CRISIL upgrades Craftsman Automation's credit ratings to AA-/Stable

CRISIL Ratings has upgraded the credit ratings of Craftsman Automation (CAL). The long-term bank facilities have been upgraded from ‘CRISIL A+/Positive' to ‘CRISIL AA-/Stable’, and the short-term bank facilities have been upgraded from ‘CRISIL A1’ to ‘CRISIL A1+’. This means that CAL is now considered a more creditworthy company than it was before, which could make it easier for the company to borrow money in the future.

The rating agency attributed the development to the healthy and sustained improvement in CAL’s business performance in fiscal 2023, which is expected to continue in the near to medium term due to steady demand for components, mainly from the commercial vehicle (CV) and passenger vehicle (PV) original equipment manufacturers (OEMs). Besides, the company, by way of its established and superior operating efficiencies and expertise in the machined components and die-cast component space, continues to register operating profitability of at least 20%, which, along with healthy growth in revenues, is leading to strong annual cash accruals. Furthermore, the company's financial risk profile has also strengthened over time, driven by strong annual cash generation, equity proceeds received from its initial public offering, which helped lower debt, and prudent funding of its capital expenditures. Consequently, the company’s debt metrics have strengthened over time, and are expected to remain at comfortable levels over the medium term as well.

Incorporated in 1986 in Coimbatore, Tamil Nadu, CAL manufactures several components and sub-assemblies on a supply and job-work basis according to client specifications in the auto, industrial, and engineering segments. Key products in the auto segment include power train products, cylinder blocks, cylinder heads, cam shafts, and crank cases for CVs, sports utility vehicles, two-wheelers, farm equipment, and earthmoving and construction equipment

CAL’s consolidated revenue rose 44% on-year in fiscal 2023, supported by healthy demand from CVs aided by an uptick in economic growth, pick-up in private capital expenditure (capex) cycle, higher freight demand, and a revival in construction, infrastructure, and mining activities. Healthy growth is expected to continue in the near to medium term, with the full-year revenue contribution coming from DR Axion India. (DR Axion was acquired in February 2023). Operating profitability
remained healthy, though it dipped marginally to 21.6% in fiscal 2023 from 24.2% in the previous fiscal, owing to a change in product mix, higher inflation, and lower profitability at DR Axion. Operating margin is expected to further moderate with the complete integration of DR Axion, but still sustain at 20% over the medium term.

In February 2023, CAL acquired a 76% stake in DR Axion for a consideration of Rs 375 crore. It is a major supplier of cylinder blocks and heads for leading PV OEMs such as Hyundai Motor India, Kia Motors, and Mahindra & Mahindra. The acquisition has helped CAL increase the share of revenue from the PV segment and gradually lower revenue dependence on CVs, thereby diversifying the revenue stream among the auto business. CAL and DR Axion both operate in the automotive (auto) component space and have strengths in complementary areas.

According to CRISIL, CAL's financial risk profile is sound and improving thanks to strong annual cash generation. Despite availing the acquisition debt of Rs. 307 crore, debt protection metrics remain comfortable with a gearing of 0.82 times as on March 31, 2023, and an interest coverage ratio of 5.8 times for fiscal 2023. The Debt to Earnings before interest, depreciation, tax, and amortisation (EBITDA) ratio, though, rose to 1.70 times in fiscal 2023, from 1.4 times in fiscal 2022, as only two months of operating profits of DR Axion were consolidated. Continued steady business performance, resulting in healthy cash accrual, well managed capex spend, and prudent working capital management, will enable debt protection metrics to remain at comfortable levels over the medium term; for instance, the debt to EBIDTA ratio is expected to be under 1.30 times by fiscal 2024.

Weakness

Talking about the weaknesses, the rating agency added that the company's operations are intrinsically capex and working capital intensive. CAL incurred sizeable capex of Rs 2,200 crore during fiscal years 2017–2023, including the fixed asset addition arising out of the acquisition, and in some cases, has set up capex ahead of demand.

The company has to maintain a large inventory, given its customer and product portfolios. Also, with a large clientele and strong export presence, receivables are sizeable and could get stretched during a slowdown. Given the nature of operations, inventory, and payable days are also high. Given multiple strategic business units and clients, operations will continue to be working capital intensive, and hence its prudent management remains critical, the rating note continued.