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Canara Bank Securities Ltd A WHOLLY OWNED SUBSIDIARY OF CANARA BANK

CRAFTSMAN AUTOMATION LIMITED

IPO NOTE Date: 12.03.2021

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About the Company Incorporated in 1986, Craftsman Automation Ltd (Craftsman) is a leading engineering organization that is engaged in manufacturing precision components. The company design, develop and manufac-ture a range of engineering products. It is one of the leading players in the machining of cylinder blocks for the tractor segment. The business operates 3 key segments namely Automotive-Powertrain and others, Automotive-Aluminium Products, and In-dustrial and Engineering division that is engaged in manufacturing material handling equipment i.e. hoists, industrial gears, marine engines, crane kits, gearboxes, locomotive equipment, storage solu-tions, etc. The company owns 12 state-of-the-art manufacturing facilities across 7 cities of India. Its customer base includes Tata Motors, Daimler India, Tata Cummins, Mahindra & Mahindra, Royal Enfield, Siemens, Escorts, Ashok Leyland, VE Commercial Vehicles, TAFE Motors & Tractors, etc.

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Issue details

Price Band (in ` per share) 1488-1490

Issue size (in ` Crore) 823-824

Offer for Sale (shares in lakhs) 45.21

Total number of shares (lakhs)

55.28-55.29

Issue open date 15-03-2021

Issue close date 17-03-2021

Tentative date of Allotment 23-03-2021

Tentative date of Listing 25-03-2021

Offer Allocation QIB-50 %, Retail— 35%,

NIB-15%

Minimum order quantity 10

Face value (in `) 5

Amount for retail investors (1 lot)

14880-14900

Maximum number of shares for Retail investors at lower Band

130(13 Lots)

Maximum number of shares for Retail investors at upper band

130(13 Lots)

Maximum amount for retail investors at lower Band- upper band (in `)

193440-193700

Exchanges to be listed on BSE, NSE

Srinivasan Ravi

The net IPO proceeds are proposed to be utilized for the following objects:

To make reapayment/pre-payment of company's borrowing fully or partially.

To meet general corporate purposes.

Promoters

Objective of the Offer

Craftsman Automation is well diversified engineering company. It is the largest component manufacturer engaged in the ma-chining of cylinder heads and cylinder blocks in the construction equipment industry as well as in the IMHCV segment of the commercial vehicle Industry. However, the company looks expensive in comparison to its peers in terms of P/E of 48.44x (annualized) and P/B of 4.19x for 9MFY21. Considering the company’s financial performance and de-risked business model, we recommend ‘SUBSCRIBE’ for a long term.

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Automotive Components Industry In India The Indian auto components industry clocked a CAGR of 6% in production over fiscals 2015 to 2020, led by growth in replacement and exports demand. Domestic demand is forecast to log a CAGR of 6-8%, driven by demand from OEM at 7-9%, whereas exports are set to grow at 3-5% over fiscals 2020 to 2024.

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Canara Bank Securities Ltd

Industry Review

Brief Financials

Particulars (Rs. Cr) 9MFY21 FY20 FY19 FY18

Share Capital 10.06 10.06 10.06 10.06

Net Worth 716.19 663.48 627.84 541.23

Long Term Debt 535.08 668.28 693.2 430.33

Short Term Debt 156.69 244.27 135.01 272.09

Revenue from Operation 1022.79 1492.47 1818.01 1511.53

EBITDA 294.64 406.55 456.68 305.18

PAT 50.66 41.07 97.37 31.53

EPS(Rs) 25.18 20.41 48.39 15.67

Net Asset Value (Rs) 355.93 329.73 312.02 268.98

P/E # 44.38^ 73.00 - -

P/B # 4.19 4.52 - -

Source: RHP, Restated Consolidated, FV Rs.5/-, ^ annualised, # Calculated at the upper price band

