Ladies and gentlemen, good day, welcome to the earnings conference call of Craftsman Automation Limited. As a reminder, all participant lines will be in the listen-only mode. There will be an opportunity for you to ask questions after the opening remarks are concluded. Should you require assistance during the conference call, please signal the operator by pressing star followed by zero on your touchtone telephone. I now hand the conference over to Mr. Srinivasan Ravi, chairman and managing director of Craftsman Automation Limited. Thank you, over to you, Mr. Ravi.
Good afternoon, everybody. Thank you very much for joining the earnings call for Q1 fiscal year 2027. I will leave the floor open for questions. Kindly proceed with the questions.
Thank you. Participants who wish to ask questions may please press star and one on their touchtone telephone. If you wish to withdraw from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Please note that some of the statements made during this earnings conference call may constitute forward-looking statements, which are subject to risk and uncertainties and are not guarantees of future performance. We encourage you to refer to the disclaimer section in the company's investor presentation. Further, the management will not be addressing any customer-specific queries due to confidentiality obligations. Participants are requested to avoid mentioning customer names while asking questions. We also request participants to limit themselves to a maximum of two questions at a time so that all participants have an opportunity to ask their questions.
We take the first question from the line of Mumuksh Mandlesha from Anand Rathi Institutional Equities. Please go ahead.
Firstly, thank you for the opportunity and congrats on the strong results. Firstly, the standalone powertrain has seen very strong growth on both revenues and EBIT, if you see year-on-year. Can you just help us understand what are key segments and products which are doing well? How do you see the order book for this segment, and once you look at the outlook going ahead?
The strong trend is not really a strong trend. I would say that it was a muted trend earlier. It has come to a normal situation as of now in the Q1, and this is likely to continue.
Sorry, my bad. Standard aluminum part. Sorry. My bad, sir.
Okay. Aluminum.
Yes. Sorry.
Aluminum, we are on a growth path, and this growth journey will continue. The aluminum segment's pace of growth or the absolute growth and even percentage growth, all of that will beat the other segments. That is clear because of the massive investments which have gone in the recent past, and there are capacities still coming into place. Some capacities have still not matured. That is on a growth path for many more quarters.
Is there anything specific which segments particularly in this aluminum, the two-wheeler, or what are the segments?
No, we are quite balanced. We are four-wheeler heavy, if you look at the revenue portion of it. Yes, closely followed by two-wheeler. I think further on, both are growing as far as we are concerned that more new orders are coming in. Some are quick order wins where it'll see the light of the day in a couple of quarters or even in the next financial year. Some are little drawn. These orders are in the development stage, which will come into production in fiscal year 2028 and fiscal year 2029. Most of the production is coming in fiscal year 2029. That will not reflect in the revenue in the coming quarters. What are orders we have taken a few quarters back, some of it is already coming into production as of now.
Got it, sir. Secondly, can you just update further on this Kothavadi plant stationary engine order book from $100 million, which we crossed last quarter? Lastly, also on the Sunbeam transformation happening, how do you see the profitability for this entity ahead?
Kothavadi is a foundry. Machining is done at the parent plant, Arasur, which is the biggest plant. It is split into two. One is the revenue portion coming from the casting side at Kothavadi. One is the machining side coming in from the Arasur plant. The billing will happen only from the Arasur plant. I would say that, I reiterate that we have targeted $100 million of revenue in 2029. We are on track for that, and there is a good glimpse what we are having that in the future, we're starting to get more inquiries. That means what orders or inquiries we're going to get in the next few quarters will see light of the day by fiscal year 2030, fiscal year 2031. That can take it beyond the $100 million, whatever was initially projected.
As far as now we are concerned, we are now doing a little of the automotive, but mostly on the general engineering castings which are there, which is not significant as of now. The capacity utilization is under build-up, I would say. We'll have two or three more quarters before we start seeing some revenue trickle in this business.
Just on the Sunbeam side, sir, how do you see the transformation and profitability ahead, sir?
