Craftsman Automation IPO Review and Analysis in Detail
Basis Structure of the Craftsman Automation IPO
Craftsman Automation is set to bring its IPO to the Indian stock markets in March 2021. The issue will open for subscription on March 15 and will remain open till March 17.
This IPO is of a book-building nature, i.e., the shares will be offered in a price band. The other type of offering, a fixed price offering, is characterised by a unique price.
The Craftsman Automation IPO will comprise both a fresh issue segment and an offer for sale segment. The fresh issue segment contains those shares which are being freshly diluted by the company while the offer for sale segment includes those shares which are being sold by other shareholders.
The fresh issue segment will raise about Rs. 150 crores from the market. This amount will be credited directly to the company and it has been earmarked for the repayment of the company’s debt burden.
As for the offer for sale segment, this transaction is directly between the existing shareholders and the investors. The amount received from the sale of these shares is credited directly to the original shareholders and not to the company. Craftsman Automation will sell about 45.2 lakh equity shares in this segment.
The table below summarises the details about the Craftsman Automation IPO. Details like Craftsman Automation IPO date, Craftsman Automation IPO price band, Craftsman Automation IPO size, Craftsman Automation IPO subscription window, Craftsman Automation IPO listing date and more have been summarised.
After the IPO, the Craftsman Automation shares will be listed on both NSE and BSE.
About the Company
Craftsman Automation was established in the year 1986, in Coimbatore, Tamil Nadu.
Engaged primarily in the engineering segment, the company owns and operates 12 manufacturing facilities across seven different cities in India.
Apart from that, the company also owns a subsidiary in the Netherlands – Craftsman Europe B. V., and a joint venture – Carl Stahl Craftsman Enterprises, in India.
Products and Services
Craftsman Automation’s products and services can be segmented into three different verticals as follows.
1. Automotive – Powertrain and others
This segment includes engine parts like cylinder heads, cylinder blocks, transmission parts, turbocharges and more. These are used in the production of commercial vehicles, special utility vehicles, tractors, etc.
This segment is expected to grow on account of the shift to BS-VI norms, the government’s focus on infrastructure development and the commissioning of dedicated freight corridors.
2. Automotive – Aluminium products
Key products in this segment include cylinder blocks, crankcases and others for two-wheelers, as well as structural parts for passenger vehicles and heavy commercial vehicles.
The growth drivers in this segment are the increased demand for lighter materials to reduce the weight of vehicles and the lower cost of aluminium, as compared to other ferrous metals.
3. Industrial and Engineering
The main products in this segment include high-end precision products and storage solutions.
The graph below shows the revenue split-up between the different product segments.
Craftsman Automation works primarily on a B2B business model. They have introduced a B2C segment as well, but on account of the business, the B2B customers are more.
Examples of key customers include Mahindra and Mahindra, Tata Motors, Mitsubishi, Ashok Leyland, JCB India and more.
Promoter Shareholding Pattern
The table below summarises the shareholding pattern prior to the Craftsman Automation IPO.
After the Craftsman Automation IPO, the shareholding pattern is expected to change.
The table below summarises the main financial parameters for the Craftsman Automation IPO from 2016 to 2020. All the figures given below are in Rs. Crores.
As is clear from the table above, Craftsman Automation’s performance over the years has not been fairly consistent. As far as the total revenue is concerned, it increased steadily between 2016 and 2019. It was only in 2020 that the total revenue earned increased by 18.09%.
This is on account of the fall in demand, both domestic and export, across all three product verticals.
The total assets of Craftsman Automation increased steadily at a CAGR of 11.63% between 2016 and 2020.
We can see quite a fall in the net income of Craftsman Automation in 2020 as well as in 2018. In 2018, this fall is of 57.38% and in 2020, this decline comes up to 61.08%.
This is partly due to the fact that Craftsman incurred considerable capital expenditure during these years while setting up its production plants.
This inconsistency in the profit margin comes off as a cause for concern. Going forward, if the company is unable to maintain some trend in its revenue and income growth, it will present as a red flag to investors.
Another worrisome factor here is the long-term debt burden of the company. In the five-year period between 2016 and 2020, the long-term debt has grown at a CAGR of 20.6%.
