Craftsman Automation IPO review (May apply)

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Review By Dilip Davda on March 10, 2021

•    CAL is a well-diversified engineering company with marquee global customers.
•    It suffered a minor setback in FY20 due to a sudden shift from B4 to B6 compliance and EVs.
•    Despite the pandemic scare, it recovered speedily and posted good FY21-9M working.
•    The issue worth considering for long term investment.

ABOUT COMPANY:
Craftsman Automation Ltd. (CAL) is a diversified engineering company with vertically integrated manufacturing capabilities, engaged in three business segments, namely powertrain and other products for the automotive segment ('Automotive - Powertrain and Others'), aluminium products for the automotive segment ('Automotive - Aluminium Products'), and industrial and engineering products segment ('Industrial and Engineering'). It is 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.

CAL is among the top three-four component players with respect to the machining of cylinder block for the tractor segment in India. (Source: CRISIL Report). The company present across the entire value chain in the Automotive-Aluminium Products segment, providing diverse products and solutions.

Its strong in-house engineering and design capabilities help the company to offer comprehensive solutions and products to long-standing domestic and international customers in each of the segments in which it operates.

CAL has long term relationships with several marquee domestic and global original equipment manufacturers ('OEMs') and component manufacturers across our three business segments. For Automotive - Powertrain and Others segment, its key customers include Daimler India, Tata Motors, Tata Cummins, Mahindra & Mahindra, Simpson & Co. Limited, TAFE Motors and Tractors, Escorts, Ashok Leyland, Perkins, Mitsubishi Heavy Industries, John Deere and JCB India. For the Automotive - Aluminium Products segment, its key customers include Daimler India, TVS Motors, Royal Enfield, Perkins and Mahindra & Mahindra. Key customers for the industrial and engineering segment include Siemens and Mitsubishi Heavy Industries.

CAL is considered as a strategic and preferred supplier by many OEM customers and also the single-source supplier in certain product categories, for some of the key customers. Most of its business comprises direct supply to OEM customers, under long term agreements, which are renewed from time to time. With its track record and wide product portfolio, the company has been able to retain existing customers and also been able to attract new customers. It has a diversified client base with top 10 customers accounting for 59.15%, 53.41%, 56.25% and 52.59% of its revenue from operations, in the nine months ended December 31, 2020, and Fiscals 2020, 2019 and 2018, respectively.

ISSUE DETAILS/CAPITAL STRUCTURE:
To part finance its plans for repayment/prepayment of certain borrowings (Rs. 120.00 cr.) and general corpus fund needs, the company is coming out with a maiden IPO by way of a fresh equity issue (of approx 1006710 shares) worth Rs. 150.00 cr. and an offer for sale of 4521450 equity share of Rs. 5 each to mobilize Rs. 823.70 cr. for this combo offer (total 5528160 shares) at the upper price band. It has fixed the price band of Rs. 1488 - Rs. 1490 per share. Minimum application is to be made for 10 shares and in multiples thereon, thereafter. The company has allocated 50% QIBs, 15% HNIs and 35% for Retail investors. The issue opens for subscription on March 15, 2021, and will close on March 17, 2021.

This issue is jointly lead managed by Axis Capital Ltd. and IIFL Securities Ltd. while Link Intime India Pvt. Ltd. is the registrar to the issue. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 26.16% of the post issue paid-up equity capital of the company.

Having issued initial equity at par, it raised further equity (on the basis of the face value of Rs. 5 per share) in the price range of Rs. 339.56 to Rs. 477.44 per share between September 2010 and August 2012. It has also issued bonus shares in the ratio of 5 for 4 in March 2007 and 3 for 4 in December 2017. The average cost of acquisition of shares by the promoters is Rs. 1.06, Rs. 1.27, Rs. 208.21 and Rs. 469.88 per share.

CAL's current paid-up equity capital of Rs. 10.06 cr. will stand enhanced to Rs. 10.56 cr. post issue. With the higher price of the IPO, the company is looking for a market cap of Rs. 3148.12 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, CAL has (on a consolidated basis) posted turnover/net profits of Rs. 1522.86 cr. / Rs. 31.53 cr. (FY18), Rs. 1831.64 cr. / Rs. 97.37 cr. (FY19) and Rs. 1501.06 cr. / Rs. 41.07 cr. (FY20). For the first nine months of the current fiscal ended on December 31, 2020, it has earned a net profit of Rs. 50.66 cr. on a turnover of Rs. 1029.91 cr.

For the last three fiscals, CAL has posted an average EPS of Rs. 28.95 and an average RoNW of 9.24%. The issue is priced at a P/BV of 4.19 based on its NAV of Rs. 355.93 per share as of December 31, 2020, and at a P/BV of 3.63 based on post issue NAV of Rs. 409.96 per share(at the upper price band).

If we annualized FY21-9M earnings and attribute it to fully diluted post issue equity, then the asking price is at a P/E of around 46.61 against industry composite P/E of 72.76. The issue appears reasonably priced.  

As of December 31, 2020, CAL had a total secured borrowing of Rs. 890.11 cr. Reduction in this will add to savings in interest cost and improve bottom lines.

COMPARISON WITH LISTED PEERS:
As per offer documents, CAL has shown Bharat Forge, Endurance Techno, Jamna Auto, Mahindra CIE, Minda Ind., Sundaram Fastners and Ramkrishna Forge as its listed peers. They are currently trading at a P/Es of around 221.3, 58.77, 70.15, 90.46, 167.32, 60.02 and 00 (As of March 10, 2021). However, they are not fully comparable on an apple to apple basis.  

DIVIDEND POLICY:
The company has paid a dividend of 10% (FY18) and 50% (FY19). However, it has not paid any dividend for FY20 and the current fiscal so far. It will follow prudent dividend policy post listing based on its performance and future prospects.

MERCHANT BANKERS TRACK RECORDS:
The two Book Running Lead Managers (BRLMs) associated with the offer have handled 21 issues in the past three fiscals, out of which 8 issues closed below the issue price on the listing date.

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