| Craftsman Automation Limited | ||||||
| Ratings upgraded to 'CRISIL AA-/Stable/CRISIL A1+'; Rated amount enhanced for Bank Debt | ||||||
| Rating Action | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has upgraded its ratings on the bank facilities of Craftsman Automation Limited (CAL) to ‘CRISIL AA-/Stable/CRISIL A1+’ from ‘CRISIL A+/Positive/CRISIL A1’
The rating upgrade follows the healthy and sustained improvement in CAL’s business performance in fiscal 2023, which is expected to continue in the near to medium term, due to steady demand for components, mainly from the commercial vehicle (CV) and passenger vehicle (PV) original equipment manufacturers (OEMs). Besides, the company, by way of its established and superior operating efficiencies, and expertise in the machined components and die-cast component space continues to register operating profitability of atleast 20%, which along with healthy growth in revenues, is leading to strong annual cash accruals. CAL’s financial risk profile has also strengthened over time, driven by strong annual cash generation, equity proceeds received from its initial public offering which helped lower debt, and prudent funding of its capital expenditure. Consequently, the company’s debt metrics have strengthened over time, and are expected to remain at comfortable levels over the medium term as well.
CAL’s consolidated revenue rose 44% on-year in fiscal 2023, supported by healthy demand from CVs aided by uptick in economic growth, pick-up in private capital expenditure (capex) cycle, higher freight demand, revival in construction, infrastructure and mining activities. Healthy growth is expected to continue in the near to medium term, as well with full year revenue contribution coming from DR Axion India Pvt Ltd (DR Axion, acquired in February 2023). Operating profitability remained healthy, though it dipped marginally to 21.6% in fiscal 2023 from 24.2% in the previous fiscal, owing to change in product mix, higher inflation and lower profitability at DR Axion. Operating margin is expected to further moderate with complete integration of DR Axion, but still sustain at ~20% over the medium term.
In February 2023, CAL acquired 76% stake in DR Axion for a consideration of Rs 375 crore. DR Axion is the major supplier of cylinder blocks and heads for leading PV OEMs such as Hyundai Motor India Ltd (rated ‘CRISIL AAA/Stable/CRISIL A1+), Kia Motors, and Mahindra & Mahindra Ltd (rated ‘CRISIL AAA/Stable/CRISIL A1+’). The acquisition has helped CAL increase the share of revenue from the PV segment and gradually lower revenue dependence on CVs, thereby diversifying the revenue stream among the auto business. CAL and DR Axion both operate in the automotive (auto) components space and have strengths in complementary areas.
CAL’s financial risk profile is healthy and improving, supported by strong annual cash generation. Despite availing the acquisition debt of Rs. 307 crore, debt protection metrics remain comfortable with gearing of 0.82 times as on March 31, 2023 and interest coverage ratio of ~5.8 times for fiscal 2023. The Debt to Earnings before interest, depreciation, tax and amortization (EBITDA) ratio though rose to ~1.70 times in fiscal 2023, from 1.4 times in fiscal 2022, as only two months of operating profits of DR Axion were consolidated. Continued steady business performance, resulting in healthy cash accrual, well managed capex spend and prudent working capital management, will enable debt protection metrics remain at comfortable levels over the medium term; for instance the debt to EBIDTA ratio is expected at under 1.30 times by fiscal 2024.
The ratings continue to reflect the strong position of CAL in the auto-engineering contract-manufacturing sector, established customer relationships, healthy operating margin and improving financial risk profile. These strengths are partially offset by large working capital requirement and capital intensive operations, and part vulnerability of performance to slowdown in the automotive sector. |
Analytical Approach CRISIL Ratings has consolidated the business and financial risk profiles of CAL and its wholly-owned subsidiaries, (Craftsman Europe B V Netherlands and DR Axion) due to operational and financial linkages between them.
Goodwill on the acquisition of DR Axion is amortized over a period of 5 years commencing from the date of acquisition in fiscal 2023. Consequently, reported PAT, net worth and ratio computations are adjusted.
Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths: Diversified revenue stream from Auto segment CAL is a leading player in the auto-engineering contract-manufacturing sector, with a diversified clientele across industries. It has three business segments: auto-power train (~52% of revenues), aluminium products (~25% of revenues), and industrial and engineering (balance revenues) as on March 31, 2023. The auto-power train segment caters to CVs, PVs, farm equipment, construction and mining equipment segments of the auto industry. The aluminium products division supplies aluminium components to two-and-four-wheeler and power transmission manufacturers. The industrial and engineering segment offers goods and services such as gears, material handling equipment, storage products, special purpose machines and other general engineering products to various industries.
The addition of capacity, products and customers, and healthy customer relationships led to revenue growth of 44% in fiscal 2023. Besides addition of new PV OEM customers arising from DR Axion, steady offtake by key customers and increase in business share with leading medium and heavy CV players should aid the maintenance of CAL’s market position over the medium term. At consolidated level, the company is expected to achieve a healthy double digit revenue growth over the medium term, including due to improving contribution from DR Axion.
