Craftsman Automation (NSE:CRAFTSMAN) Q1 2027 Earnings Call

0:00 Ladies and gentlemen, good day, and welcome to the Earnings Conference Call of Craftsman 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. I now hand the conference over to Mr. Sridhar Vasan Ravi, Chairman and Managing Director of Craftsman Automation Limited. Thank you, and over to you, Mr. Ravi. Good afternoon, everybody. Thank you very much for joining the earnings call for Q1 FY 'twenty seven. I will leave the floor open for questions.

0:49 Kindly proceed with the questions. Thank 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 risks and uncertainties and are not guarantees 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 obligation. 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 Omakesh Kundlesha from Anandrati Institutional Equities. Please go ahead.

1:52 Yes. Thank you for the opportunity and congrats on the strong results. So firstly, the stand alone powertrain has seen a very strong growth on both revenues and EBITDA, if you see Y o Y. 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 once you 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 come. Sorry, my bad. Aluminum part, sorry. My bad, sir. Okay. Aluminum, your question. Aluminum, we are on a growth path and this growth journey will continue.

2:46 The aluminum segments pace of growth or the absolute growth and 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 to place, some capacities are still not matured. So that is on a growth path for many more quarters. Is there anything specific, which segments particularly in this aluminum, the two wheeler, what are the segments? So we are we are quite balanced. We are four wheeler heavy. If you look at the 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 little drawn.

3:48 These orders are in the development stage, which will come into production in FY 2028 and FY 2029. Most of the production is coming in FY 2029. 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 Kutawadi plant stationary engine order book from $100,000,000 which we crossed last quarter? And just lastly, also on the Sunbeam transformation happening, so how do you see the profitability for this entity? Kodawadi project is... Kodawadi is a foundry. Machining 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 Cordovari, one is the machining side coming in from the Arasur plant.

4:48 So the billing will happen only from the Arasur plant. So I would say that I reiterate that we have targeted $100,000,000 sort of revenue in 2019. We are on track for that. And there is a good glimpse what we are having that in the future, we'll get starting to get more inquiries. That means what orders or inquiries we're going to get in the next few quarters, we'll see light of the day by FY 'thirty, 'thirty one. So that can take it beyond the 100,000,000, whatever was initially projected. As far as now, we are concerned that we are now doing a little of the automotive, but mostly on the general engineering costings, 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 trickle in this business.

5:41 And just on the Sunbeam side, how do you see the transformation and profitability ahead, 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 request 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 exit 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 on quarter, we'll see improved results coming from the current quarter onwards, I would say.

6:29 Got it, sir. Thank you so much for the opportunity. Thank you. We take the next question from the line of Mukesh Sarath from Aventis Park. Please go ahead. Yes, sir. Good afternoon and thank you for the opportunity. My first question is regarding this CapEx that you've announced for the Unit three at Huzoor. You mentioned that they are at about 85% utilization. Just trying to understand, we had just started the alloy bees plant probably a couple of quarters back. So have we reached high utilizations there?

7:15 And also what components are we looking at in this Unit 3? Yes. Overall in the Aluminum segment, we are touching the CapEx are happening across various locations. Okay. Well as in our D RAC and subsidiary, of course, Sunbeam is not on expansion per se. Now coming to the alloy wheel, I think they declared whatever the installed capacity is 5,800,000. And this year, we are hopefully will be touching or crossing 4,000,000 on the current year that is at the combined plant of Guwadi as well as Shulabiri.

8:05 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 Odhur facility is not for alloy wheel, it is for the additional high pressure die casting and to start with high pressure die casting only on parts which are in the automotive industry. It can be for two wheeler, it can be for four wheeler, but we have 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. Since we're out of capacity, we are proactive to put up capacity.

8:52 And this capacity also will put up in phases. It is not that we will be doing in one single year. It will be filling out two or two years, maybe over five years quarters, depending on the need. Got it. Got it. And what would be our CapEx plan for this year, both if you could break it up into standalone and in the subsidiary businesses? In Sandeep, it will be maintenance CapEx and some maybe capacity balance CapEx. DRXN is 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 in line. Now we have got more orders.

9:38 And we are seeing also more orders coming in. And some of the orders are maturing in 'twenty, not maturing, start up production in 'twenty nine and some are starting in production in 2030 in general. So there will be CapEx continuation. We'll be facing the CapEx. It will not be full CapEx one year. If you see more traction coming in from pick in orders, then we may accelerate the CapEx. So we have to do a wait and watch sort of CapEx. The approved plan is around INR $4.30 crore CapEx for Doctor. On Craftsman... This is over sorry, the $4.30 crore is for two year period, sir? So we have taken approval for this year, but I think will spending this year or some of it may spill over to next year. Depends on the demand.