Source: RHP, CBSL

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Outlook on aluminium castings market in India Automotive industry demand is estimated to clock 2-4% CAGR during fiscal 2020 to 2024 with the expected improvement in the economy, improvement in consumer sentiment, vehicle launches & support from financiers. The subdued growth pace expectation is due to the sharp drop expected in fiscal 2021. From fiscal 2021-2024, industry is expected to register a healthy growth of 8-10% CAGR. In line with automotive demand, the aluminium castings market (in tonnage terms) is projected to grow 3-5% to reach 0.45-0.55 million MT by fiscal 2024. Outlook of Powertrain Market Powertrain and transmission market to accelerate up to fiscal 2024 The power train market is expected to clock 12-14% CAGR during fiscals 2020 to 2024. Fiscal 2021, though, is expected to be affect-ed by a drop in domestic demand as well as subdued exports owing to disruptions in the economies caused by the Covid-19 pan-demic globally. In automobiles, a powertrain generates power and transmits it to the wheels. It can be broadly classified into four components – (i) engine and engine parts, (ii) transmission, (iii) driveshaft, and (iv) rear axle. Cylinder block Cylinder block is the supporting structure of the engine on which all engine parts are mounted. It houses the cylinder, which gives engine its power. The cylinder block for commercial vehicles (CVs), off-road vehicles, sports/multi-utility vehicles (SUVs / MPVs), and tractors uses cast ironThe market size of the cylinder block for CVs, construction vehicles, MPV/SUVs, and tractors was Rs 27.9 billion in fiscal 2020, which is expected to reach ~Rs 40.6 billion by fiscal 2024.

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Industry Review

Source: RHP, CBSL

Source: RHP, CBSL

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Cylinder head Cylinder head covers the cylinder and helps the head gasket seal the cylinders in order to build enough compression for the engine operation. Similar to a cylinder block, cylinder heads are also manufactured by the process of casting using ferro alloys. The current market size of cylinder head for CVs, construction vehicles, SUVs, and tractors is Rs 14 billion, which is expected to reach ~Rs 18.2 billion by fiscal 2024. Transmission Transmission is commonly known as the gearbox, which transmits power to the wheels through the drive shaft and rear axle. Auto-component companies are engaged in casting, forging and machining of engine parts, transmission parts housing, drive shaft, rear axle housing, etc. The current market size of transmission for CVs, SUVs, and tractors is ~Rs. 280 billion, which is expected to reach ~Rs. 385 billion by fiscal 2024. Rear axle Rear axle lies between the wheels and the differential gear that transmits power from the differential to the wheels. The differential gear and rear axle are enclosed in a single housing that is connected to the drive shaft. Auto component manufacturers use the pro-cess of forging/ castings, post which heat treatment and machining is done for the finished product. The current market size of rear axle for CVs, SUVs and off-road vehicles is Rs 73.8 billion, which is expected to reach ~Rs 90.3 billion by fiscal 2024. Outlook on Aluminium Castings Used in Power Transmission in India To service a large generation installed base, the estimated investment in the transmission sector is expected to be ~Rs 3.3 trillion over the next five years. Industrial castings used in power transmission – demand outlook Demand for industrial castings from the power transmission sector is driven by investments of the Central and state government transmission companies. Investments are expected to rebound from fiscal 2022, supporting demand in the casting industry. The Industry is expected to reach Rs 18-20 billion, clocking a 4-6% CAGR during fiscals 2020 to 2024.

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Industry Review

Source: RHP, CBSL

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Casting for gas-insulated switchgears – demand outlook GIS-based casting demand grew at a 6-8% CAGR over fiscals 2016 to 2020 to Rs 2.4 billion in value terms. Demand for GIS based castings is expected to accelerate at a 10-12% CAGR to Rs 3-4 billion by fiscal 2024.

Craftsman has three business segments, namely Automotive - Powertrain and Others segment; Automotive – Aluminium Products and Industrial and Engineering segment and contributed about 51.21%, 21.10% and 27.69% of total revenue from operations in 9MFY21, respectively.

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Industry Review

Source: RHP, CBSL

Company Review

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Product Segment Revenue Mix Geographic Segment Revenue Mix

Diversified engineering company with a focus on providing comprehensive solutions and manufacturing high quality, intricate and critical products, components and parts Craftsman is the largest player involved in the machining of cylinder blocks and cylinder heads in the intermediate, me-dium and heavy commercial vehicles segment as well as the construction equipment industry and is also among the top 3-4 players in machining of cylinder blocks for tractor segment in India. They are present across the entire value chain in the Automotive- Aluminium Products segment, providing diverse products and solutions. They offers comprehensive one-stop solutions to their customers including design, process engineering and manufacturing including foundry, heat treatment, fabrication, machining and assembly facilities. They are diversified across end-user industries and cater to commercial vehicles, two-wheeler, tractor and other segments. They actively pursue cross-selling opportunities across segments to derive value for their existing and prospective customers. This not only helps them in solving complex customer problems that require multi-domain expertise but also helps them in penetrating customers’ different business segments and enhance their capabilities to collaborate with OEMs right from the designing of their new products. Their diversified presence across various segments and design capability pro-vides them with the flexibility to operate successfully across business cycles and mitigate any fluctuations in the indus-try.

