What should you do with the Craftsman Automation IPO?

craft ipo What should you do with the Craftsman Automation IPO?

Craftsman Automation is into the manufacture of precision parts catering largely to the auto sector with a focus on cylinder blocks for tractors. With a robust Kharif and Rabi output, the tractor demand has seen a sharp spurt in India with most of the leading tractor companies reporting solid growth. Demand for Craftsman Automation is largely derived from demand and is contingent on the auto sector growth. Craftsman IPO opens on 15 March and is one in the string of IPOs that are scheduled before the end of this fiscal year.

Key terms of the Craftsman Automation IPO

The Rs.823.70 crore IPO of Craftsman Automation opens for subscription during the coming week. Here are key terms and facts about the IPO.

table 1 What should you do with the Craftsman Automation IPO?

Data Source: IPO Filings

The business model of Craftsman Automation

Craftsman Automation has been around for 35 years in the business in India and is a leading manufacturer of precision components, especially with a focus on high-end engineering products. Craftsman operates in 3 broad segments viz. Automotive Powertrain, Automotive Aluminium Products, and Industrial Engineering. One of its most popular products is the machining and manufacture of cylinder blocks for the tractor segment.

Since it caters to the specialized engineering and automotive space, it counts among its marquee client list, some of the biggest names in India. These clients include Tata Motors, Daimler India, M&M, Eicher, Escorts, Ashok Leyland, and TAFE Motors. Needless to say, most of the tractor manufacturers are customers of Craftsman Automation.

Craftsman Automation services its client needs through 12 state-of-the-art manufacturing facilities spread across 7 locations in India. Apart from a leadership position in the engineering niche, Craftsman also brings to the table, strong design capabilities, solid financial performance over the last many years, and promoters with an established track record.

How will the company utilize the funds?

The company is not too hungry for capital at this point in time. The IPO will give an exit to some of the early stakeholders in the company and help them monetize their holdings partially. The idea is to list the stock and be able to get an indicative valuation for the company more from the point of view of being able to use the stock as a currency.

The total inflow will be the fresh portion of Rs.150 crore and nearly Rs.120 crore out of that will be utilized to pre-pay some of the debt in its books so as to improve the solvency and coverage ratios of the company.

Are the valuations of Craftsman Automation reasonable?

At a business level, the company is a niche player with a solid customer base and it is increasingly becoming an OEM supplier to most names. Also, the company has recovered the lag effects of the pandemic quite remarkably, which is good news in terms of the resilience of the stock.

Let us look at the financials. For the first nine months ended Dec-20, Craftsman Automation earned net profits of Rs.50.66 crore on a turnover of Rs.1030 crore. Craftsman has reported a return on net worth (RONW) of 9.24%. Let us now look at valuations in P/BV and in P/E terms.

In terms of post-issue net asset value, the stock currently trades at 3.63 times Price to book, which is not too steep, when you consider the high growth potential for the business. The P/E calculated based on annualized EPS of FY21 comes to around 46, which is actually less than the industry average for other auto ancillary companies.

The company will reduce its borrowings and that will further improve the P/E and make it more attractive. If you look at the peer group consisting of Bharat Forge, Endurance Technologies, Minda, or Jamna; then most of them quote at P/E ratios of over 70X. From that perspective, this stock has the potential to offer growth. Investors must keep a close watch on the auto cycle, as that will be the deciding factor for this stock in the future.

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