| Craftsman Automation Limited | ||||||
| Rating outlook revised to 'Positive'; Ratings Reaffirmed | ||||||
| Rating Action | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has revised its outlook on the long-term bank facilities of Craftsman Automation Ltd (CAL) to ‘Positive’ from ‘Stable’, while reaffirming the rating at ‘CRISIL A+’; further, the short-term rating has been reaffirmed at ‘CRISIL A1’.
On December 29, 2022, CAL announced that it has signed definitive agreements to acquire 76% stake in DR Axiom India Pvt Ltd (DRAIPL) for a consideration of Rs 375 crore. The acquisition is expected to be completed by the fourth quarter of fiscal 2023 subject to fulfilment of conditions precedent agreed in the definitive agreement. DRAIPL is the major supplier of cylinder blocks and heads for leading passenger vehicle (PV) original equipment manufacturers (OEMs) such as Hyundai Motor India Ltd (rated ‘CRISIL AAA/Stable/CRISIL A1+) and Kia Motors India Pvt Ltd, as well as Mahindra Heavy Engines Ltd.
The acquisition is in line with CAL’s strategy to increase the share of revenue from the PV segment, and gradually lower revenue dependence on commercial vehicle (CV) segment, thereby diversifying the overall revenue stream. CAL and DRAIPL both operate in the automotive (auto) components space and have strengths in complementary areas. The acquisition will help both entities leverage their strengths and build better synergies. The acquisition is expected to enable CAL to enhance its client base, by including Korean auto OEMs, and also explore additional export opportunities. CRISIL Ratings will continue to monitor the progress on the transaction, which is subject to customary closing conditions, and synergy benefits arising out of the same.
The revision in outlook reflects the sustained strong improvement in CAL’s business performance in fiscal 2023, which is expected to continue in the next fiscal as well, due to healthy demand for components from the CV and passenger vehicle OEMs, and also supported by the proposed acquisition of DRAIPL. Besides, demand from export customers has also remained steady.
CAL’s revenue rose 45% on-year in the first half of fiscal 2023, supported by healthy demand from CVs aided by uptick in economic growth, pick-up in private capital expenditure (capex) cycle, higher freight demand, revival in construction, infrastructure and mining activities. The company is expected to clock revenues of ~Rs.2900-3000 crores in fiscal 2023, almost doubling from ~Rs.1500 crores in fiscal 2021. Healthy double digit growth is expected to continue in fiscal 2024 as well. Operating profitability remained healthy, though it dipped marginally to 23.05% in the first half of fiscal 2023, from 24.85% during the similar period a year ago, owing to aluminium inventory related losses. Post-acquisition, operating margin is expected to further moderate with integration of DRAIPL, which has lower profitability, but still sustain at ~20% over the medium term.
The ratings also factor in the healthy financial risk profile of CAL, supported by improvement in the debt protection metrics in first half of fiscal 2023 due to healthy cash accrual (annualized over Rs.400 crore). Despite increase in debt due to proposed acquisition, debt protection metrics are to remain comfortable with gearing less than 0.9 times as on March 31, 2023 and interest coverage ratio above 6 times for fiscal 2023. The Debt to Earnings before interest, depreciation, tax and amortization (EBITDA) ratio though is expected to rise to ~1.8-2 times in fiscal 2023, from 1.4 times in fiscal 2022, as full benefit of EBITDA of DRAIPL will not be available in the current fiscal. Continued steady business performance, resulting in healthy cash accrual, moderate capex spend and prudent working capital management, should enable debt protection metrics to improve to comfortable levels over the medium term; for instance the debt to EBIDTA ratio is expected at ~1.5 times by fiscal 2024.
The ratings continue to reflect the strong position of CAL in the engineering contract-manufacturing sector, established customer relationships, healthy operating margin and improving financial risk profile. These strengths are partially offset by sizeable capex, large working capital requirement, and vulnerability to slowdown in the automotive sector. |
Analytical Approach CRISIL Ratings has consolidated the business and financial risk profiles of CAL and its wholly-owned subsidiary, Craftsman Europe B V Netherlands, due to operational and financial linkages between them. DRAIPL will also be consolidated on acquisition.
Please refer Annexure - List of a Consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths:
CAL is a leading player in the engineering contract-manufacturing sector, with a diversified clientele across industries. It has three business segments: auto-power train (~50% of revenues), aluminium products (~25% of revenues), and industrial and engineering (balance revenues). The auto-power train segment caters to CVs, farm equipment, construction and mining equipment and passenger car segments of the auto industry. The aluminium products division supplies aluminium components to two-and-four-wheeler and power transmission manufacturers. The industrial and engineering segment offers goods and services such as gears, material handling equipment, storage products, special purpose machines and other general engineering products to various industries.
The addition of capacity, products and customers, and healthy customer relationships led to revenue growth of 45% in the first half of fiscal 2023. Besides addition of new PV OEM customers post acquisition of DRAIPL, steady offtake by key customers and increase in business share with leading medium and heavy CV players should aid the maintenance of CAL’s market position over the medium term. The company is expected to clock revenues of ~Rs.2900-3000 crores in fiscal 2023, almost doubling from ~Rs.1500 crores in fiscal 2021. Healthy double digit growth is expected to continue in fiscal 2024 as well.
