Craftsman Automation Limited (CRAFTSMAN) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the earnings conference call hosted by Craftsman Automation Limited. You may note that some of the statements which may be made by the management team during this conference call may contain certain forward-looking information, which are not guarantees of future performance and are subject to a number of risks and uncertainties. We encourage you to refer to the disclaimer in the investor presentation of the company. Further, the management will not be addressing any customer-specific queries owing to confidentiality obligations. We kindly request you to avoid mentioning any customer names in your questions. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Srinivasan Ravi, Chairman and Managing Director of Craftsman Automation Limited. Thank you, and over to you, sir.

Good afternoon, everybody. It gives me immense pleasure in welcoming you all for the earnings call for the quarter year ended 30th September, 2025. Just a few headlines, the consolidated financial highlights for H1 FY '26. Sales was at INR 3,786 crores against the previous year H1 sales of INR 2,365 crores. The Powertrain contributing INR 1,034 crores, Aluminum Products, INR 2,275 crores, and Industrial & Engineering, INR 476 crores, respectively. EBITDA stands at INR 582 crores with Powertrain contributing to INR 236 crores, Aluminum is ForEx contributing to INR 351 crores and Industrial & Engineering contributing to INR 32 crores. Unallocated expenses is around INR 37 crores. Now on the financial metrics. The net debt to EBITDA on the consolidated basis is 0.94 -- the net debt to equity, I mean. Net debt to EBITDA is 2.46 and EBITDA margin is around 15%, EBIT margins around 10% and ROCE annualized is 15%. Now I will leave the floor open to the Q&A.

[Operator Instructions] The first question is from the line of Krupashankar NJ from Avendus Spark.

My first question is on the Kothavadi plant. Can you give us an update on the plant? And how is the order book looking there? And further to that, any update on the revenue target of $100 million in the next 4 to 5 years? Anything you want to guide on that?

The Kothavadi plant operation is operational at Phase 1 level, which is for engineering products for the automotive -- the Powertrain portion of it, which is the stationary engines. As I mentioned, the revenue stream will start in 2029. But the order book is of the $100 million, I think $50 million of the order book is on paper received with us and products are under development. Rest of it is in final stage of discussions. As you know, the lead time for development of these products and validation of products is 3 to 4 years' time. We are on stream -- on track for the 2029 numbers. And we see a lot of traction in this business currently, owing to the no new capacities coming up anywhere in the world in general. Because we started this a little earlier, we've got some head start on this business going forward.

The second question was on the CapEx. Can you give an update on the INR 280 crore CapEx announced for DR Axion and when does it come on speed? And this is for existing customers and any guidance on total CapEx itself for the next 2 years?

This question is specific to DR Axion, and DR Axion, you know that the current plant is -- capacity is full, and we have only 3 customers. And the current customers have increased their order portion, number one. Number two is, there is -- within the Aluminum segment, we are moving into now more into cylinder blocks. So we have an order on hand, which -- for which we need to do a CapEx. So we've just taken a larger piece of land so that we have for the future. Chennai by itself is slowly become to be a global hub for the automotive. As you are aware that many other customers, including the American customer, who just announced large CapEx in that region. So we are gearing up for the new requirements. As far as we are concerned, I think this is the first stepping stone as far as DR Axion is concerned on the -- addressing the global demands for the overseas customers as well as the growth in the domestic industry.

Any guidance you want to share about CapEx -- overall CapEx for the next 2 years, sir?

See, overall CapEx for the next 2 years, you know very well the announcements are happening on a regular basis with multinational customers. In certain cases, we are in discussion with them for years together without an end in sight about when the order is going to be placed, when it's getting ramped up. But off late, we see very intense engagements with all the customers and also new customers, including customers looking for export requirements for North America to Europe as well as they're setting a base within India for their subassembly or product export. So as and when we are getting a firm requirement from the customer, then we are announcing the CapEx. And we check on the return of capital employed and the viability of such a project and whether we are technically capable of executing the project and whether the project is scalable or in line with our current strengths what we have in the market. So you can understand that we were looking back last year whatever QIP we've raised looks conservative in the current circumstances. As I mentioned, also the Aluminum Products segment is still subscale in India overall, whereas the global Tier 1, Tier 2 companies are -- the magnitude of those companies are at least 3x, 4x of the Indian Tier 1 suppliers today. So we will take it as it comes on the CapEx.

[Operator Instructions] Next question is from the line of Mitul Shah from DAM Capital Advisors.