Healthy operating efficiency Focus on niche products and better technical capabilities, supported by cost-optimisation measures, have supported operating efficiency. Higher margin from machining operations led to a better-than-industry operating margin of over 20% on sustained basis over the past years. In fiscal 2023, however, the share of the higher-margin machining business reduced, which along with rise in material costs resulted in the operating margin moderating to 21.6% in fiscal 2023 from 24.2% in the previous fiscal.
CAL is continuously undertaking cost-control initiatives through automation, employee base optimisation and wastage reduction; this coupled with improved capacity utilisation post acquisition of DR Axion (which has lower operating margins) should still aid in sustaining the operating margin at atleast 20% over the medium term.
Annual cash accrual for fiscal 2024 is estimated at over Rs.730 crores, which will help part fund capex and incremental working capital. Capex going forward is expected to range between Rs.350-380 crore annually, and will be partly debt funded. The management has planned to gradually lower debt levels through progressive term loan repayment of term loans, and may also consider pre-payment, if possible. With continued healthy cash generation, prudent annual capex spend and controlled working capital management, debt metrics are expected to witness a gradual improvement in fiscal 2024; for instance the ratio of debt to EBITDA is expected at under 1.3 times.
Weaknesses: Capital-intensive business and large working capital requirement Operations are intrinsically capex and working capital intensive. CAL incurred sizeable capex of Rs ~2,200 crore during fiscals 2017-2023 including the fixed asset addition arising out of the acquisition, and in some cases, has set up capex ahead of demand.
The company has to maintain large inventory, given its customer and product portfolios. Also, with a large clientele and strong export presence, receivables are sizeable and could get stretched during a slowdown; Given the nature of operations, inventory and payable days are also high. Given multiple strategic business units and clients, operations will continue to be working capital intensive, and hence its prudent management remains critical.
Vulnerability to cyclical trends in automotive sector The company caters to the auto, farm equipment, construction and earthmoving equipment, and locomotive industries, demand from which is typically linked to the economic activity. It is diversifying into non-auto industries, such as aluminium casting for power transmission and storage solutions, to mitigate the concentration risk. However, the business performance is likely to remain susceptible to sharp slowdown in demand from the auto industry over the medium term, given that the segment will account for over 75-80% of revenues. |
Liquidity: Strong CAL’s liquidity position is strong, and benefits from its healthy annual cash generating ability. The company’s cash accrual is projected at more than Rs 730 crore for fiscal 2024 and expected to rise thereafter, being more than adequate to meet term debt repayment obligation of ~Rs. 116 crore in fiscal 2024, and ~Rs. 240 crore in fiscal 2025, and part fund capex. Further, the company has adequate headroom in the form of unutilised bank limit of Rs. 450 crore with modest average utilization levels of ~48%. |
Outlook: Stable CAL will continue to benefit from its established market position, strong customer relationships, healthy operating efficiency and also from the acquisition of DR Axion. The financial risk profile will continue to remain healthy, supported by improving cash accrual, and prudently funded capex and good working capital management. |
Rating Sensitivity factors Upward factors
Downward factors
ESG Profile of CAL CRISIL Ratings believes that Environment, Social, and Governance (ESG) profile of CAL supports its existing strong credit risk profile.
The auto component sector has a moderate impact on the environment owing to moderate emissions, water consumption and waste generation. The sector’s social impact is also moderate considering the impact of operational activities on the company’s own employees . The company is actively focusing on mitigating environmental and social risks.
Key ESG highlights
While there is growing importance of ESG among investors and lenders, the commitment of CAL to ESG principles will play a key role in enhancing stakeholder confidence, given high share of market borrowing in its overall debt and access to both domestic and foreign funds / capital markets. |
About the Company Incorporated in 1986 in Coimbatore, Tamil Nadu, by Mr S Ravi, CAL manufactures several components and sub-assemblies on supply and job-work basis according to client specifications in the auto, industrial and engineering segments. Key products in the auto segment include power train products, cylinder blocks, cylinder heads, cam shafts and crank cases for CVs, sports utility vehicles, two-wheelers, farm equipment and earthmoving and construction equipment.
The company also has a non-ferrous sand foundry catering to power transmission equipment manufacturers. Its industrial and engineering segment has a wide range of products, including industrial gears, storage solutions, material handling and locomotive engine components. CAL has a tool room that supplies dies for injection moulding and mould base. Moreover, it manufactures special-purpose machines for metal and non-metal cutting.
Post the initial public offering (IPO) in 2022, the promoter and promoter group, comprising Mr. S Ravi and his family, continue to hold majority stake of 54.99% in CAL. Other stakeholders include mutual funds with 13.20% stake, alternate investment funds 4%, foreign portfolio investors 12% and public the balance. |
Key Financial Indicators
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
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Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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