Craftsman Automation Limited (CRAFTSMAN) Q1 2027 Earnings Call Transcript

Ladies and Chairman, good day, and welcome to the earnings conference call of Craftsman's Automation Limited. As a reminder, all participant lines will be in the listen-only mode. There will be an opportunity for you to ask questions after the opening remarks are concluded. Should you require assistance during the conference call, please signal the operator by pressing star followed by zero on your touchstone telephone. I now have the conference over to Mr. Srinivasan Ravi, Chairman and Managing Director of Craftsman Automation Ltd. Thank you, and over to you, Mr. Ravi.

Good afternoon, everybody. Thank you very much for joining the earnings call for Q1-FI27. I will leave the floor open for questions. Can you proceed with the questions?

Thank you. Participants who wish to ask questions may please press star and 1 on their touchstone telephone. If you wish to withdraw from the question queue, you may press star and 2. Participants are requested to use handsets while asking a question. Please note that some of the statements made during this earnings conference call may constitute forward-looking statements which are subject to risk and uncertainties and are not candies of future performance. We encourage you to refer to the disclaimer section in the company's investor presentation. Further, the management will not be addressing any customer-specific queries due to confidentiality obligations. Participants are requested to avoid mentioning customer names while asking questions. We also request participants to limit themselves to a maximum of two questions at a time, so that all participants have an opportunity to ask their questions. We take the first question from the line of Mumukesh Mandilesha from Anandrati Institutional Equities. Please go ahead.

Yeah, thank you for the opportunity and congrats on the strong results. So firstly, the standalone powertrain has seen a very strong growth on both revenues and EBIT. If you see why, why? Can you just help us understand what are key segments and products which are doing well? And how do you see the order book for this segment and how one should look at the outlook going ahead?

The strong trend is not really a strong trend. I would say that it was a muted trend earlier. It has come to a normal situation as of now in the Q1, and this is likely to continue. Sorry, my bad. Standard aluminum part, sorry. My bad, sir.

Oh, aluminum.

Your question is aluminum. Aluminum, we are on a growth path, and this growth journey will continue. The aluminum segments... The pace of growth or the absolute growth, even percentage growth, all of that will beat the other segments, that is clear, because of the massive investments which has gone in the recent past. And there are capacities still coming into place. Some capacities have still not matured. So that is on a growth path for many more quarters.

Anything specific? What segments, particularly in this aluminum, the two-wheeler, what are the segments?

We are quite balanced. We are four-wheeler heavy, if you look at the revenue portion of it. Yes, closely followed by two-wheeler. But I think the further on, both are growing as far as we are concerned that more new orders are coming in. Some are... Quick order wins where it will see the light of the day in a couple of quarters or even in the next financial year. Some are a little drawn. These orders are in the development stage, which will come into production in FI28 and FI29. Most of the production is coming in FI29. So that will not reflect in the revenue in the coming quarters. But what are orders we have taken a few quarters back? Some of it is already coming into production as of now.

Got it, sir. So, secondly, can you just update further on this Kothawadi plant special engine order book from $100 million, which we crossed last quarter? And just lastly, also on the Sunbeam transformation happening. So, how do you see that property for this entity, AID?

The Kaudhavadi project is, Kaudhavadi is a foundry. Missioning is done at the... I think the parent plant, Arasur, which is the biggest plant, so it is split into two. One is the revenue portion coming from the casting side at Kodawadi. One is the missioning side coming from the Arasur plant. So the billing will happen only from the Arasur plant. So I would say that I reiterate that we have targeted 100 million. We are on track for that. And there is a good glimpse what we are having that in the future we are starting to get more inquiries. That means what orders or inquiries we are going to get in the next few quarters. We will see light of the day. Bye. FI 30, 31. So that can take it beyond the 100 million, whatever was initially projected. As far as now we are concerned, we are now doing little of the automotive, but mostly on the general engineering castings which are there, which is not significant as of now. The capacity utilization is under buildup, I would say. So we'll have two or three more quarters before we start seeing some revenue recall in this business.

And just on the Sunbeam side, sir, how do you see the transformation and probability, sir?