Of course, a part of the IPO proceeds has been earmarked to service this debt. It is Craftsman Automation’s aim to reduce the debt-equity ratio to less than 1.
The Indian automobile sector is expected to grow at a CAGR of 2.64% between 2020 and 2024. This sector is largely dominated by two-wheelers, which make up about 80% of the total demand for automobiles.
The growth rate expected in this sector is quite low. This is on account of the changing trends, namely the introduction of electric vehicles, the rising prices of fuel and the concerns about increasing pollution.
Now, coming to the market for automobile components in India, it recorded a CAGR of 6% between 2015 and 2020. Domestic demand in this segment is expected to grow at a CAGR of about 7%, and export demand is expected to grow at a CAGR of about 4%.
The aluminium casting market in India was sized at about Rs. 16,900 crores in 2020. Out of this, 78% of the demand came from original equipment manufacturers, i.e., those companies who use aluminium casting products as intermediate goods.
This market segment is expected to grow at a CAGR of 8% and reach a size of Rs. 22,500 crores by 2025. Growth in this market is backed by the increase in domestic manufacture, the demand for lighter non-ferrous alternatives and the lower cost of aluminium.
Now, coming to the powertrain market in India, that is expected to grow at a CAGR of 14% and reach a size of Rs. 84,600 crores by 2024.
Powertrains, in this case, refer to a system that generates powers and then sends them to the wheels of the automobile. It comprises several components like an engine, cylinder block, cylinder head and more.
Powertrains are used in the production of automobiles and Craftsman Automation is one of the leading manufacturers in this sub-segment. The growth in this segment is backed by the increasing demand for automobiles, both in the domestic market and in the export market.
It should be noted that the market for automobile components is fragmented, but the majority of the market share is captured by the larger players. Here, Craftsman has an advantage on account of its existing relationships with large automobile manufacturers like Tata Motors, Mahindra and Mahindra and more.
The table below summarises the key comparison parameters of Craftsman Automation with its peers.
As we can see, Craftsman Automation is small in comparison to some of its peers, especially Bharat Forge, Endurance Technologies and Mahindra CIE.
The last fiscal year had a tremendous negative impact on all the companies in this segment, as is clearly visible from the negative revenue growth trends here.
It should be noted that Craftsman Automation boasts of the highest profit margin among its peers.
If Craftsman is able to expand efficiently and in keeping with its strategic plans, there is no reason why the company should not emerge as a leader in this segment.
One of the primary strengths of Craftsman Automation is the fact that it has long-term relationships with most of its clients. In 2020, over 69% of the operating revenue came from customers who have been with Craftsman for over 10 years.
Apart from that, the company’s promoter Srinivasan Ravi is a mechanical engineer with over 30 years of experience in his field. He has received several entrepreneurial awards such as “Entrepreneur of the Year” and “Outstanding Entrepreneur Achiever Award”.
Among weaknesses, one glaring fact is the company’s inconsistent financial performance over the past five years. Part of it is due to the impact of the COVID-19 crisis, part of it is on account of the declining growth rate in demand for automobiles.
Another weakness is the company’s debt burden. As of September 2020, Craftsman Automation had a total secured borrowings of Rs. 963.48 crores. Apart from that, the company has outstanding tax liabilities of Rs. 17.68 crores.
Craftsman Automation is also involved in certain legal proceedings, both civil and tax, which amount to Rs. 21.24 crores.
While Craftsman Automation has long-term relationships with its customers, there is the fact that the company does not have any such dependable relationships with its raw material providers. This puts the supply chain in danger of collapsing if the company fails to acquire raw materials and supplies.
Another weakness is the fact that Craftsman extends a lot of credit to its customers. In 2020, the company’s trade receivables amounted to Rs. 194.32 crores, which came up to about 13% of the operating revenue.
In order to calculate the valuation of the Craftsman Automation IPO, we will use the price to earnings ratio. If the company’s P/E ratio is lower than the industry average, it is considered to be undervalued. On the other hand, if the company’s P/E ratio is higher than the industry average, then the company is considered to be overvalued.
As per the basis structure, Craftsman Automation’s P/E ratio is 73. The average P/E ratio in the industry is 72.76.
This means the Craftsman Automation IPO is more or less correctly valued.