Q1FY24 Review: Craftsman Automation: Strong DR Axion cushions miss in Standalone

25 Jul 2023 , 12:15 PM

Craftsman’s Q1 consolidated results were largely in line with estimates. Standalone performance was weaker than expected (6% Ebitda miss) but was offset by positive surprise in DR Axion (recent acquisition). Organic (standalone) revenue and Ebitda growth slowed substantially in Q1 (12% and 0%, respectively) due to weakness in CV, tractor and storage solutions. Mgmt. is hopeful of pick-up in storage solutions in Q2FY24 and CV revenue starting Q3FY24. Order wins in recent years should start flowing into revenue in coming quarters. DR Axion surprised positively with sharp up-tick in margins, and completely off-set the miss in Standalone earnings. Analysts of IIFL Capital Services largely maintain their FY24/FY25 EPS estimates following these results. Retain BUY with TP of Rs5150.

Q1 Consol. results in-line: 

Craftsman’s Q1 revenue grew 53% YoY (incl. acquisition) and 12% YoY organically (standalone). Standalone revenue missed estimates by 3% (weak Powertrain segment) and margin missed by 60bps, resulting in absolute Ebitda (flat YoY) coming in 6% below estimates. DR Axion performance was stronger than expected with 4% rev beat and sharp margin expansion (18% in Q1 vs 11% in Q4). As a result, consol. performance was largely in line with analysts of IIFL Capital Services estimates.

Organic growth moderates in Q1: 

Post a 21% revenue growth in FY23, standalone growth moderated to 12% in Q1FY24. This is reflecting weakness in underlying segments (auto & non-auto). MHCV industry slowed in Q1 as strong pre-buy impact witnessed in Q4FY23 reversed. Tractor segment was down YoY for Craftsman. The above limited “Powertrain” revenue growth to 10%. “Industrial & engineering” segment also saw moderation in growth to 6%, dragged down by YoY decline in Storage solutions segment. Only Aluminum (+21% YoY) showed strength. Management is hopeful of pick-up in Storage Solutions from Q2FY24 and CV revenue in H2FY24.

DR Axion surprises positively and saves the day: 

For DR Axion (acquired in Feb 2023), this was the first full quarter of consolidation into Craftsman. Ebitda margin improved from sub-normal level of 11% in Q4FY23 to 18% in Q1FY24 (much higher than forecast of 14%). Mgmt. mentioned that DR Axion is well-placed to clock 16-17% margin on a full-year basis, after accounting for seasonal margin weakness in Q3.