On the Sunbeam side, we have the restructuring is more or less complete, but some restructuring we have postponed to a few months because of requests from customer on this matter, like there are exit customers, there are exit parts where we have to handle the customer for a... Couple of quarters more before we are able to achieve that. So with that, I think by December, I think 90% of the turnaround or the restructuring will be complete. So as we move on, quarter and quarter, we'll see improved results coming from the current quarter onwards, I would say.

Got it, sir. Thank you so much for the opportunity.

Thank you. Participants who wish to ask a question, please press star and 1. We take the next question from the line of Mukesh Saurav from Evendus Park. Please go ahead.

Yes, sir. Good afternoon and thank you for the opportunity. My first question is regarding this CAPEX that you have announced for Unit 3 at Huzoor. You mentioned that we are at about 85% utilization. Just trying to understand, we had just started the alloy wheels plan probably a couple of quarters back. So, you know, have we reached high utilization there? And also, what components are we looking at in this unit tree?

Yes, the overall in the aluminum segment, we are touching... The CAPACs are happening across various locations, as well as in our direction subsidiary. Of course, Sunbeam is not on expansion. Now, coming to the alloy wheel, I think we declared whatever the installed capacity is 5.8 million, and this year, we hopefully will be touching or crossing 4 million wheels on the current year. Thank you very much. Combined plant of Vivadi as well as Shulagiri. So, we are not putting in capacity there. Once we see that we are crossing this 80% threshold, we are marginally expanding the capacity. So, now the Auzur facility is not for alloy wheel. It is for the traditional high pressure die casting and to start with high pressure die casting only on. Parts which are for the automotive industry. It can be for two-wheeler, it can be for four-wheeler, but we are run out of space and capacities in our current plant, so we are making an enabler, so we will fill in with the customer orders as and when they come. But we are seeing good traction on inquiries, and we expect the market to grow. If we are out of capacity, we are proactive to put up capacity. And this capacity also will put up in phases. It is not that... We will be doing it in one single year. It will be fully mobile.

Got it. And what will be our CAPEX plan for this year, both, if you could break it up into standalone and in subsidiary businesses?

In Sunbeam, it will be maintenance CAPEX and some maybe capacity balance CAPEX. In DR Action, it's quite substantial CAPEX is there. Of course, the land has been purchased last year itself. So this year, we have, when we started the project, we have a few orders on end. Now we have got more orders. And we are seeing also more orders coming in, and some of the orders are maturing in 20, not maturing, start of production in 29, and some are starting in production in 2030 in general. So there will be capex continuization. We will be facing the capex. It will not be bulk capex on year. If you see more traction coming in from quick win orders, then we may accelerate the capex. So, we have to do a wait-and-watch sort of capex. The approved plan is around 430 crore capex for DIA. On craftsmen... This is over...

Sorry, the 430 is for two-year period, sir?

So, we have taken approval for this year, but I think we will be spending this year, or some of it may spill over too, and it depends on the demand. Because if you cannot really cut off exactly on March 31st, something may, always, it is not, the CapEx will, ongoing CapEx will not be a cutoff line, really speaking.

Sure, sure, sure. And you were mentioning about trend loans, sorry.

Standalone, we have been averaging more than 1,000 crore, I think, capex, and that will continue, and everything depends on the next two quarters, what growth we see on the standalone. We have shown reasonable growth on Q1, and this growth rate, the traction continues to grow. We are at no wait to watch more.

Got it, got it. And just lastly, material costs have obviously been moving up quite a bit, and probably now we've seen some correction there. How are we placed in terms of passing through some of these costs that we have already faced last quarter? And how much more is there for us to kind of offset any of these hikes?

This is different for different customers. Yes, some of the customers are fair. Some of the customers are taking their own time to make this adjustment which is having global. But we are confident all customers will need to align to the... Thank you.

Okay. All right. Thank you, sir. I'll get back in the queue.

Thank you. Participants are a reminder, if you wish to ask a question, please press start and 1. We take the next question from the line of Chandra Mowly Uttar from Goldman Sachs. Please go ahead.

Hi, good evening, and thank you for taking my questions. My first question is just around the heavy horsepower engines opportunity. So, related to some of the opportunities you mentioned, you've had more customer inquiries beyond the supplies that you're currently doing. I just wanted to understand typically how long is the sort of prove out and initial low numbers of sort of batch certification time frame, low volume batch certification time frame, after which you typically get into full production on slightly larger contracts with some of these customers. I just want to understand how long that period is before you could potentially get into full production on some of those customer orders and inquiries that are coming through.

