Q3FY24 Review: Craftsman Automation: Organic growth is weak; DR Axion does well

30 Jan 2024 , 08:43 PM

Craftsman’s Q3 Ebitda missed analysts of IIFL Capital Services estimate by 8% due to sharp slowdown in Standalone earnings (Rev +8% YoY, Ebitda -1%, Ebit -6%). DR Axion continued to clock improvement in Ebitda margin, up at 19% vs 14% at the time of acquisition. The slowdown in Standalone is a reflection of the deceleration in Auto production in India, as well as lower off-take in exports and non-auto segments. Mgmt. guidance for FY25 implies continuation of slowdown in the end markets (CV, tractors, PV, Exports, Storage solutions, etc.). Craftsman is expected to do slightly better than the end-markets due to new order flow. Analysts of IIFL Capital Services cut FY24-FY26 EPS estimates by 2-5%. Retain BUY with TP of Rs5300 (24x 2YF EPS). 

Q3 Ebitda miss by 8% as Standalone business disappoints: 

Consol. revenue grew 51% YoY (incl. DR Axion, acquired in Feb 2023), and came in 4% below analysts of IIFL Capital Services est. Ebitda grew 39% YoY, (driven by DR Axion) and came in 8% below their estimate. The miss was attributable to weakness in Standalone. Organic growth (Standalone) was weak with revenue up 8% YoY and Ebitda down 1% YoY. Consol. PAT missed analysts of IIFL Capital Services estimate by 23%. 

Organic growth likely to be muted in FY24/FY25, reflecting slowdown in underlying auto industry: 

In the Powertrain segment, mgmt. expects end-markets (CV, tractors, deemed exports, etc.) to stay flattish in FY25. Craftsman’s revenues are expect to grow high single-digit %, driven by new order wins. Within Industrial, the largest sub-segment, namely Storage Solutions, is weak with the industry clocking decline in revenue. Craftsman did better than the industry (YTD rev -4% YoY), but it came at the cost of margins. Mgmt. expects this industry to stay weak in CY24 (i.e. FY25) and pick up only in FY26. Mgmt. is most bullish on the Aluminium segment and expects high-teen % growth in FY25, driven by new orders. Craftsman is setting up a new plant in North India; this plant will focus on Aluminium segment to start with, backed by new orders. 

DR Axion much more EPS accretive, vs expectations at the time of acquisition: 

DR Axion’s Ebitda margin has improved to ~19% vs 14% at the time of acquisition. The sharp jump in DR Axion’s earnings has led to the transaction becoming 20-22% EPS accretive vs. earlier expectation of 7-10% accretion. Had it not been for DR Axion acquisition, Craftsman’s PBT would have clocked YoY decline in FY24.