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Company Review

Competitive Strengths

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Strong in-house process & product design capabilities with the ability to interchange capacity and product mix Craftsman is present across various levels of the component value chain, providing products and services that range from product design, prototyping, tool development, manufacturing, assembly and production of integrated compo-nents, reducing or minimizing their use of, or reliance on, externally sourced components. Their diversified presence across various levels of the component value chain and design capability is unique across the competitive landscape. They place a strong focus on research and development, with an emphasis on continuous improvement in product per-formance, cost and reliability, to enhance their product range. Long term and well established relationships with marquee domestic and global OEMs Craftsman is having strong and well established relationships with several marquee domestic and global OEMs as well as component manufacturers. The company is supplying products and solutions for over 10 years, such as Tata Motors and Tata Cummins. Its key customers include Daimler India, Tata Motors, Tata Cummins, Mahindra & Mahindra, Royal En-field, Mitsubishi Heavy Industries, Siemens India, Escorts, Ashok Leyland, Simpson & Company, TAFE Motors and Trac-tors, Perkins India, John Deere and JCB India. The details of the sales to key customers of its revenue from operations are as follows

Dependency on Cyclical Automotive business Substantially all of Craftsman business is directly related to vehicle sales and production by its customers, who consist primarily of large automotive OEMs, and demand for its products is largely dependent on the industrial output of the automotive industry. The sales, volumes and prices for vehicles are influenced by the cyclicality and seasonality of de-mand for these products. The automotive industry has been cyclical in the past. The company’s operations and perfor-mance are directly related to levels of global vehicle production and are therefore affected by factors that generally affect the automotive industry. The automotive industry is sensitive to factors such as consumer demand, consumer confidence, disposable income levels, employment levels, fuel prices and general economic conditions. High debt could dampen financial performance Craftsman substantial indebtedness could require company to dedicate a substantial portion of cash flow from opera-tions to payments in respect of indebtedness, thereby reducing the availability of its cash flow to fund working capital, capital expenditures and other general corporate expenditures. As of December 31, 2020, Craftsman had total debt (including current maturities) of INR 890.12 crore with D/E ratio stood of 1.15x as against INR 1040.65 crore with D/E ratio of 1.45x in FY2020. Loss of any of key customers could affect top line Craftsman’s overall sales from top four customers represented 43.14%, 33.91%, 34.14% and 31.73% of total revenue from operations for 9MFY21, FY2021, FY2020, FY2019 and sales from top 10 customers represented 59.15%, 52.37%, 51.75% and 48.46% of total revenue from operations for 9MFY21, FY2021, FY2020, FY2019. It is difficult to forecast the success or sustainability of any strategies undertaken by any of its key customers in response to the current economic or industry environment. There could be significant reduction in production and sales, or demand for company’s pro-duction from significant customers may adversely affect its business, results of operations and financial condition.

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Risk Factors

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Craftsman Automation is well diversified engineering company. It is the largest component manufacturer engaged in the machining of cylinder heads and cylinder blocks in the construction equipment industry as well as in the IMHCV segment of the commercial vehicle Industry. While in case of the tractor Industry Craftsman is among the top 3-4 component manufacturers with respect to cylinder block machining. Craftsman Automation has already incurred significant capex and look forward growth period in the com-ing years on the back of its engineering capabilities. The company has de-risked its business model by diversifying across business segments over the years. It has well-established rela-tionships with marquee domestic & global vehicle makers. Craftsman Automation has strong clientele Tata Motors, Dailmer India, Tata Cummins, Mahindra & Mahindra, Royal Enfield, Siemens, Escorts, Ashok Leyland, VE Commercial Vehicles, TAFE Motors & Trac-tors, etc. However, the company looks expensive in comparison to its peers in terms of P/E of 48.44x (annualized) and P/B of 4.19x for 9MFY21. Considering the company’s financial performance and de-risked business model, we recommend ‘SUBSCRIBE’ for a long term. Sources: Company Website and red herring prospectus

