of a captive source of special purpose machines and co-investing by its customers drives very superior RoCEs (returns on capital employed) of over 50 percent for this segment, said Motilal Oswal.
Improving utilisations of aluminium die casting to aid margin: Motilal Oswal believes aluminium usage will increase due to the structural trend of light weighting due to (i) stringent emission norms, and (ii) increasing EV mix.
Motilal pointed out that while India is lagging behind developed markets, faster adoption of emission norms and technology will drive increased usage of aluminium in the Indian auto industry.
Improving utilisation, mix and fall in aluminium prices will drive recovery in EBITDA margins to 15-15.5 percent.
A play on capex and consumption: Craftsman's industrial and engineering segment is a play on Capex recovery (high-end sub-assembly and contract manufacturing) and rising consumption (storage solutions), Motilal Oswal said.
Apart from Capex recovery, the high-end sub-assembly business is eyeing emerging opportunities in localisation and import substitution opportunities, increasing machining opportunities in renewable and capital goods, and reorganising the supply chain globally and consolidation in India, for which it has already bagged new orders, Motilal said.
"Despite being a late entrant in the storage solution business, the company is now among the top three players in conventional storage and the market leader in the nascent automated storage. In addition to strengthening its presence in the e-commerce segment, it has secured business from other sectors such as pharma, auto, and cold storage, thereby helping to expand its addressable market," Motilal Oswal said.
According to a MintGenie poll, six analysts on an average have a ‘strong buy’ call on the stock.
Disclaimer: The above article is based on a report by brokerage firm Motilal Oswal Financial Services. The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.