10:29 Because we cannot really cut off exactly on March 31, something may always it is not the CapEx will ongoing CapEx will not be a cut off line, really speaking. Sure, sure, sure. And you were mentioning about stand alone, sorry? Stand alone, we have been averaging more than INR 1,000 crore, I think, CapEx, and that will continue. And everything depends on the next two quarters what growth we see on the stand alone. We have shown reasonable growth on Q1 and this growth rate, which is the traction continues to grow from Q1 level, then we may have to accelerate some of the CapEx, which is meant for last year towards Q4.

11:15 As of now, we don't see much need to react very quickly because still we have global problems. Right. Yes, we are in a wait and watch mode. Got it. Got it. And just lastly, material costs have obviously been moving up quite a bit and probably now you'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.

12:05 But we are confident all customers will need to align to the new reality that this sort of situation supplies have to be fairly compensated for the supply prices, which should be a pass through. So beyond that, I would not like to make any specific observation here. All right. Thank you, sir. I'll get back in the queue. We take the next question from the line of Chandramaoli Uttar from Goldman Sachs. My first question is just around the heavy horsepower engines opportunity.

12:56 So related to some of the opportunities you mentioned, you've had more customer inquiries beyond the supplies that you're currently doing. Just wanted to understand, typically, how long is the sort of prove out and initial low numbers of sort of batches 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 wanna 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 we are... These are all the large customers. So we have six customers. Four customers, the orders have been resumed. Five customers' order has been received. One customer, we are receiving the orders shortly.

13:48 With the first four customers itself, we have filled in the first 100,000,000 sort of revenue target, which we have set up for 2930. This is casting and machining 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 these current parts. So the I would say 30% of the production will be recognized by FY 2024 and another 50% will come into FY 2029, I would say. So FY 2020 will be the first year of seeing that full revenue.

14:42 But what comes along the way since we established communication channels, established the exchange of information with their engineering divisions where 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 or the incremental new order wins for new product lines, it will come from the same customers. So it will not take the four year time line, which we have been initially we have gone through. And already we have almost four years from the time we started, I would say. So 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 production I think by 2030 or 2031 itself.

15:41 So the biggest challenge about the customers are shifting as a supplier, first of all, and because their product quality depends on us. So that phase has been passed, I would say. We have passed that phase. So it is more likely that we will accelerate from now on. Got it. 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 Craftsman here. I'm just clarifying that this is likely to sit within the powertrain segment. I just want to understand relative to the powertrain margins, the margin profile of this business could shift once it hits steady state? Is there any start up costs that you think will have to be absorbed before which the margin starts to approach steady state? Just want to understand that aspect as well.

16:46 The current EBIT margins of the current powertrain business is having a weightage of more than 70 something percent 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'm just giving you a headline, I would say. So frankly speaking, the depreciation is already happening in the 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.

17:32 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 operating leverage sets up. But our confidence is that the return ratios will be on the 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 have built up. Only thing we added the casting portion to the business. That is the only change there.

18:43 Got it. That's helpful. And just last question is on the industrial segment. 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. So 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 has 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's not CapEx intensive business as you know. So the operating leverage is helping us to increase the margins. The CapEx cycle has started in India and we are seeing a lot of traction both on the material handling lifting equipment as well as on the storage.

19:47 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 Engineer side. Got it. 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 Sandeen. 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?

20:35 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 Craftsman where we are also offering with orders. 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 to Tiny Scale Industries. So this is where we are exiting. So it is a negative margin profile in which these products we are exiting. So when we 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'm very confident about Q4 mid teens sort of an EBITDA margin for Sunbeam.

21:39 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 mid teens it will be the margin in line with the Craftsman business. 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 aluminum predominantly aluminum and less of machining and less of value addition. That profile will change. So that is what also is going lead to the increased margin expansion.

22:32 Understood, sir. Just one more question on the CapEx. So you listed down the CapEx for each of the entities, Sunbeam you said maintenance, Doctor. Axion you said INR430 crores, stand on approximately INR1000 crores. So on a consolidated basis for this year, should we work with about INR1500 crores of CapEx subject to obviously revisions depending on capacity utilization in the second half. But for now, INR1500 crores sounds okay, right, as a sum of the three pieces? Conservatively, yes. But the traction what we see is this we thought because of Iran prices, everything will slow down and stop. That was when the CapEx 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, I mean, across the world, I would say, general, maybe for different fields and different end users.