Congratulations for a very strong performance, strong top line margins, sir. Sir, my first question is on Aluminum Products, margins have improved meaningfully. Apart from operating leverage, what are the drivers? And is there anything onetime or what can be considered as a sustainable margins?

Mr. Mitul, I will answer the second part of the question. These are sustainable margins. Earlier, the base was small when we've try to do the new Bhiwadi plant and the start-up operations cost actually really affected the equation of profitability for, say, a couple of quarters. That is behind us now. And now as we start the new project in Hosur, we are more prepared and the base is bigger. So the -- whatever expenses or the start-up costs which we are incurring, more or less, it is becoming smaller in the context of the entire Aluminum business. So the -- what current margin trend you are seeing is this will continue in the future also. So as we speak, the Hosur plant also has started operations, which we have already intimated the domain. I think the Q4, we will see some reasonable sales. This Phase 1 of the project is through, so we will see incremental revenue coming quarter-on-quarter on the Aluminum Products as a whole, not only from the Hosur plant, but also from the Bhiwadi plant as well as the original business of Craftsman, where the -- some of the orders are maturing to higher.

Sir, second question, can you help with some key ballpark numbers of the Powertrain breakup between CV, SUV, tractor, off-highway and similarly, revenue breakup like Sunbeam, DR Axion, et cetera.

This is already there. I mean, if I remember, I think it is -- we have put it up in the website, in the presentation, very clearly the breakup between the -- all the segments. I think I'll read out from that slide itself. I think we uploaded today.

If it's there in PPT, I'll take down. No problem, sir. But Sunbeam, DR Axion all these details are there, sir, in the presentation?

No, everything is there. The breakup between all the 3 is there.

[Operator Instructions] Next question is from the line of Abhishek Kumar Jain from AlfAccurate.

Congrats for a strong set of numbers. First question on the Sunbeam business. So quarterly run rate is now INR 330 crores. And just wanted to understand that how is the progress in the EBITDA margin? And what is your target EBITDA margin for FY '27 in the Sunbeam business.

I think we are looking at double-digit EBITDA margin for the financial year '27. We had the union settlement done only on the last day of May, that is the May 31. So really speaking, we started the restructuring of Sunbeam and all the shifting of the operations from the Gurgaon plant to the new plant in Bhiwadi. All that was an ongoing process for 3 months. Now it is complete. But we have just started the -- we had the festive season going on, so we really didn't concentrate on the cost reduction or rationalization of the operations. Now we started that operations, and it will take around next 2 quarters, I would say, to come to a level of better operational efficiency. So we'll get the benefit for the full financial year. So we are expecting a 10% or plus EBITDA for the -- double-digit EBITDA for the next financial year. Revenue being more or less around the same region at what it is.

Okay. And your net debt has gone up to the INR 2,800 crores, so what is your plan to reduce debt as you are looking to sell some land and pay the debt of around INR 350 crores. So what is your plan for FY '27?

December 31 will be the last date of the closing of the plant in Gurgaon. We had to keep the plant because the overseas customers, mainly the North American customers of Sunbeam didn't -- I mean, could not do the validation at the new plant in the short period of time. So we had to keep that license going. So now that it's over, we have vacated the plant in total. So from January onwards, the land can be put up for sale. So we are in contact with the key people, and large organizations to look at the land sale. This will be a process which will take -- it will go through the next financial year, more through the middle of next financial year, and that will reduce the debt of Sunbeam and Craftsman Group as a whole.

Okay. So how much expected date is in FY '27 and it will go down to the INR 2,800 crores to INR 2,200 crores or INR 2,300 crores?

See, the net debt to EBITDA currently as on H1, when you look at an analyst number, is around 2.46 totally. So for the consolidation, I think we will be closer to the number of 2 net debt to EBITDA for the consolidation for FY '27.

Okay. And my last question...

Sorry to interrupt Abhishek, can I request you to come back for a follow-up question, please? [Operator Instructions] The next question is from the line of Joseph George from IIFL Capital.

Sir, I had 2 questions. One is on CapEx, you mentioned that it is a fluid thing because new orders keep coming. But would you be able to indicate the CapEx guidance for FY '26 given that we are almost 7 months into the year?

It will be around closer to INR 1,000 crores for Craftsman and DR depends on how much land we buy. So we're just waiting to see any more new customers are willing to add up whether to buy a bigger piece of land or a smaller piece of land. So for Sunbeam, the CapEx is negligible.

