Exclusive Contracts In Stationary Engines Will Expand Market Reach And Strengthen Future Prospects

Key Takeaways

• Strategic acquisitions and expansions, along with investments in new facilities, are set to diversify products and increase revenue and margins via economies of scale.
  
• Transitioning to higher-margin markets and reducing net debt through asset sales are expected to improve financial stability and long-term earnings.
  
• Craftsman Automation's acquisitions and new ventures are increasing debt and expenses, risking profitability and revenue growth amid operational inefficiencies and strategic uncertainties.

Catalysts

Operates as an engineering company in India.

• Craftsman Automation's strategic acquisitions and expansions, such as the Sunbeam and Fronberg Germany acquisitions, have set the stage for revenue growth by diversifying its product range and geographic footprint. This is likely to drive a substantial increase in consolidated revenue.
  
• The company's investments in new facilities, like the greenfield plant at Bhiwadi and planned plant at Kothavadi, are expected to reach full capacity utilization, boosting revenue and improving net margins through economies of scale.
  
• Revenue from high-value segments, such as stationary engines, is anticipated to ramp up, driven by exclusive contracts with top clients in a growing market, thereby enhancing long-term earnings potential.
  
• Efforts to transition from reliance on the two-wheeler ICE market to four-wheeler and structural parts markets reduce exposure to market-specific risks and capitalize on higher-margin product offerings, thus enhancing net margins.
  
• The planned sale of land at Gurgaon and ongoing efficiency improvements are expected to significantly reduce net debt and interest expenses, improving leverage ratios and providing a healthier balance sheet, which can positively impact earnings.

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 February 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 51.2x today. This future PE is lower than the current PE for the IN Machinery industry at 30.0x.
• 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 14.7%, as per the Simply Wall St company report.

Craftsman Automation Future Earnings Per Share Growth

Risks

• Craftsman Automation's significant investments and acquisitions, such as the purchase of DR Axion and Sunbeam, have led to increased debt levels and start-up costs, impacting net margins and increasing financial risk.
  
• An increase in expenses due to acquisitions, such as legal and due diligence costs, along with initial operating losses from new plants like Bhiwadi and Kothavadi, are currently affecting the company’s earnings and reducing profitability.
  
• The current low operational efficiency at newly established plants, such as the Bhiwadi facility operating at 20% efficiency, suggests a risk to revenue growth if ramp-up efforts are delayed.
  
• The transition of the Powertrain segment to include stationary engines requires a long development and approval process, potentially delaying revenue recognition and adding uncertainty to future earnings.
  
• Future debt reduction heavily relies on the sale of land in Gurgaon, which, if delayed, could prolong higher interest expenses and pressure net margins.

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 14.7%.
  
• Given the current share price of ₹4078.8, the analyst price target of ₹5114.43 is 20.2% higher.
  
• 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.