Let us give a number to it on the number of customers. These are all large customers. We have six customers. Four customers, the orders have been received. Five customers, the order has been received. One customer will receive the orders shortly. With the first four customers itself, we have filled in the first 100 million sort of revenue target, which we have set up for 29-30. This is casting and missioning, of course. Two customers, we already started pilot lot machining, and it's being used for our customers for production. The casting validation is a little longer, so we will need, for these two products, which we are already machining and supplying, which casting is coming from across the globe and going back to the customer, we will need another one year to productionize the current parts. So, the... I would say 30% of the production will be personalized by FI 284, and another 50% will come into FI 29, I would say. So FI 30 will be the first year of seeing that full revenue. But what comes along the way, since we established communication channels, established the exchange of information with their engineering... There are a lot of in-house manufacturing has been done, so it has been a very difficult, long passage. To get all the data and the two teams to work together, which we are working for the last three and four years now, totally. Now the exchange of information is faster, approvals are getting faster. So for the second set of inquiries of the incremental new order wins for new product lines, it will come from the same customers. So it will not take the four-year timeline which we have in. Initially, we have gone through, and already we have almost four years from the time we started, I would say. So, um... What we get now, I think, within two years, it will come into production. So, we may see that what new orders we are going to get in the near future, we'll see productionizing by 2030 or 2031 itself. So, the biggest challenge about the customers accepting as a supplier, first of all, and because their product quality depends on us, so that phase has been... We have passed, I would say. We have passed that phase. So it is more likely that we will accelerate from now on.

That's helpful. Second question is just related to the same incremental business opportunity on heavy horsepower engines. Just want to understand what the typical margin profile and opportunity could be for craftsmen here. I'm just clarifying that this is likely to sit within the powertrain segment. I just want to understand relative to powertrain margins, how the margin profile of this business could shift once it hits. Steady state. Is there any startup costs that you think will have to be absorbed before which the margin starts to upload steady state? Just want to understand that aspect as well.

The current EBIT margins of the current powertrain business is having a weightage of more than 70-70% on... Investments made on the conventional powertrain, I would say. The new powertrain weightage or the large station engines, the weightage will be lower. I will not know the exact number, but I am just giving you a headline, I would say. So, frankly speaking, the depreciation is already happening for the large engine investments done. There is also... The cost we are incurring during this development phase, which is already factored in the powertrain results in the last few quarters also. So this is as a percentage will not increase because what we have, what is coming into production in the next few quarters will offset the new incremental development cost which will happen. For new products, which are still not developed yet. So, I think the worst part of that is over that we have to absorb some startup costs, which is already in the past history, and our results are in spite of that. So, we find that the return ratios are in similar lines. But we have to understand when a new capacity is coming up with a larger capacity and capacity utilization is lesser, the EBIT margins may look depressed on that particular portion for some time until capacity utilization and operator leverage sets up. But our confidence is that the return ratios will be among similar lines on the current powertrain within a couple of years. So today, as it grows, I don't think this is going to distort the powertrain business. It is in the same business model what we built up. Only thing, we added the casting portion to the business. That is the only change.

Got it. That's helpful. And this last question is on the industrial segment. I know it's a smaller part of the total business for us, but I think this quarter there's been a spike in what the performance has been versus the normal quarterly range we've observed in the recent past. I just want to understand what are some of the drivers of why the industrial segment has sort of inflected this quarter versus the recent trend rates.

Broadly speaking, we have the very long history with the contract manufacturing that is quite steady. Nothing as much as changed there. But our product lines, both in the material handling system as well as storage division, they are seeing upswing on demand. I would say. It is not capex intensive business as you know. So the operating leverage is helping us to increase the margins. The capex cycle started in India and we are seeing a lot of traction both on the material handling lifting equipment as well as on the storage. Our orders are increasing quarter on quarter, I would say. So this will keep the margins intact going forward. This is not a one spike what we see in the industrial industry.

All right, that's very helpful. Thank you very much, and all the best.

Thank you.

