Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA-/Stable/CRISIL A1+’ ratings on the bank facilities of Craftsman Automation Ltd (CAL).

 

On May 4, 2024, CAL announced that it has signed a definitive agreement with Daerim International Co Limited, South Korea (Daerim) to acquire the residual 24% shareholding held by Daerim  in DRAIPL for a cash consideration of Rs.250 crore. The acquisition is expected to be completed by June 2024, post which DRAIPL will become a wholly owned subsidiary of CAL. Earlier in February 2023, CAL had acquired 76% stake in DRAIPL from its erstwhile parent, Daerim for Rs.375 crore. Besides, CAL has also notified the stock exchanges that it is in process of raising funds from the market upto an extent of Rs.1200 crore which is expected to be completed shortly. The equity proceeds shall be utilized towards acquisition of residual stake in DRAIPL, general corporate and debt reduction purposes.

 

CAL’s business performance continued to see sustained improvement in fiscal 2024, with revenues increasing by 40% on-year, benefitting also from full year contribution from DRAIPL, steady demand for components, mainly from original equipment manufacturers (OEMs), and increase in share of business with customers. DRAIPL which is the major supplier of cylinder blocks and heads for leading passenger vehicle (PV) OEMs such as Hyundai Motor India Ltd (rated ‘CRISIL AAA/Stable/CRISIL A1+), Kia Motors, and Mahindra & Mahindra Ltd (rated ‘CRISIL AAA/Stable/CRISIL A1+’). The acquisition of DRAIPL has helped CAL increase the share of revenue from the PV segment, thereby diversifying the revenue stream among the auto business. CAL and DR Axion both operate in the automotive (auto) components space and have strengths in complementary areas. CRISIL Ratings expects CAL to register steady double digit revenue growth over the medium term, supported by increase in share of business with existing and new customers, besides new component addition.

 

Besides, the company, by way of its established and superior operating efficiencies and expertise in the machined components and die-cast component space continues to register healthy operating profitability. In fiscal 2024, operating profitability dipped to ~20.0% but still remained healthy (21.6% in fiscal 2023), owing to change in product mix, reduced offtake from high margin segment,  higher inflation and marginally lower profitability at DR Axion as compared to profitability of CAL on standalone basis. Operating profitability is expected to stabilise at ~19-20% over the medium term, which along with steady revenue growth, will ensure healthy annual cash generation.

 

CAL’s financial risk profile has also strengthened over time, driven by strong annual cash generation, equity proceeds received from its initial public offering which helped lower debt, and prudent funding of its capital expenditure. Consequently, the company’s debt metrics are at comfortable levels, despite sizeable capex of over Rs.600 crores being undertaken in fiscal 2024, which was partly debt funded. Gearing was at ~0.91 times at March 31, 2024 (0.82 times at March 31, 2023). Interest coverage ratio was ~5.1 times in fiscal 2024 as compared with ~5.8 times in previous fiscal. However, the ratio of debt to earnings before interest, depreciation, tax and amortization (EBITDA) ratio though remained at ~1.7 times in the last two fiscals. Given the company’s equity raising plans, debt metrics are likely to further improve, should debt be pre-paid. The same will be a monitorable.

 

The ratings continue to reflect the strong position of CAL in the auto-engineering contract-manufacturing sector, established customer relationships, healthy operating margin and improving financial risk profile. These strengths are partially offset by large working capital requirement and capital intensive operations, and part vulnerability of performance to slowdown in the automotive sector.

Analytical Approach

CRISIL Ratings has consolidated the business and financial risk profiles of CAL and its subsidiaries, (Craftsman Europe B V Netherlands and DR Axion) due to operational and financial linkages between them.

 

Goodwill on the acquisition of DR Axion is amortized over a period of 5 years commencing from the date of acquisition in fiscal 2023. Consequently, reported PAT, net worth and ratio computations are adjusted.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Diversified revenue stream from Auto segment: CAL is a leading player in the auto-engineering contract-manufacturing sector, with a diversified clientele across industries. It has three business segments: -power train (~35% of revenues), aluminium products (~48% of revenues), and industrial and engineering (balance revenues) during fiscal 2024. The power train segment caters to CVs, PVs, farm equipment, construction and mining equipment 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 40% in fiscal 2024 on account of full year revenue contribution from DRAIPL and growth in business segments of CAL. Besides addition of PV OEM customers arising from DR Axion, 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. At consolidated level, the company is expected to achieve steady double digit revenue growth over the medium term.

 

• Healthy operating efficiency: 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 over the past years. In fiscal 2024, however, the share of the higher-margin machining business reduced, which along with stable material costs resulted in the operating margin moderating to 19.9% in fiscal 2024 from 21.6% in the previous fiscal. CAL is continuously undertaking cost-control initiatives through automation, employee base optimization and wastage reduction; this coupled with improved capacity utilisation post acquisition of DR Axion (which has lower operating margins compared to CAL on standalone basis) should still aid in sustaining the operating margin at 19-20% over the medium term.

