AXIS Capital initiates coverage on Craftsman Automation with Buy Rating

True to its name; initiate coverage with BUY

• Craftsman is a diversified engineering company and a process expert with strong machining and casting capabilities catering to auto and industrial OEMs.
• Play on auto cycle recovery and manufacturing resurgence in India; strong track record of outperforming auto industry growth to sustain over the medium term.
• Expect 24%/43% revenue/PAT CAGR over FY21-25E; strong FCF generation and improving RoCEs (19-20% by FY24E). Initiate with BUY and TP of Rs 3,250

Process expert with strong machining and casting capabilities

Craftsman Automation (CAL) is a diversified engineering company - a process expert with strong machining and casting capabilities - catering to both automotive (73% of overall revenue with presence across segments) and industrial OEMs. The company has a highly skilled and experienced in-house R&D team led by the promoter Mr. Srinivasan Ravi. Craftsman adds significant value to its customers led by its key strengths of (1) flexible design of manufacturing lines, (2) vertical integration and (3) cost-efficient execution of complex and critical machining jobs.

Strong play on auto cycle recovery and manufacturing resurgence in India

We see CAL as a play on (1) cyclical recovery in auto industry especially in MHCVs (28% industry volume CAGR over FY21-25E) and (2) potential manufacturing resurgence in India - in particular, it will be a direct beneficiary of greater focus of OEMs to make India an export hub (especially powertrain/transmission components) and import substitution/localization by companies looking to reduce supply chain risks and over-dependence on China. This has already started to reflect in new order wins and the trend will likely accelerate over the next 3 years. CAL has a strong track record of outperforming auto industry growth over the last five years; we expect this to continue over the next 4 years as well (1,000 bps annual outperformance) led by (1) addition of new customers, (2) scale up of presence in auto aluminium segment and (2) market share gains with existing customers.

Initiate coverage with BUY rating and TP of Rs 3,250

We expect the company to deliver 24%/43% revenue/PAT CAGR over FY21-25E. With material headroom for utilization levels to improve, capex intensity will be low leading to de-leveraging of the balance sheet (net debt free by FY25E) and improvement in return ratios (post-tax RoCE) to 19-20% by FY24E. We initiate coverage with a BUY rating and target price of Rs 3,250, which is based on 10x Dec22 EV/EBITDA - stock can be a potential doubler from current levels over the next 3 years. Key risks are (1) slower-than-expected recovery in auto industry, (2) delay in revival of capex cycle and (3) elevated cost pressures.

Shares of Craftsman Automation Limited was last trading in BSE at Rs. 1975.55 as compared to the previous close of Rs. 1981.45. The total number of shares traded during the day was 410 in over 146 trades.

The stock hit an intraday high of Rs. 2031.95 and intraday low of 1961.90. The net turnover during the day was Rs. 823020.00.

Source : Equity Bulls

Keywords

CraftsmanAutomation INE00LO01017 AXISCapital InitiatingCoverage Buy