Thank you. We take the next question from the line of Joseph George from IIFL Capital. Please go ahead.

Hi, sir. Just a couple of questions. One is on Sunbeam, you mentioned that you might give off or discontinue some of the maybe low margin businesses. I wanted to understand how big is that in terms of scale down and corollary, what will be the positive impact it will have on your overall Sunbeam margins?

The revenue per se we are replacing as we are exiting some of the business, we are replacing some of the business from some other customers directly or indirectly, I would say, with support from the parent company craftsmen where we are also not knowing without us. So that way our capacity is not getting underutilized in general. The exit sort of a business are legacy businesses which are more than a decade old or even in some cases two decades old. And some of it is also partly was outsourced. Tiny scale industries. So this is where we are exiting. So it is a negative margin profile which these products we are exiting. So when you are exiting this, I think surely the margins will pick up with better operating leverage from new customers which are coming in. So exit rate, I am very confident about Q4 maintenance out of an EBITDA margin. For Sunbeam, I said there is a delay in the exit because we need to handle or support the customer during the exit period. Most customers have requested us. I think as a matter of goodwill, we stand by them while we exit. So Q4 maintains the margin in line with. And revenue, there may be a 10-20% sort of reduction in the top line, but there will be an increase in the gross margin of value addition. That is a realistic situation that the top line is more governed in the current case with predominantly aluminum and less of missioning and less of value addition. That profile will change. So that is what also zero will lead to the increased. Margin expansion.

Understood, sir. Just one more question on the KPEX. So you listed down the KPEX for each of the entities. Sunbeam, you said maintenance. DR Axion, you said 430 crores. Stand on approximately 1,000 crores. So on a consolidated basis for this year, should we work with about 1,500 crores of KPEX, subject to obviously revisions depending on capacity utilization in the second half. But for now, 1,500 sounds okay, right, as a sum of the three pieces.

Conservatively, yes, but the traction what we see, if this, we thought because of the Iran crisis, everything will slow down and stop. That was when the KAPEX plans were made. Suppose this Q2... Whatever is going to happen in the Indian market and global market, if we see the same traction going on, manufacturing globally is increasing across the world, I would say, in general, maybe for different fields and different end uses, but still, if this higher traction, if you are going to happen in Q2, Q3, our board will decide in Q3 or in Q4 to increase capex. So, we may see at the tail end some revision in CapEx if things go better than what we expect.

Thank you. That's all I did.

Thank you. We take the next question from the line of Shagun, Bay Area, from Anandrati Shares and Stock Brokers Limited. Please go ahead.

Yeah, hi. Am I on the booth? Can I know the current capacity utilization for the segments, the business segments?

Yes, power train is averaging around 70 odd percent. Of course, in the festive season, it will go beyond 75, maybe closer to 80, but that will be for a short period. But after that, again, the capacity utilization during Q3 will come down. Q4, again, is likely to rise. But on an annualized basis, anywhere between 80 percent is wishful thinking. I think beyond 70 percent is very difficult because of the seasonal. This is the nature of the business and the risk of stopping customer lines. I would say that we are operating at, I think, 10% lesser than the optimum capacity. At 10%, hopefully, we will be able to bridge the gap in this Q2 or Q4 as we start. On the power drain, and aluminum, we are already operating at more than 80 odd percent.

Thank you. We take the next question from the line of Vignesh, SBK, from KC Maw Wealth. Please go ahead.

Hi, am I audible?

Yes, please.

So just on the confirmation of the heavy HP opportunity, I think 30% will come from FI 28 and 50% 29. Is my understanding correct?

No, FI 30 will test that 100 million, whatever the first initial target. So, we may see that increasing if new order bins are there with the same customers and similar product lines where the developmental time and the time for testing is lower.

Okay, but these revenues will start from FI 28, sir, just to understand?

Yes.

Initial revenue?

Yes, FI28. Now it is FI27, really speaking, it's too small to talk about it. So from FI28 onwards, we'll see a decent number.

And just on the standalone CAPEX, can you know, like, where are we spending the thousand crores? Anything particular?

That's a very important question.

Just to understand exactly what we are focusing on.