 

• Healthy and improving financial risk profile: Financial risk profile continues to be healthy and supported by steady cash accrual generating ability. Hence, despite mainly debt funded acquisition of DR Axion, debt protection metrics remain comfortable. Debt, however, increased to Rs.1593 crore at the end of fiscal 2024 as compared with Rs 1172 crore at the end of previous fiscal, primarily for funding the capex of Rs 630 crore during the fiscal; Increase in debt levels has led to gearing rising to ~0.91 times as on March 31, 2024 and interest coverage ratio of ~5.1 times for fiscal 2024. However, the Debt to EBITDA ratio remained at ~1.70 times in fiscal 2024, on account of full revenue consolidation of DRAIPL. Also, CAL is in process of raising funds of up to of Rs 1200 crore, which will be utilized towards funding the acquisition cost of Rs 250 crore while the remaining surplus be utilized towards debt reduction and general corporate purposes. While CRISIL Ratings expects CAL’s debt metrics to gradually improve supported by healthy cash generation (~Rs. 600 crore per annum), and prudently funded capex (expected at ~Rs.500-600 crore per annum). However, should equity raise be used to partly prepay debt, improvement in debt metrics would be faster.

 

Weaknesses:

• Capital-intensive business and large working capital requirement: Operations are intrinsically capex and working capital intensive. CAL incurred sizeable capex of Rs ~2,800 crore during fiscals 2017-2024 including the fixed asset addition arising out of the acquisition, and in some cases, has set up capex ahead of 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; Given the nature of operations, inventory and payable days are also high. Given multiple strategic business units and clients, operations will continue to be working capital intensive, and hence its prudent management remains critical.

 

• Vulnerability to cyclical trends in automotive sector: 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 performance is likely to remain susceptible to sharp slowdown in demand from the auto industry over the medium term, given that the segment will account for over 75-80% of revenues.

Liquidity: Strong

CAL’s liquidity position is strong, and benefits from its healthy annual cash generating ability. The company is expected to generate cash accruals of atleast ~Rs.600 crore annually, which will more than suffice to to meet term debt repayment obligation of ~Rs. 105 crore in fiscal 2025, and Rs. 259 crore in fiscal 2026, and part fund proposed capex. Further, the company has adequate headroom in the form of unutilised bank limit of Rs.  600crore with average utilization levels of ~70% for 9 months ended March 2024.

Outlook: Stable

CAL will continue to benefit from its established market position, strong customer relationships, healthy operating efficiency and also from the acquisition of DR Axion. The financial risk profile will continue to remain healthy, supported by improving cash accrual, prudently funded capex and good working capital management.

Rating Sensitivity factors

Upward factors

• Sustained healthy business performance resulting in steady cash generation.
• Prudent capital spending and working capital management, and faster than expected reduction in debt levels, including from equity proceeds raised, leading to improvement in financial risk profile and debt metrics – for instance Debt/EBITDA sustaining at below 1-1.2 times.

 

Downward factors

• Significantly weak operating performance impacting annual cash generation
• Large, debt-funded capex or acquisition or significant stretch in working capital requirement, impacting debt metrics; for instance Debt/EBITDA in excess of 2-2.25 times

 

ESG Profile of CAL

CRISIL Ratings believes that Environment, Social, and Governance (ESG) profile of CAL supports its existing strong credit risk profile.

 

The auto component sector has a moderate impact on the environment owing to moderate emissions, water consumption and waste generation. The sector’s social impact is also moderate considering the impact of operational activities on the company’s own employees. The company is actively focusing on mitigating environmental and social risks.

 

Key ESG highlights

• The company has a continuous focus on improving its contribution towards the ESG journey among the industry. CAL has undertaken variety of initiatives to reduce the carbon emissions by not only following it, but also monitor among its suppliers through monitoring systems that are in place.
• Share of energy from renewal sources has improved to 23.57% as compared to 5.36% in fiscal 2021. Further, the usage of renewable energy as part of its facilities is better compared to its peers.
• The company has a higher water recycling rate of 60.30% as compared to the industry average.
• The company encourages local sourcing wherever possible and procures ~92% of the raw materials domestically. While the same is marginally compared to its peers, the same has been increasing since fiscal 2021 from 70% to ~92% in fiscal 2023.
• The governance structure is characterized by 70% of its board comprising of independent directors. It has a committee at the Board level to address investor grievances and had also put out extensive disclosures.

 

While there is growing importance of ESG among investors and lenders, the commitment of CAL to ESG principles will play a key role in enhancing stakeholder confidence, given high share of market borrowing in its overall debt and access to both domestic and foreign funds / capital markets.

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) in 2022, the promoter and promoter group, comprising Mr. S Ravi and his family, continue to hold majority stake of 54.99% in CAL. Other stakeholders include mutual funds with 13.20% stake, alternate investment funds 4%, foreign portfolio investors 12% and public the balance.

Key Financial Indicators - Consolidated

As on/for the period ended March 31*	Unit	2024	2023
Revenue	Rs.Crore	4452	3182
PAT	Rs.Crore	299	241
PAT margin	%	6.72	7.59
Adjusted debt/adjusted net worth	Times	0.91	0.82
Interest coverage	Times	5.13	5.79

    *CRISIL Ratings adjusted numbers

Any other information: Not Applicable