On the Sunbeam side, the restructuring is more or less complete. Some restructuring we have postponed to a few months because of request from customer on this matter. Like, there are exit customers, there are exit parts where we have to handle the customer for a couple of quarters more before we are able to exit that. With that, I think by December, I think 90% of the turnaround or the restructuring will be complete. As we move on quarter-on-quarter, we'll see improved results coming from the current quarter onwards, I would say.
Got it, sir. Thank you so much for the opportunity.
Thank you. Participants who wish to ask a question, please press star one. We take the next question from the line of Mukesh Saraf from Avendus Spark. Please go ahead.
Yes, sir. Good afternoon. Thank you for the opportunity. My first question is regarding this CapEx that you've announced for the Unit 3 at Hosur. You mentioned that you're at about 85% utilization. Just trying to understand, we had just started the alloy wheels plant probably a couple of quarters back. Have we reached high utilizations there? And also, what components are we looking at in this Unit 3?
Yes. Overall in the aluminum segment, we are touching, the CapEx are happening across various locations.
Okay.
As well as in our DR Axion subsidiary. Of course, Sunbeam is not on expansion anymore per se. Coming to the alloy wheel, I think the declared whatever the installed capacity is 9.8 million. This year, we hopefully will be touching or crossing four million wheels on the current year. That is at the combined plant of Kothavadi as well as Shoolagiri. We have not putting in capacity there. Once we see that we are crossing this 80% threshold, we are marginally expanding the capacity. Now the Hosur facility is not for alloy wheel, it is for the additional high pressure die casting and to start with high pressure die casting only on parts which are for the automotive industry. Can be for two-wheeler, it can be for four-wheeler, we are run out of space and capacities in our current plants, we are making an enabler.
We will fill in with the customer orders as and when they come. We are seeing good traction on inquiries and we expect the market to grow. Since we're out of capacity, we are proactive to put up capacity. This capacity also will put up in phases. It is not that we will be doing in one single year. It will be spilling off through two years, maybe over five, six quarters, depending on the need.
Got it. What would be our CapEx plan for this year? Both, if you could break it up into standalone and into subsidiary businesses.
In Sunbeam, it will be maintenance CapEx and some maybe capacity building CapEx, something like that. In DR Axion, it's quite substantial CapEx is there. Of course, the land has been purchased last year itself. This year, when we started the project, we have a few orders in hand. Now we have got more orders, and we are seeing also more orders coming in, and some of the orders start our production in fiscal year 2029, and some are starting in production in fiscal year 2030 in general. There will be CapEx standardization. We'll be pacing the CapEx. It will not be bulk CapEx on one year. If we see more traction coming in from frequent orders, we may accelerate the CapEx. We have to do a wait and watch sort of CapEx. The approved plan is around INR 430 crore CapEx for DR.
Sorry, the INR 430 crore is for a two-year period, sir?
We have taken approval for this year, I think we'll see whether we'll be spending this year or some of it may spill over to next year.
Sure.
Depends on the demand.
Oh, yeah.
Yes. We cannot really cut off exactly on March 31st. Always, the ongoing CapEx will not be a cut-off line, really speaking.
Sure. You were mentioning about standalone, sorry.
Standalone, we have been averaging more than INR 1,000 crore, I think, CapEx.
Right.
That will continue. Everything depends on the next two quarters, what growth we see on the standalone. We have shown reasonable growth on Q1 and this growth rate, if the traction continues to grow from Q1 level to higher level-
Sure
We may have to accelerate some of the CapEx which is meant for last year towards Q4. As of now, we don't see much need to react very quickly because still we have global problems.
Right.
We are in a wait and watch mode.
Got it. Just lastly, material costs have obviously been moving up quite a bit and probably now we've seen some correction there. How are we placed in terms of passing through some of these costs that we have already faced last quarter? How much more is there for us to kind of offset any of these hikes?
This is different for different customers. Yes, some of the customers are fair. Some of the customers are taking their own time to make these adjustments which is having global. We are confident all customers We'll need to align to the new reality that this sort of situation, suppliers have to be fairly compensated for the raw prices, which should be a pass through. Beyond that, I would not like to make any specific observation here.
Okay. All right. Thank you, sir. I'll get back in with you.
