DR Axion And Sunbeam Acquisitions Will Boost Future Operational Efficiency

Key Takeaways

• Strategic acquisitions and partnerships, alongside high-margin business shifts, are set to boost revenue, earnings, EBITDA, and net margins.
  
• Expansion in stationary engines and operational consolidation, including plant closures, are expected to enhance financial health and profitability.
  
• Significant investments and inefficiencies in new projects could pressure financials, increase risk, and delay revenue realization, impacting net margins and earnings.

Catalysts

Operates as an engineering company in India.

• Recent strategic investments in acquisitions and partnerships, such as the DR Axion and Sunbeam acquisitions, are expected to enhance revenue streams and operational efficiency, contributing to increased revenue and earnings in the future.
  
• The company's shift towards high-margin businesses, such as alloy wheels and stationary engines, along with the development of key projects like the Bhiwadi and Kothavadi plants, are projected to improve net margins and EBITDA as these projects reach full capacity.
  
• Craftsman Automation's entry into the global stationary engine market, driven by data center growth and partnerships with major multinational companies, is expected to significantly boost the company's revenue and profitability in the Powertrain division in the next few years.
  
• The consolidation of operations and closure of the Gurgaon plant, combined with reduced employee costs and land sales, are anticipated to improve overall financial health by reducing debt levels and enhancing net margins and earnings.
  
• Continued focus on automated storage and a strong order book in the Industrial & Engineering segment is likely to enhance revenue visibility and improve EBIT margins, capitalizing on the growth in logistics and storage automation demands.

Craftsman Automation Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Craftsman Automation's revenue will grow by 20.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.8% today to 8.6% in 3 years time.
• Analysts expect earnings to reach ₹7.5 billion (and earnings per share of ₹314.01) by about March 2028, up from ₹1.9 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.8x on those 2028 earnings, down from 59.4x today. This future PE is greater than the current PE for the IN Machinery industry at 28.4x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.65%, as per the Simply Wall St company report.

Craftsman Automation Future Earnings Per Share Growth

Risks

• Significant investment in acquisitions and greenfield projects, such as DR Axion, Sunbeam, and others, has increased capital expenditures, which could pressure financials in the short term and impact net margins.
  
• Initial operating losses and lower efficiency in new plants, like Bhiwadi operating at 20% efficiency, are contributing to reduced EBITDA and could affect earnings until the plants reach full capacity.
  
• High debt-to-EBITDA ratio of 2.24x due to recent expenditures and delayed asset sales (e.g., Gurgaon land sale) may increase financial risk and interest expenses, further affecting net margins.
  
• Potential challenges in ramping up contracts and execution risks in new and existing markets, such as the Powertrain division with its long gestation projects, could delay revenue realization and impact earnings.
  
• The complexity and potential delays in customer approvals for new projects, particularly in the stationary engines sector, might postpone expected revenue streams, affecting overall financial projections.

Valuation

• The analysts have a consensus price target of ₹5114.429 for Craftsman Automation based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹5800.0, and the most bearish reporting a price target of just ₹4275.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹87.4 billion, earnings will come to ₹7.5 billion, and it would be trading on a PE ratio of 29.8x, assuming you use a discount rate of 14.6%.
• Given the current share price of ₹4733.45, the analyst price target of ₹5114.43 is 7.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.