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Peer Comparison

Our Views

Company

FV

(₹ )

CMP

Revenue in (₹ crore)

Basic EPS

P/E*

P/B*

RONW (%)

NAV

Craftsman Automa-tion Ltd 5 1490 1492.47 20.41 73.00 4.52 6.19% 329.73

Bharat Forge Ltd 2 612.9 8055.84 7.51 81.61 5.43 6.65% 112.80

Endurance Tech-nologies Ltd 10 1390 6917.71 40.2 34.58 6.50 18.81% 213.71

Jamna Auto Indus-tries Ltd 1 68.95 1128.95 1.2 57.46 5.32 9.27% 12.97

Mahindra CIE Au-tomotive Ltd 10 176.60 7907.8 9.34 18.91 1.44 7.64% 122.26

Minda Industries Ltd 2 549.75 5465.14 5.91 93.02 6.87 8.94% 80.03

Sundaram Fasten-ers Ltd 1 722.70 3723.23 2.97 243.33 7.58 16.29% 95.39

*P/E & P/B ratio based on closing market price as on March 9th, 2021, At the upper price band of IPO, financial de-tails consolidated audited results as on FY20.

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Analyst Certification

We/I Lohit Bharambe, PGPM, MBA, Research Analyst authors and the names subscribed to this report, hereby certify that all of the views expressed in this re-search report accurately reflect our views about the subject issuer (s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation (s) or view (s) in this report. It is also confirmed that above mentioned Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.

Disclosures and Disclaimers

CANARA BANK SECURITIES LTD (CBSL), a wholly owned subsidiary of CANARA BANK, is a SEBI registered intermediary offering broking services to its institu-tional and retail clients; we also run a proprietary trading desk. CBSL is member of BSE & NSE. We are registered as RESEARCH ANALYST under SEBI (INH000001253). CBSL or its associates do not have an investment banking business. Hence, they do not manage or co mange any public issue. Neither CBSL nor its associates, neither the research analysts nor their associates (i) have any financial interest in the company which is the subject matter of this research report (ii) holds ownership of one percent or more in the securities of subject company (iii) have any material conflict of interest at the end of the month immediately preceding the date of publication of the research report OR date of the public appearance (iv) have received any compensation from the subject company in the past twelve months (v) have received any compensation for investment banking merchant banking or brokerage services from the subject company in the past twelve months (vi) have received any compensation for any other product or services from the subject company in the past twelve months (vii) have received any compensation or other benefits from the subject company or third party in connection with the research report. (viii) Research Analyst involved in the preparation of Research report discloses that he /she has not served as an officer, director, or employee of subject company (ix) is involved in market making activity of the company. We shall adhere to SEBI guidelines from time to time. We may have earlier issued or may issue in future reports on the companies covered herein with recommendations/ information inconsistent or different those made in this report. We may rely on information barriers, such as "Chinese Walls" to control the flow of information contained in one or more areas within us, or other are-as, units, groups or affiliates of CBSL. The Research Desk does not solicit any action based on the material contained herein. It is for the general information of the clients / prospective clients of CBSL. CBSL will not treat recipients as clients by virtue of their receiving the research report. It does not constitute a personal recom-mendation or take into account the particular investment objectives, financial situations, or needs of clients / prospective clients. Similarly, the Research Desk does not have regard to the specific investment objectives, financial situation/circumstances and the particular needs of any specific person who may receive it. The secu-rities discussed in the report may not be suitable for all investors. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives. Persons who may receive the research report should consider and independently evaluate whether it is suitable for his/ her/their par-ticular circumstances and, if necessary, seek professional/financial advice. 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The report has not been prepared by or in conjunction with or on behalf of or at the instigation of, or by arrangement with the company or any of its directors or any other person. Any opinions and projections contained herein are entirely based on certain assumptions and calculations. None of the directors of the company or any other persons in the research team accepts any liability whatsoever for any loss arising from any use of the research report or its contents or otherwise arising in connection therewith. The information contained herein is not intended for publication or distribution or circulation in any manner whatsoever and any unauthorized reading, dissemination, distribution or copying of this communication is prohibited unless otherwise expressly authorized. Please ensure that the client has read “Risk Disclosure Document for Capital Market and Derivatives Segments” as prescribed by Securities and Exchange Board of India (SEBI) before investing in Securities Market. 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Research Desk Canara Bank Securities Ltd

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