Thank you. Participants, a reminder. If you wish to ask a question, please press star and one. We take the next question from the line of Chandra Muthiah from Goldman Sachs. Please go ahead.
Hi, good evening, and thank you for taking my questions. My first question is just around the heavy horsepower engines opportunity. Related to some of the opportunities you mentioned, you've had more customer inquiries beyond the supplies that you're currently doing. Just want to understand, typically, how long is the sort of prove out and initial low numbers of sort of batches certification timeframe, low volume batch certification timeframe, after which you typically get into full production on slightly larger contracts with some of these customers. Just want to understand how long that period is before you could potentially get into full production on some of those customer orders and inquiries that are coming through.
Let us give a number to it on the number of customers we are. These are all the large customers. We have six customers. Four customers, the orders have been received. Five customers, the order has been received. One customer, we are receiving the orders shortly. With the first four customers itself, we have filled in the first $100 million sort of revenue target, which we had set up for 2029, 2030. This is casting and machining, of course. Two customers, we already started pilot lot machining, and it's being used by our customers for production. The casting validation is little longer. We will need, for these two products which we are already machining and supplying, which casting is coming from across the globe and going back to the customer, we will need another one year to productionize these current parts.
I would say 30% of the production will be productionized by fiscal year 2028, and another 50% will come into fiscal year 2029, I would say. fiscal year 2030 will be the first year of seeing that full revenue. What comes along the way, since we established communication channels, established the exchange of information with their engineering divisions, where lot of in-house manufacturing has been done. It has been a very difficult, long passage to get all the data and the two teams to work together, which we're working for the last 3.5 years , four years now, totally. The exchange of information is faster, approvals are getting faster. For the second set of inquiries or the incremental new order wins for new product lines, it will come from the same customers. It will not take the four-year timeline which initially we have gone through.
Already we have almost four years from the time we started, I would say. What we get now, I think within two years it will come into production. We may see that what new orders we are going to get in the near future, we'll see productionizing by 2030 or 2031 itself. The biggest challenge about the customers accepting us as a supplier, first of all, and because their product quality depends on us, that phase has been passed, I would say. We have passed that phase. It is more likely that we will accelerate from now on.
Got it. That's helpful. Second question is just related to this same incremental business opportunity on heavy horsepower engines. Just want to understand what the typical margin profile and opportunity could be for Craftsman here. Just clarifiying that this is likely to sit within the powertrain segment. I just want to understand, relative to the powertrain margins, how the margin profile of this business could shift once it hits steady state. Is there any startup costs that you think will have to be absorbed before which the margin starts to approach steady state? Just want to understand that aspect as well.
The current EBIT margins of the current powertrain business is having a weightage of more than 70%, 75% on investments made on the conventional powertrain, I would say. The new powertrain weightage or the large station engines, the weightage will be lower. I will not know the exact number, but I'm just giving you a headline, I would say. Frankly speaking, the depreciation is already happening for the large engine investments done. There is also the cost we're incurring during this development phase. This is already factored in the powertrain results in the last few quarters also. This is, as a percentage, will not increase because what is coming into production in the next few quarters will offset the new incremental development cost, which will happen for new products which are still not developed yet.
I think the worst part of that is over, that we have to absorb some startup costs, which is already in the past history, and our results are in spite of that. We find that the return ratios are in similar lines. We have to understand when a new capacity is coming up with a larger capacity and capacity utilization is lesser, the EBIT margins may look depressed on that particular portion for some time until capacity utilization and operating leverage sets up. Our confidence is that the return ratios will be among similar lines from the current powertrain within a couple of years. Today, as it grows, I don't think it's going to distort the powertrain business. It is in the same business model what we built up. The only thing, we added the casting portion to the business. That is the only change there.
Got it. That's helpful. This last question is on the industrial segment. I know it's a smaller part of the total business for us, but I think this quarter, there's been a spike in what the performance has been versus the normal quarterly range we've observed in the recent past. Just want to understand what are some of the drivers of why the industrial segment has sort of inflected this quarter versus the recent trends?