23:28 But still, this higher traction if we 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. Understood, sir. Thank you. That's all I had. Thank you. We take the next question from the line of Shagun Beria from Anandrati Shares and Stockbrokers Limited. Yes. Can I know the current capacity utilization for the segments, the business segment? Yes. Powertrain is averaging around 70 odd percent.

24:16 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 right. For an annualized basis, anywhere between 80% is a wishful thinking. I think beyond 70% is very difficult because of the seasonal nature of the business and the risk of stopping customer lines. I would say that we are operating around, I think, 10 lesser than the optimum capacity. The 10%, hopefully, we will be able to bridge the gap in this Q2 or Q4 as we stand. On the powertrain. And aluminum, are already operating at more than 80 odd percent, I would say.

25:14 We take the next question from the line of Vignesh SBK from KCMW Wealth. Yeah. So just on the confirmation of this heavy HP opportunity, I think 30% will come from FY twenty eight and fifty percent '29. Is my understanding correct? No. Yeah. FY thirty will test a 100,000,000 whatever would be first initial target. So we may see that increasing if new order wins are there with the same customers and similar product lines where the development will time and the time for testing is lower. Okay. But this revenues will start from FY '28, sir? Just just to understand.

25:59 Yes. Initial revenue? Yes. FY '28. Now with this FY '27, really speaking, it's too small to talk about it. So from FY '28 onwards, we'll see a decent number. And... Yeah. And just on the stand alone CapEx, can you know, like, where are we spending this thousand crores? Anything particular? Oh, okay. That's a very important question. Just just to understand, like, where are we focusing on? Yeah. See, let us take about powertrain, and let us also talk about aluminum. The infrastructure required for a new aluminum 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 two earnings calls away, I think I had mentioned that the land alone for DRXN plant two costed us around INR 150 crores, which is around 50 acres of land.

27:05 So and we have to put up a basic infrastructure without any production equipment will easily cost INR 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 them and the infrastructure there, they will touch around 150 to $2.50, depending on the plant size. So then only comes the production equipment. So we have been holding back these sort of activity for a long time, but we are also seeing that just like our customers have been announcing greenfield facilities with the 500 acres and 3,000 crore or 20,000 crore something.

27:53 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 has happened and the disconnection. I was just answering on the CapEx, where the CapEx is going. The fundamentally, when we are during the IPO, we were around INR 1,500 crore only on the revenue side. And when we are quantum growing almost on the revenue, we need more plants, more locations. Our decision to put up a client will decide whether the customer is going to support us in the long term, and we have to follow our customers across India.

28:38 Most of the customers have announced greenfield projects and are looking forward to us also investing. So any greenfield project anywhere between INR 100 to 200 crore will be the basic infrastructure without the production equipment to have a planted in a structured equipment. So this will have unless we fill up the plant with a decent amount of production capacity, the operating leverage will not set in. So that is the reason for the jump in CapEx. But also, we see big improvement in the revenue growth. Revenue growth even after adjusting the aluminum cost, we're 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 the...

29:31 Our EBITDA itself will carry the day for us. So so thanks for the information, sir. Just to understand this, mostly will be towards aluminum side, sir? No. It will be for both powertrain and aluminum in the right proportion depending on the growth opportunities. Powertrain station engines station engines are little new so that there will be some CapEx. Yes, there's a foundry also there. So that will take more than 50% of the powertrain. But the powertrain versus a large amount of capacity installed. You may recall that our depreciation is around close to around INR 500 crores now currently.

30:17 And to replace those machinery, the replacement costs are high, even with lot of planning and lot of adjustments, reconditioning of old machines still, I think INR $25,300 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 in exactly put up. The CapEx is around 5 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.

31:06 Vishnari also has more or less rupee terms close to double totally with the over a period of time. So the incremental CapEx is quite difficult, I would say. Thank you, sir. Thanks for the time. And just on the CapEx front, we are saying we are putting thousand 500 crores. So funding should be from internal accrual, sir? So year after will be only internal accruals. Of course, the cash mismatch will be there. See, as I mentioned, the... There's no ever 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 EBITDA numbers, not absolute numbers, we do not talk about it.

31:54 But I think it is to keep a good to net debt to EBITDA, I think we are on track. Okay, sir. And last thing on the cash, any... Sorry. The land, any updates, sir? 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. Thank you. That's it from my side. Thank you. Thank if you wish to ask a question, please press star and 1. Participants who wish to ask a question, please press star and 1. There are no further questions from the participants, I now hand the conference over to Mr.

32:46 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 one, Tier two companies. India is moving towards some 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 Craftsman Automation Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your line.