IPO Analysis: Craftsman Automation

IPO rating- Invest for listing gains 

About the issue 

The company is entering the capital market with its initial public offering (IPO) of equity shares of the face value of Rs 5 each. This will mark the twelfth public offering of the year. The public issue comprises a fresh issue of equity shares worth Rs 150 crore and offer-for-sale (OFS) of up to 45.21 lakh equity shares by promoters and existing shareholders. The price band of the issue has been fixed at Rs 1,488 to Rs 1,490 per equity share. The IPO opens on March 15 and closes on March 17, 2021. The issue may list on March 25, 2021. Craftsman Automation IPO has a market lot size of 10 shares. The quota for retail investors has been fixed at 35 per cent of the net offer. The QIB and NII quotas are fixed at 50 per cent and 15 per cent, respectively. The objective of the offer is to make repayment of the company's borrowing fully or partially as well as to meet general corporate purposes. 

About the company 

Craftsman Automation is a diversified engineering company. The business operates in three key segments namely, automotive-powertrain & others, automotive-aluminium products, and industrial & engineering division, which is engaged in manufacturing material handling equipment i.e. hoists, industrial gears, marine engines, crane kits, gearboxes, locomotive equipment, storage solutions, etc. The company is present across the entire value chain in the automotive-aluminium products segment, providing diverse products & solutions. Its strong in-house engineering and design capabilities help them to offer comprehensive solutions & products to its long-standing domestic and international customers. The company designs, develops, and manufactures a wide range of engineering products. It is one of the leading players in the machining of cylinder blocks for the tractor segment. The company owns 12 state-of-the-art manufacturing facilities across seven cities of India. Its customer base includes Tata Motors, Daimler India, Tata Cummins, Mahindra & Mahindra, Royal Enfield, Siemens, Escorts, Ashok Leyland, VE Commercial Vehicles, TAFE Motors & Tractors, etc. 

Strengths 

Long-term and well-established relationships with domestic & global OEMs. 

Strong in-house process and product design capabilities. 

Leading engineering product manufacturer. 

Extensive manufacturing footprint with strategically located manufacturing facilities, having an ability to interchange capacity and product mix. 

Financials 

The company's total revenue was Rs 537 crore, Rs 1,501 crore, Rs 1,832, and Rs 1,523 in the six-month ended September 30, 2020 and in fiscals 2020, 2019, and 2018, respectively. Further, its net profit was Rs 5.60 crore, Rs 41.70, Rs 87.80 crore and Rs 25.60 crore in the six-month ended September 30, 2020 and in fiscals 2020, 2019 and 2018, respectively. CAGR has increased by 15.42 per cent from the fiscal year 2018 to 2020. 

Valuation & recommendation  

Craftsman Automation is the largest component manufacturer engaged in the machining of cylinder heads and cylinder blocks in the construction equipment industry. While in the case of the tractor industry, the company is among the top 3-4 component manufacturers with respect to cylinder block machining. The company has various strategies to grow such as increase the wallet share & acquire new business by leveraging the existing OEM relationships and adding new customers along with exploring opportunities to grow the business through import substitution. It also pursues emerging opportunities, including storage solutions & material handling. From the valuation perspective, the company is commanding PE of 73x of FY20 EPS and 44x of FY21E EPS at the upper price band of Rs 1,490, which seems to be slightly overpriced. Some of the listed peers of the company are Ramkrishna Forgings, Bharat Forge, Endurance Tech, Jamna Auto, Mahindra CIE, Minda Industries, and Sundaram Fasteners. Ramkrishna Forgings Ltd has the highest P/E ratio of 181.89x while Mahindra CIE Automotive Ltd, the lowest 17.40x. The average industry P/E ratio stands at 72.76x. Looking at the above positives, we believe that the company will keep growing its business at a healthy rate, and hence, you can invest for a listing gain.