Electric Mobility Will Erode ICE Revenue And Raise Costs

Key Takeaways

• Heavy reliance on ICE components and limited diversification make the company vulnerable to rapid industry and regulatory changes.
  
• Elevated debt and tightening margins restrict the ability to invest in technology, threatening long-term competitiveness and earnings stability.
  
• Strategic capacity investments, diversified growth, and deleveraging initiatives support margin expansion, resilience, and strong long-term earnings potential amid favorable industry trends.

Catalysts

Operates as an engineering company in India.

• The accelerating global shift towards electric vehicles and e-mobility, while a growth driver for aluminium components, poses a significant long-term risk to Craftsman Automation's traditional internal combustion engine (ICE) and Powertrain businesses-exposing a high portion of future revenues to technological obsolescence as OEMs reduce their requirement for ICE components.
  
• Intensifying geopolitical instability and the trend of protectionist trade policies threaten the durability of export-led growth and 'China + 1' outsourcing strategies; any escalation in tariffs, regulatory hurdles, or supply chain disruptions could directly erode overseas revenues and lead to cost inflation in the medium to long run.
  
• The company remains highly exposed to automotive and industrial segments, and despite recent diversification, it faces ongoing concentration risk from a small base of key clients and limited presence in faster-growing sectors outside of auto and storage-this structural vulnerability could amplify earnings volatility in future demand downturns.
  
• High leverage and persistent debt on the balance sheet will constrain flexibility to invest in critical Industry 4.0 technologies and may push up interest expenses, which would pressure net margins just as the company needs to fund next-generation manufacturing capabilities to remain competitive with larger, more technologically advanced global players.
  
• Costly compliance with increasingly stringent global ESG and carbon emissions standards will likely require incremental capital expenditure in manufacturing upgrades; this will further squeeze margins and reduce free cash flow, directly impacting the company's ability to deliver sustainable long-term growth in earnings.

Craftsman Automation Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Craftsman Automation compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Craftsman Automation's revenue will grow by 17.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.4% today to 7.4% in 3 years time.
• The bearish analysts expect earnings to reach ₹6.8 billion (and earnings per share of ₹286.66) by about July 2028, up from ₹1.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 32.2x on those 2028 earnings, down from 79.1x today. This future PE is lower than the current PE for the IN Machinery industry at 33.9x.
• 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 14.88%, as per the Simply Wall St company report.

Craftsman Automation Future Earnings Per Share Growth

Risks

• Craftsman Automation is projecting robust revenue and earnings growth, with management reaffirming guidance for ₹7,000 crore of revenue and ₹1,100 crore of EBITDA, driven by double-digit growth across core segments; this suggests both revenue and earnings strength in the coming years.
  
• The company has made strategic investments in capacity and modernization, particularly in the Powertrain and Aluminium segments, leading to improved capacity utilization, operational leverage, and margin expansion, all of which are likely to strengthen EBITDA margins and profitability over the long term.
  
• Craftsman is benefiting from strong secular trends such as the localization of manufacturing, increasing Indian exports, and growth in outsourcing to Indian suppliers due to global de-risking, positioning the company to capitalize on rising export demand and thus boosting revenue growth.
  
• The diversification of the business into non-automotive and high-growth verticals such as storage solutions, along with decreasing customer concentration, is mitigating risks from end-market cyclicality and supporting a more resilient earnings and margin profile.
  
• The company has a clear deleveraging plan, aided by strong operating cash flows and planned asset sales, which will reduce interest expenses and strengthen the balance sheet, thereby supporting higher net margins and future earnings growth.

Valuation

• The assumed bearish price target for Craftsman Automation is ₹5000.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Craftsman Automation's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹7700.0, and the most bearish reporting a price target of just ₹5000.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₹92.2 billion, earnings will come to ₹6.8 billion, and it would be trading on a PE ratio of 32.2x, assuming you use a discount rate of 14.9%.
  
• Given the current share price of ₹6448.0, the bearish analyst price target of ₹5000.0 is 29.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.