Q2FY24 Review: Craftsman Automation: DR Axion offsets slowdown in organic business

1 Nov 2023 , 12:32 PM

Craftsman’s Q2 Ebitda came in 3% above analysts of IIFL Capital Services estimate, due to positive surprise in DR Axion (76% stake acquired in Feb 2023). The YoY growth in revenue and Ebitda has tapered down to singledigit on an organic basis (standalone). This is a reflection of the slowdown in auto production in India, as well as lower off-take in exports and non-auto segments. On the other hand, DR Axion surprised positively with 26-27% QoQ jump in revenue and Ebitda. Higher-than-expected growth and margin expansion in DR Axion has made the acquisition 20-22% accretive to FY24 EPS, vs. earlier estimate of 7-10% accretion. Analysts of IIFL Capital Services largely maintain their FY24-26 EPS estimates, following these results. Retain BUY with TP of Rs5,300 (based on 24x 2YF EPS). 

Q2 Consol. Ebitda 3% above est.: 

Craftsman’s Q2 revenue grew 52% YoY (incl. acquisition) and 7% YoY organically (standalone). Standalone revenue growth was weak due to Powertrain and Non-auto segments. These segments clocked YoY decline in Ebit. DR Axion performance was stronger than expected with 26-27% QoQ growth in revenue and Ebitda. As a result, consol. performance was slightly better than expected. 

Organic growth moderated substantially in Q2: 

Post a 21% revenue growth in FY23, standalone growth moderated to 12% in Q1FY24 and 7% in Q2FY24. This reflects weakness in underlying segments (auto production, exports, storage solutions). Within Powertrain, CV segment clocked growth, but tractors and off-highway clocked YoY decline. In nonauto, storage solutions revenue clocked 23% YoY decline. Mgmt. has now moderated growth guidance for the Powertrain segment to high single digit/low double-digit in FY24/FY25, and expects acceleration in FY26 on the back of new orders. The Aluminum segment is likely to clock strong growth in FY24 and beyond, driven by new order wins. 

EPS accretion from DR Axion offsets organic slowdown: 

Analysts of IIFL Capital Services now forecast 23% revenue growth for DR Axion in FY24. Ebitda margin has improved to 18% vs. 13-14% pre-acquisition. The sharp jump in DR Axion’s earnings, post-acquisition by Craftsman in Feb 2023, has led to the transaction becoming 20-22% EPS accretive vs. earlier expectation of 7-10% accretion. This has fully off-set potential EPS downgrades due to slowdown in the organic business.