Understood, sir. And the second question that I had was on your ROCE target. So you mentioned that when you're taking new orders or thinking of investment into new plants, you have set some ROCE targets. And based on passing that threshold, you think of further investments. So would you be able to indicate what is the minimum ROCE threshold that you have in mind while considering new CapEx?

The new CapEx, so the minimum threshold level will be a pre-tax ROCE of 20%. We do all the vetting on this matter. Generally, there can be a possibility that the existing business may be slowing down or the model is getting changed. We take that into factor, which may affect the numbers going forward. But the new CapEx is based on minimum 20% ROCE. Now coming to when will we reach the 20% minimum ROCE for the new businesses is -- on the automotive side from the time the business is awarded to the investment, to the time of the PPAP and to the actual revenue generation and the peak revenue generation, there is a lag of around 3 years, totally. From the start of investment to coming to a peak revenue generation is anywhere between 3 to 4 years. So what happens, new projects when you're growing at around 30% overall as a company invested in the Craftsman now stand-alone is at a run rate of pretty close to 30% growth. The new CapEx actually spoils the old return of investment. But the new CapEx, when it starts to mature, then -- and we slow down investment, I think we'll breach even the 20% ROCE levels.

Next follow-up question is from the line of Mitul Shah from DAM Capital Advisors.

Sir, earlier, I asked for that breakup. That was -- like a broader breakup is already there in PPT, which have I shown. My question was breakup within Powertrain, if you can highlight that.

I think broadly, I think the commercial vehicle is around 46%, off-highway 21%, tractors 19% and others like passenger vehicles and SUV is around 14%. And this is the broader breakup. It is almost in line with the previous years. Only thing the CV has shown a decline and tractor has shown a small increase. But going forward, the tractor is having more traction now currently. When CVs comes back, I think the numbers will also come back. Today, we are dependent less than 50% on the commercial vehicle segment. And within the country, it is also lesser now currently. So I think the changes in the -- or the slowdown in the commercial vehicle segment is really not affecting us to a level where it affects our profitability.

Sir, how this compares with the last quarter Q-on-Q?

Commercial vehicle from 49% as a percentage has declined to 46%. Off-highway has increased from 20% to 21%. Tractor has increased from 17% to 19%. And the SUV segment is flat at 14%.

Sir, second question on utilization. If you can help with the various segmental utilization. This time seems to be aluminum must have improved significantly. So how is the overall utilization for aluminum for Powertrain and for others?

Aluminum, still we are in the ramp-up phase in the Bhiwadi plant. And the Hosur plant is brand new, and we just started commercial production a week ago. So these are 2 things which are changing. On the current capacities of DR, it has been stable. It is linked with 2 of the passenger vehicle manufacturers or 3 passenger vehicle manufacturers, which you are aware is in public domain. And on Craftsman per se, the -- some export to Europe has increased marginally, yes. So the capacity utilization has improved in the Aluminum business. But whatever the new segments where we have invested, they are still waiting for customer approvals to ramp up. So the capacity utilization, still there is headroom, but it doesn't mean that we don't need investment because the capacities on one -- say, one particular size of press may be available, but some other size of press we might have received orders and more lines need to be set up. So we cannot say that we will not need CapEx even though there is some unutilized plant capacity. And sometimes the peak demand of the customers are also keeping changing on a seasonal basis. It is also depending on market share. Some of the customers whom we are engaged with on Aluminum business seem to be doing very well on both on the passenger vehicle segment as well as on the 2-wheeler market, and that shows a larger capacity utilization. Also, the trend towards both on the passenger vehicle, but more so on the 2-wheeler side is to increase outsourcing rather than in-sourcing. So what we see is in the future that customers will be outsourcing whatever they're currently doing inside the plant as they gain more confidence in the supply base.

And on the Powertrain side, sir?

Powertrain, more or less, it is the same. We have not added any product per se to the Powertrain business. You're aware that each of the plants are having a set of customers, in Jamshedpur, in Faridabad, in Pune, in Chennai and also in Coimbatore. It is more of status quo. Nothing has changed there.

Next follow-up question is from the line of Abhishek Kumar Jain from AlfAccurate Advisors.

Sir, in data center, what kind of potential opportunity are you looking for your company? What is your plan for that?

I stick to the same number from India, $100 million going into '29 or 2030 as the case may be, depends on product approval cycles. So this is the first stage of revenue. After that, for this, more than 50% is orders on hand and the balance 50% is already advanced stage of negotiation with the customer. As I mentioned, it takes around 3 years from the time of order to the -- seeing some revenue start. So we are on track for the $100 million.