Focus on niche products and better technical capabilities, supported by cost-optimisation measures, have supported operating efficiency. Higher margin from machining operations led to a better-than-industry operating margin of over 20% on sustained basis since fiscal 2020. In the first half of fiscal 2023, however, the share of the higher-margin machining business reduced, which along with inventory losses due to reduction in aluminium prices resulted in the operating margin moderating to 23.05% in the first half of fiscal 2023 from 24.85% during the similar period of the previous fiscal.
CAL is continuously undertaking cost-control initiatives through automation, employee base optimisation and wastage reduction; this coupled with improved capacity utilisation post acquisition of DRAIPL should aid in sustaining the operating margin at above 20% over the medium term.
Debt metrics are expected to moderate temporarily in fiscal 2023, but still remain comfortable, due to part debt funding of the proposed acquisition and consolidation of debt from books of DRAIPL. Annual cash accrual is estimated at over Rs.400 crores, adequate to meet repayment obligation and progressive repayment of term loans of Rs 353 crore in fiscal 2023, and Rs 100 crore in fiscal 2024. Capex going forward is expected to range between Rs.200-300 crore annually, and will be partly debt funded. The management has planned to gradually lower debt levels through progressive repayment of term loans and prudent working capital management. With continued healthy cash generation, moderate annual capex spend, and controlled working capital management, debt metrics are expected to witness a gradual improvement in fiscal 2024; for instance the ratio of debt to EBITDA is expected at ~1.5-1.6 times.
Weakness:
Operations are intrinsically capex and working capital intensive. CAL incurred sizeable capex of Rs ~1,500 crore during fiscals 2017-2022, and in some cases, has set up capex ahead of demand. In case of higher uptick in end-market demand.
The company has to maintain large inventory, given its customer and product portfolios. Also, with a large clientele and strong export presence, receivables are sizeable and could get stretched during a slowdown; however, receivables marginally reduced in fiscal 2022. Given the nature of operations, creditors are also high. Yet, the company reduced payables to 137 days as on March 31, 2022 (162 days a year ago) to gain discount on cash purchases, resulting in marginal improvement in the total outside liabilities to tangible networth (TOL/TNW) ratio. Given multiple strategic business units and clients, operations will continue to be working capital intensive, and hence its prudent management remains critical.
The company caters to the auto, farm equipment, construction and earthmoving equipment, and locomotive industries, demand from which is typically linked to the economic activity. It is diversifying into non-auto industries, such as aluminium casting for power transmission and storage solutions, to mitigate the concentration risk. However, the business risk profile is likely to remain susceptible to sharp slowdown in the auto industry over the medium term, given that the segment accounts for over 50% of revenue. Any sharp downturn in the economy or industrial activity will also impact the company. |
Liquidity: Adequate Cash accrual is projected at more than Rs 400 crore in fiscal 2023 and expected to rise thereafter, being adequate to meet term debt repayment obligation of Rs 353 crore in fiscal 2023, and Rs 130 crore in fiscal 2024. Further, the company has adequate headroom in the form of unutilised bank limit of 60% through 12 months ended November 2022, and cash surpluses of Rs. 260 crore. Annual capex needs ranging from Rs.200-300 crore will be partly debt funded. |
Outlook Positive CAL will continue to benefit from its established market position, strong customer relationships and healthy operating efficiency. The financial risk profile will continue to remain healthy, supported by improving cash accrual, moderate capex needs and prudent working capital management. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company Incorporated in 1986 in Coimbatore, Tamil Nadu, by Mr S Ravi, CAL manufactures several components and sub-assemblies on supply and job-work basis according to client specifications in the auto, industrial and engineering segments. Key products in the auto segment include power train products, cylinder blocks, cylinder heads, cam shafts and crank cases for CVs, sports utility vehicles, two-wheelers, farm equipment and earthmoving and construction equipment.
The company also has a non-ferrous sand foundry catering to power transmission equipment manufacturers. Its industrial and engineering segment has a wide range of products, including industrial gears, storage solutions, material handling and locomotive engine components. CAL has a tool room that supplies dies for injection moulding and mould base. Moreover, it manufactures special-purpose machines for metal and non-metal cutting.
Post the initial public offering (IPO), the promoter and promoter group continue to hold majority stake of 58.77% in CAL, while 5.48% is held by Marina III Singapore Pte Ltd and 4.79% by International Finance Corporation (IFC) as on Dec 2022. Pre-IPO, Marina III and IFC held 15.5% and 14.1% stakes, respectively, in CAL.
For the first six months of fiscal 2023, CAL reported profit after tax (PAT) of Rs 116 crore on operating income of Rs 1,447 crore compared with PAT of Rs 73 crore on operating income of Rs 1,000 crore, respectively, during the corresponding period of the previous fiscal. |
Key Financial Indicators
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Interchangeable with working capital demand loan |
Annexure – List of entities consolidated
Note: DRAIPL will also be fully consolidated post acquisition. |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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