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Craftsman Automation Ltd

| Q3 FY26 Earnings Conference Call

BULLISH SENTIMENT

Report Source

⬤2nd Feb 26

Summary : Craftsman Automation is strategically expanding capacity and rationalizing businesses to capitalize on market growth and technological shifts, despite short-term margin pressures and high debt.

Management Perspective positive : Management expresses confidence in margin improvement, sustainable growth, and strategic positioning across segments. Phrases like 'improving from Q4 onwards,' 'outlook seems a lot more positive,' and 'heavy weight lifting of Sunbeam is over' indicate optimism.

Concall Report Analysis & Insights

Business Overview

  1. Aluminium segment experienced Q3 operational losses from a new plant startup, with production now ramping up.
  2. Alloy wheel capacity utilization is below 50% due to diverse parts, BIS approval, and customer validation.
  3. Powertrain segment sees positive outlook in commercial vehicle and tractor segments, benefiting from higher engine capacities.
  4. Industrial & Engineering segment shows sustainable EBIT margin growth, holding strong market positions.
  5. Sunbeam's restructuring is complete, with non-core aluminium piston assets sold to simplify the business model.

Future Growth Prospects

  1. Aluminium margins are expected to improve continuously from Q4 onwards.
  2. Alloy wheel utilization is projected to reach 60-70% by Q3 next year, driving margin improvement.
  3. Sunbeam's margins are anticipated to improve from Q2 next year, with a higher exit run rate.
  4. Industrial & Engineering segment will see margin expansion due to operating leverage and increasing demand.
  5. Increased aluminium content in vehicles is expected due to EV shift and light-weighting trends.

Management Insights

  1. Aluminium business margins are expected to moderate at a higher level, despite optical reductions from commodity prices.
  2. The company has invested in automation over three years to enhance manpower productivity.
  3. Sunbeam's business restructuring is largely complete, with a focus on improving margins.
  4. Industrial & Engineering segment's strong EBIT margin is sustainable due to operating leverage and market consolidation.
  5. The company is rationalizing Sunbeam's business by exiting non-core customers to improve efficiency.

Signs of Skepticism

  1. Management avoids specific timelines for debt reduction, linking it to future growth rates.
  2. Margin guidance is complex due to commodity price volatility, making direct comparisons difficult.
  3. Acknowledges that current alloy wheel margins are not yet in the double-digit range.
  4. The company is not rushing to sell land at a lower price to reduce debt immediately.

Risk Factors

  1. Q3 aluminium margin dip was caused by new plant startup losses and commodity price volatility.
  2. Alloy wheel margins are not yet double-digit due to steep ramp-up and new plant integration.
  3. New plant pre-operative costs will temporarily impact margins for DR Axion.
  4. Debt-to-EBITDA ratio is 2.55, with a target of 1-1.5, indicating current leverage.
  5. Significant capital expenditure is required for ongoing capacity expansion.

Good To Know

  1. The company is preparing for the new Labour Code, which will necessitate more automation.
  2. Craftsman participated in the EUROGUSS exhibition, showcasing aluminium products.
  3. Consolidated net debt-to-EBITDA is 2.55 (annualized 9-month figure).
  4. Return on capital employed (pre-tax) is approximately 16%, with ROE around 12% annualized.
  5. The Kothavadi project addresses a unique, once-in-a-lifetime OEM product requirement.

Key Drivers

  1. New plant ramp-ups will improve margins.
  2. Increased demand for light-weighting in vehicles.
  3. Consolidation benefits top-tier suppliers.
  4. Strategic focus on high-value customers.

Key Analyst Discussions

Competitive Environment

  1. Consolidation in Industrial & Engineering means larger projects go to top 3 suppliers.
  2. European and American aluminium suppliers face distress, leading to outsourcing opportunities.
  3. Craftsman is not directly competing with European/American suppliers on current products.
  4. Supplier base consolidation is driven by technological changes and new emission norms.

Market Trends & Consumer Behavior

  1. Commercial vehicle and tractor segments show a positive market outlook.
  2. Shift towards higher engine capacities and horsepower in CVs is beneficial.
  3. OEMs are increasingly outsourcing machining activities, especially for 2-wheelers.
  4. Growing demand for Industrial & Engineering products is observed in India.
  5. EV shift and CAFE norms are driving demand for lighter aluminium components.

Financial Highlights

  1. Aluminium standalone margins dipped sequentially due to new plant startup losses.
  2. Alloy wheel margins are currently below high single-digit, not yet double-digit.
  3. Industrial & Engineering segment's EBIT margin jump is deemed sustainable.
  4. Debt-to-EBITDA stands at 2.55, with a medium-term target of 1-1.5.
  5. Significant capex is being incurred, adding INR1,000 crores to the top line this year.

Product Composition

  1. Powertrain segment benefits from both volume growth and increased average horsepower.
  2. Aluminium products are priced component-to-component, not on a per-tonnage basis.
  3. DR Axion's EBITDA margins are currently around 20%.
  4. Consolidated revenue breakdown: PV 34%, 2-wheeler 24%, CV 12%, storage 9%, tractor 4%.

Strategic Considerations

  1. Fronberg acquisition addresses the energy demand spike from data centers and AI.
  2. Kothavadi project focuses on a unique product for OEMs creating new capacities.
  3. Sunbeam's business rationalization involves exiting 10 customers contributing 5% of revenue.
  4. The company focuses on 4-5 core customer groups for 95-97% of its revenue.
  5. Long-term investment in Powertrain for 5-10 years, betting on ICE technology.