Craftsman Automation Is Cash Positive. But Why Is It Raising Funds?

Craftsman Automation will raise Rs 1,200 crore by issuing shares to institutional buyers. While auto makers raising funds isn’t unheard of, we seldom see them selling equity to this end due to strong cash generation nature of the business. Even during the pandemic, we saw companies like M&M, Tata Motors etc. have more preference towards raising capital via debentures instead of equity-based instruments.

Craftsman has delivered constant growth in financials and returns over the past years. So, why does this cash generating auto ancillary major needs to raise funds? Let's take a look.

The company incurred capital expenditure in the past 12-18 months, including during the acquisition of auto-parts maker DR Axion.

Funding was mostly through internal accrual, yet the company's net debt more than doubled in the year-ended March 2024, as compared with two years ago. Currently, its capex is at Rs 580 crore.

Craftsman Automation, during its earnings call for the quarter ended March, said it leveraged because of expansion and has decided to pare debt.

Its net debt-to-Ebitda ratio had risen to 1.6 times during the fourth quarter, prompting the deleveraging and fundraise via QIP.

The company's revenue and profit have doubled since the year ended March 2022. While margins have dipped, they remain above 20%. The company's return on capital employed and return on equity have also stayed consistent.

The company expects the powertrain segment to deliver high, single-digit or low, double-digit growth in fiscal 2025. The aluminium casting business is expected to grow by 15%.

It also expects the off-highway and industrial engineering segments to deliver $100 million in incremental revenue over the next 4–5 years. For the past two years, the company has been investing in this segment.

The automotive powertrain segment makes products like engine crankcases, cylinder heads, camshafts, transmission housing, differential carriers, and axle housing, with major applications in commercial vehicles and tractors. Both currently contribute roughly 70% of total revenue from the powertrain segment. On a consolidated basis, this forms roughly 35% of total revenue.

The aluminium products division offers high- and low-pressure die casting products. Demand for these products has increased significantly as they're lightweight and comply with the upcoming stringent emission norms.

Craftsman is a key beneficiary of this trend and also acquired a 76% stake in DR Axion in the fourth quarter of FY23. They have now acquired the remaining stake as well. Following the acquisition, this segment's revenue contribution has increased to 49% of consolidated revenue, up from 25%.

The industrial and engineering products unit specialises in high-end precision products and makes tailormade machines. This is a key import substitution play as well. According to Motilal Oswal, currently 35% of products like gear boxes are imported, and localisation could benefit Craftsman Automation. On a consolidated basis, this unit contributes to 16% of total revenue.

As many as nine out of the 10 analysts covering Craftsman Automation have a 'Buy' call on the stock, with Motilal Oswal and Mirae Asset forecasting the highest target price of Rs 5,305 and Rs 5,307 per share, respectively.

Motilal Oswal expects Craftsman to post annualised growth of 15%, 17%, and 27% in consolidated revenue, Ebitda, and profit after tax over fiscals 2024-2026, respectively.

The stock has generated 19% returns to investors in the last 12 months.