Craftsman Automation: DR Axion to bring scale and EPS accretion

23 Mar 2023 , 10:40 AM

Recommendation: Buy

Target Price: Rs 3,750

DR Axion has grown revenue at a fast clip in recent years, coinciding with Kia’s entry and scale-up in the PV market in India. In addition, DR Axion has moved beyond Hyundai/Kia, with sizeable order-wins from M&M; this should drive the next phase of growth. DR Axion (with 100% PV exposure) is complementary to Craftsman’s existing aluminium business, which has high dependence on 2Ws. The acquisition came at an attractive valuation of 4.4x FY23 estimated EV/EBITDA. With large capacity expansion in recent years, DR Axion’s utilization level is low at about 65%. Increase in utilization will bring in margin expansion, while also keeping capex low and cash flows strong in the interim. Analysts at IIFL Capital Services expect the acquisition to be EPS-accretive by 5-7% in FY24/FY25.

DR Axion has scaled up well in recent years

DR Axion focuses on cylinder heads and cylinder blocks for the PV segment in India. It is the single source supplier of cylinder heads to Hyundai and Kia. Its volumes more than doubled over FY20-23, coinciding with scale-up of Kia’s volumes in India (Kia entered India in FY20). In recent years, the company received sizeable orders from M&M, which should drive its next leg of growth.

DR Axion to complement Craftsman’s existing business and open up new doors

This acquisition will more than double Craftsman’s scale in the aluminium segment. Craftsman’s existing aluminium business has high concentration of 2W customers. DR Axion’s PV exposure will complement it well, while also bringing in new customers, namely Hyundai and Kia. Moreover, Craftsman focusses on high-pressure die-casting while DR Axion’s strength lies in gravity and low-pressure die-casting.

Valuation attractive at 4.4x FY23 EV/EBITDA; expect 5-7% EPS accretion

Craftsman acquired 76% of DR Axion at Rs3.75 billion and an EV (100%) of Rs6.5bn. This translates to FY23 PE of 9x and EV/EBITDA of 4.4x. This is attractive compared to valuations of listed auto component companies. Analysts at IIFL Capital Services estimate the transaction to be EPS-accretive by 5-7%. They have not given effect to this transaction in their forecasts, pending detailed balance-sheet disclosures, which are expected in Q4FY23 results.