Reshoring And EV Demand Will Reshape Global Component Markets

Key Takeaways

• Rapid operating leverage in new segments and strong market positioning could deliver EBITDA and margin gains much earlier and larger than expected.
  
• Diversified business mix, global market share gains, and increasing localization set stage for superior, sustained profitability and higher long-term valuation.
  
• Heavy reliance on legacy businesses, high capital spending, and exposure to traditional automotive segments increase long-term risk amid industry shifts and limited revenue diversification.

Catalysts

Operates as an engineering company in India.

• Analyst consensus expects new high-margin businesses to deliver incremental revenue and margin uplift over several years, but with the demonstrated rapid breakeven in alloy wheels and strong operating leverage setting in at Bhiwadi, these segments could deliver outsized EBITDA and net margin contributions much sooner than anticipated, strongly accelerating profit growth.
  
• While consensus sees global stationary engine market entry driving Powertrain growth, Craftsman's unique positioning as one of fewer than ten global suppliers and multi-year order book linked to secular data center demand suggests a significant potential to capture global market share, leading to revenue and margin expansion well above expectations by the end of the decade.
  
• As capacity utilization rapidly approaches 85 percent across major businesses with strong existing order pipelines, the company is ideally positioned to capitalize on the global reshoring and supply chain localization wave, setting the stage for step-change acceleration in top-line growth as OEMs increasingly shift sourcing to India.
  
• With management signaling the subscale nature of the Indian component industry relative to China and highlighting ambition to reach global scale in aluminium and Powertrain, any large-scale consolidation or strategic OEM outsourcing could trigger multi-year, above-industry revenue compounding and operating leverage benefits.
  
• Diversification across auto and non-auto verticals, including the fast-scaling storage solutions business with high returns on capital and negligible CapEx needs, could sharply reduce cyclicality and increase structural profitability, supporting sustainable margin expansion and a higher long-term valuation multiple.

Craftsman Automation Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Craftsman Automation compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Craftsman Automation's revenue will grow by 18.8% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 3.4% today to 8.6% in 3 years time.
• The bullish analysts expect earnings to reach ₹8.2 billion (and earnings per share of ₹345.26) 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 bullish analyst cohort, the company would need to trade at a PE ratio of 40.8x on those 2028 earnings, down from 76.5x today. This future PE is greater than the current PE for the IN Machinery industry at 34.1x.
• 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 14.9%, as per the Simply Wall St company report.

Craftsman Automation Future Earnings Per Share Growth

Risks

• The company's growth prospects rely heavily on the stabilization and ramp-up of recently acquired and consolidated businesses such as Sunbeam, which currently has no new order pipeline and is focused on consolidation with limited or no near-term revenue growth, potentially capping topline and margin improvement.
  
• Despite guidance for strong growth across Powertrain and Aluminium segments, Craftsman Automation's business mix remains significantly exposed to traditional internal combustion engine components, creating a long-term risk to revenues and margins as the automotive industry accelerates its transition to electric vehicles and reduces demand for ICE parts.
  
• High capital expenditure requirements-₹750 crores to ₹800 crores groupwide, with major investments in modernization and new plant capacity-could constrain free cash flows, especially if delays in achieving higher capacity utilization or margin improvements occur, limiting the company's ability to invest in future technologies and impacting long-term earnings growth.
  
• Customer concentration remains a pronounced risk; revenue diversification efforts have increased the major customer count only modestly, and the company is still tied to large OEM contracts, making it vulnerable to changes in key customer purchasing patterns or contract renegotiation, which can directly impact revenue stability and cash flows.
  
• Rising global sustainability standards and the push toward localized supply chains could drive up operational expenses and capital investment needs for Craftsman Automation, particularly if global competitors with advanced automation or lower compliance costs capture market share, leading to margin pressure and reduced competitive advantage in the long term.

Valuation

• The assumed bullish price target for Craftsman Automation is ₹7625.73, which represents two standard deviations above the consensus price target of ₹5945.25. 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 bullish 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 bullish analysts, you'd need to believe that by 2028, revenues will be ₹95.4 billion, earnings will come to ₹8.2 billion, and it would be trading on a PE ratio of 40.8x, assuming you use a discount rate of 14.9%.
  
• Given the current share price of ₹6236.0, the bullish analyst price target of ₹7625.73 is 18.2% 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.