And as you are mentioning that around INR 1,000 crores kind of the CapEx in the stand-alone business and INR 280 crores in the DR Axion. So when all these numbers will start to yield the results? I mean to say that this INR 1,200 crores CapEx would be in FY '27 and revenue will start from FY '28?

Okay. So I just want to step back a little when we became a public company of revenue. Now every year, we seem to be looking at additional revenue equal to the number what we were at the time of the IPO. And today as we have to put in the investment much earlier when compared to the actual revenue generation. And today, land cost has slightly gone up -- [ fully ] gone up quite high. And when the plant becomes saturated, we have to have a step change for the investment. The new campus will allow us to grow further with marginal investment going forward in the future. But as you are aware that setting up any new campus for the infrastructure, not only land and building, but also other compliances is quite expensive. So this is a step change what we are in the current situation.

Okay. So the total CapEx would be around INR 1,400 crores that will be in FY '27 only?

I mentioned that the Craftsman CapEx is around INR 1,000 crores. All this will start yielding results 2, 3 years down the line only. It's not the CapEx for the current situation. There are 2 options, whether to -- these customers are quite large in nature. So when we commit for the orders and we quote for the orders, it is obvious that we are interested to invest and grow the company going forward in the future. And we have not taken any large bids at all. And more so, we shied away from most of the EV projects because we are unsure of that. Whatever we have taken is more solid in nature and the revenue is pretty -- we're very confident about the revenue coming in.

And my last question on that your total sales would be around INR 7,700 crores in FY '26 and FY '27, it is expected to cross INR 9,000 crores, as you are mentioning. So just wanted to understand what is your long-term plan for -- or long-term target for the revenue by FY '30, including the data center and other revenue?

What we -- the whole global market, we are -- Craftsman is not an expert here, but I'll just touch upon that. The entire community is waiting for the inflection point of $4,000 per capita GDP, which is according to all the experts, it seems to be not far off totally. For that -- after that, I think the growth will be sustained for a longer period of time according to the data shown on all developed countries in the past. So the government has announced the first income tax reduction, then the GST portion of it and now the bank interest also has reduced, encouraging more debt to be drawn by not only the manufacturing community, but also the consumers are willing to take up higher cost products because there -- more cash is available there. So when this comes, we are seeing large commitments from OEMs themselves for new plants across the country. I'm pervy to certain discussions with certain customers. Because of confidentiality, I cannot talk about it, but we are going to see the capacity of manufacturing with our existing customers growing around 50% in the next 3 years totally. So whether we are going to satisfy these customers with the number by also matching the investment or letting go new orders is a choice which we should not be taking a negative point that we are not willing to invest. This means that the end customer requirement, which drives the demand, we have to follow the demand. So we are confident about a payback with the 20% ROCE on a mature level. And you are aware that when the Aluminum business when we started long back, it was showing a very minimum traction. And in fact, there are many questions asked whether it's profitable or why we are investing in the Aluminum business when Powertrain is more profitable. So the answer is now available that the Powertrain -- Aluminum business is growing multifold. The demand is only the tip of the iceberg on the Aluminum business today. So we are seeing traction that either we invest as Indian companies or we'll have multinational companies investing into India for the sort of businesses. So we are confident about our ability to deliver to the customer. And we are confident our shareholders will support this sort of large CapEx. I want to draw in parallel there. China is years ahead on the investment cycle, and we are only making a marginal investment. And when you call China Plus One policy, without investment we really cannot even think of even quoting for an order. So I think we have decided to take the growth path.

[Operator Instructions] Next question is from the line of Vignesh from Ksema Wealth Management.

Just want to understand how is the German subsidiary doing? And any idea on like how the European market is shaping up and opportunities from that?

The German subsidiary is catering 90% of the revenue towards large engines for the power generation, which is, again, predominantly getting into the data center business. Predominantly means majority, I will not say predominantly. But overall, the capacities in this segment as a supplier base, it is much lower than the actual demand. So the plant is running very effectively, I would say. The order book is full. Even the revenue has increased. The Q2 revenue is around -- H1 revenue is around INR 158 crores, and we had an EBITDA of around INR 14.87 crores -- EBITDA of around INR 11.4 crores. So our PAT itself for the first half of the year is almost INR 8 crores totally on this matter. So we see a trend like this going on for a few more years surely on this matter. So we are not seeing any challenges in the company as far as the order portion is concerned.