Let us talk about powertrain, and let us also talk about aluminium. The infrastructure required for a new aluminium project is quite high, and also on the powertrain today. So when we go for new locations and new campuses, the base itself is quite high. If... In the two earnings call survey, I think I had mentioned that the land alone for DR Axian plant costed us around 150 crores, which is around 50 acres of land. So, and to put up a basic infrastructure without any production equipment will easily cost another 75 to 80 crores. So, when you want to go for a plant of a decent size, not mega size. I think the land and building and infrastructure, the ETP, HTP, the power connections, and the road in the infrastructure there will touch around 150 to 250 depending on the plant size. So then only comes the production equipment. So we have been holding back these sort of activities for a long time, but we are also seeing that just like our customers have been announcing greenfield facilities.

Ladies and gentlemen, we have lost the line of the management. Please stay connected while I reconnect the management. Thank you. Ladies and gentlemen, we have the management line reconnected. Sir, you can proceed. Thank you.

Thank you. Sorry for the disturbance which just happened in the disconnection. I was just answering on the capex, where the capex is going. Fundamentally, when we are... During the IPO, we were around 1,500 crore only on the revenue side, and when we are quantum growing almost on revenue, we need more plants, more locations. Our decision to put up a plant will decide whether the customer is going to support us in the long term, and we have to follow our customers across India. Most of the customers have announced greenfield projects and are looking forward to us also investing. So any greenfield project anywhere between 100 to 250 crores will be the basic infrastructure without the production equipment to have a plant readiness to accept equipment. So this will have, unless we fill up the plant with a decent amount of production capacity, operating leverage will not set in. So that is the reason for the jump-in capex. But also we see... Big impact in the revenue growth. Revenue growth, even after adjusting the aluminum cost, we are seeing higher traction in the growth. So our return ratios will not get affected even though these capexes are put in place because the base capex is quite high now for gross block and net block. So further on, I think our EBITDA itself will carry the day for us.

So, thanks for the information, sir. Just to understand, this mostly will be towards aluminium size, sir?

No, it will be for both overtrain and aluminium in the right proportion, depending on the growth opportunities. Overtrain, of course, the station engines are a little new, so that there will be some capex. Yes, there is a foundry also there. So that will take more than 50% of the powertrain. But the powertrain, for say, is a large amount of capacity installed. You may recall that our depreciation is close to around 500% now, currently. And to replace those missionaries, the replacement costs are high, even with a lot of planning and a lot of adjustments, reconditioning of old missions still. I think 250-300 crore maintenance capex itself is required, as we speak. You understand that the dollar, euro, all this has undergone change. So the same capex is going to be very costly. We did a small exercise for internal and for our board. We found that the capex, what we did in 2016, we want to have the same capacity exactly put up. The capex is around five to seven times more. Because the land has increased eight, nine times, the construction cost has increased three, four times, all the infrastructure cost has increased. Missionary also has more or less, in rupee terms, close to double totally over a period of time. So the incremental capex is quite difficult.

Thank you, sir. Thanks for the time. And just on the CapEx frame, we are saying we are putting 1,500 crores. So funding should be from internal accrues, sir?

So, year after, it will be only internal accruals. Of course, the cash mismatch will be there. See, as I mentioned, there is no need to come to the public markets, per se. That is clear. But at the EBITDA level of whatever we have projected initially on the growth on the EBITDA numbers, not the absolute numbers, we don't want to talk about it. But I think it is to keep a good... Dead to EBITDA, I think we are on track.

Okay, sir. And last thing on the cash, sorry, the land, any updates?

Yes, it is gaining traction. I think something is happening. I think we are close to signing a deal, I would say. That's all.

Okay, sir. Thank you. That's your permission.

Thank you.

Thank you. Participants, if you wish to ask a question, please press start and 1. Participants who wish to ask a question, please press star and 1. As there are no further questions from the participants, I now hand the conference over to Mr. Srinivasan Ravi for his closing comments.

Thank you very much for all of you to join the conference. I have some closing remarks. The CAPEX cycle has started in India. I think this CAPEX cycle is going to continue quite for a long time, I would say, in general. Not only the OEMs, but also tier 1, tier 2 companies. India is moving towards a manufacturing economy, and I think we have very bright prospects to continue to grow in the coming years. With these closing remarks, I would thank you all once again.

Thank you, sir. On behalf of CraftSense Automation Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your line.