Craftsman Automation is one of the IPOs to hit D-Street next week. Are you confused as an investor if you should subscribe to it or no? This article will give you a complete overview of this auto-component maker.
Craftsman Automation is a company led by Srinivasan Ravi with over 34 years of Industry experience. The company is a diversified engineering company with vertically integrated manufacturing capabilities, engaged in 3 business segments, namely Automotive - Powertrain (47.52% of overall revenue), and Others, Automotive -Aluminium Products (17.27%), and Industrial and Engineering (35.21%).
The company has 12 manufacturing facilities across 7 cities of India. Its customer base includes Tata Motors, Daimler India, Royal Enfield, Siemens, Mahindra & Mahindra, Ashok Leyland, Tata Cummins, Escorts, VE Commercial Vehicles, among others.
Dates: March 15 to march 17, 2021
Price Band: Rs. 1,488 to Rs. 1,490 per share
Minimum Lot: 10 shares
Minimum Application Amount: Rs. 14,880 to Rs. 14,900
Total Issue Size: Up to Rs. 824Crs (Fresh issue Rs. 150Crs and Offer for sale of upto4,521,450 equity shares)
Objects of the Offer
The net proceeds are proposed to be used in accordance with repayment/pre-payment, in full or part, of certain borrowings availed of by the company amounting to Rs. 120 Crs and for general corporate purposes.
Business and Financial Overview
Craftsman Automationis the largest player involved in the machining of cylinder blocks and cylinder heads in the intermediate, medium and heavy commercial vehicles segment as well as in the construction equipment industry in India. They are among the top 3-4 component players with respect to machining of cylinder block for the tractor segment in India.They are present across the entire valuechain in the Automotive-Aluminium Products segment, providing diverse products and solutions.
Company’s strong in-house engineering and design capabilities help them offer comprehensive solutions and products to their long standing domestic and international customers in each of the segments in which they operate.
Their comprehensive solutions include design, process engineering and manufacturing including foundry, heat treatment, fabrication, machining and assembly facilities. The core competence in machining and assembly of industrial and engineering products has helped them to establish themselves as a significant player in the Automotive - Powertrain and Others segment.
The key products in this segment are highly engineered and include engine parts such as cylinder blocks and cylinder heads, camshafts, transmission parts, gear box housings, turbo chargers and bearing caps. The end users for their products include OEMs producing commercial vehicles, special utility vehicle, tractors and off-highway vehicles. Additionally, they also provide machining services within this segment.
Craftsman Automation has strong and well established relationships with several marquee domestic and global OEMs as well as component manufacturers such as Tata Motors and Tata Cummins whom they have been supplying their products and solutions for over 10 years. They have significant presence and customer relationships in each of their business segments and are considered as a strategic and preferred supplier by many of their OEM customers. They are also the single source supplier in certain product categories, for some of their key customers.
Company’s revenues have declined by 17.90% from Rs. 1,818.01 Crs in FY19 to Rs. 1,492.47 Crs in FY20 due to thechallenging business environment. However, they have managed to improve their EBITDA margin from 25.12% in FY19 to 27.24% in FY20 and even to 28.81% for period ended December 31, 2020.The improvement in margins was on account of strong process controls resulting in better operational efficiency which is unsustainable. Given continuous capex incurred over the last three years, the return ratios have tapered down with ROE/ROCE at 6.19%/13.80% in FY20.
Auto-components manufacturer operates in a highly competitive business environment. Growing competition in the domestic and/or international markets may compel them to operate under pricing pressures and require reducing the prices of products in order to retain or attract customers, which may have an adverse effect on revenues and margins.
Craftsman Automation derives 43% of its revenue from operations as on December 31, 2020 from Top 4 customers and 59% of its revenue from operations as on December 31, 2020 from Top 10 customers. This makes company highly vulnerable on loss of any one or more clients which can adversely impact financials of the business.
Company continues to have high levels of outstanding receivables (around 20.94% of revenue from operations as on December 31, 2020) which are subject to counterparty credit risk. Anydeterioration in such customers’ financial position and their ability to pay or inability to extendcredit in line with market practice may adversely impact the profitability.
In addition to the above, company have incurred substantial capital expenditure and working capital to the average of 16% of total expenditure and may require continuous flow of additional capital to meet those requirements, which could have an adverse effect on results of operations and financial condition.
Company’s debt to equity ratio as on December 31, 2020 stands at 1.15 times. Though company would use monies raised from IPO to reduce debt levels, management has clearly stated that debt profile of the company would still remain around debt to equity ratio at 1.0 times which is inferior to its peers with ratio of 0.3-0.8 times.
Considering the upper price band of Rs. 1490, company is available at price to earnings ratio of 73 times on FY20 earnings, which is believed to be highly expensive when compared to its resilient peers. Even the current industry PE stands at around 61 times. Considering the capital intensive nature of business along with stiff competition amongst auto ancillary players, we advise long term investors to choose other resilient large players operating in the auto ancillary space. However, given the current buoyancy and liquidity gush in the capital markets, risk-taking investors can see the sentiment on this IPO and subscribe accordingly for listing gains only.