Broadly speaking, we have the very long history with the contract manufacturing that is quite steady. Nothing as much has changed there. Our product lines, both in the material handling system as well as storage division, they are seeing upswing on demand, I would say. This is not CapEx intensive business, as you know, so the operating leverage is helping us to increase the margins. The CapEx cycle started in India, we are seeing lot of traction both on the material handling lifting equipment as well as on the storage. Our orders are increasing quarter-on-quarter, I would say. This will keep the margins intact going forward. This not a one spike, what we see in the industrial engineering side.
Got it. That's very helpful. Thank you very much, and all the best.
Thank you.
Thank you. We take the next question from the line of Joseph George from IIFL Capital. Please go ahead.
Hi, sir. Just a couple of questions. One is on Sunbeam. You mentioned that you might give off or discontinue some of the maybe low-margin businesses. Wanted to understand how big is that in terms of scale down and, corollary, what will be the positive impact it'll have on your overall Sunbeam margins?
The revenue per se, we are replacing as we are exiting some of the business. We are replacing some of the business from some other customers, directly or indirectly, I would say. With support from the parent company, Craftsman, where we are also offloading the orders. That way, our capacity is not getting underutilized in general. The exit sort of a business are legacy businesses, which are more than a decade old, or even in some cases, two decades old, and some of it is also partly was outsourced to tiny scale industries. This is where we're exiting. It is a negative margin profile which these products we are exiting. When you are exiting this, I think, surely the margins will pick up with the better operating leverage from new customers which are coming in.
Exit rate, I'm very confident about Q4 maintains sort of an EBITDA margin for Sunbeam. I said there is a delay in the exit because we need to handhold or support the customer during the exit period. Most customers have requested us. I think as a matter of goodwill, we stand by them while we exit. Q4 maintains, it will be the margin in line with the Craftsman business. Revenue, there may be a 10%-20% sort of a reduction in the top line, but there will be an increase in the gross margin of value addition. That is a realistic situation, that the top line is more governed in the current case with predominantly aluminum and less of machining and less of value addition. That profile will change. That is what also will lead to the increased margin expansion.
Understood, sir. Just one more question on the CapEx. You listed down the CapEx for each of the entities. Sunbeam, you said maintenance. DR Axion, you said INR 430 crore, stand on approximately INR 1,000 crore. On a consolidated basis for this year, should we work with about INR 1,500 crore of CapEx subject to obviously revisions depending on capacity utilization in the second half. For now, INR 1,500 crore sounds okay, right, as a sum of the three pieces?
Conservatively, yes. The traction what we see, if this be thought, because of the Iran crisis, everything will slow down and stop. That was when the CapEx plans were made. Suppose this Q2, whatever is going to happen in the Indian market and global market, if we see the same traction going on, manufacturing globally is increasing. I mean, across the world, I would say in general. Maybe for different fields and different end users. If this higher traction, if they are going to happen in Q2, Q3, our board will decide in Q3 or in Q4 to increase CapEx. We may see at the tail end some revision in CapEx if things go better than what we expect.
Understood, sir. Thank you. That's all I had.
Thank you.
Thank you. We take the next question from the line of Shagun Beria from Anand Rathi Shares and Stock Brokers Limited. Please go ahead.
Yeah. Hi. Am I audible?
Yes, please. You're audible.
Yeah. Can I know the current capacity utilization for the segments, the business segments?
Yes. Powertrain is averaging around 70%. Of course, in the festive season, it will go beyond 75%, maybe closer to 80%. That'll be for a short period. After that, again, the capacity utilization during Q3 will come down. Q4 again is likely to rise. But on an annualized basis, anywhere between 80% is wishful thinking.
I think beyond 70% is very difficult because of the seasonal nature of the business and the risk of stopping customer lines. I would say that we are operating around, I think, 10% lesser than the optimum capacity. The 10%, hopefully we will be able to bridge the gap in this Q2 or Q4 as we stand on the powertrain. Aluminum, we are already operating at more than 80%, I would say.
Okay. Thank you, sir.
Thank you. We take the next question from the line of Vignesh SBK from Ksema Wealth. Please go ahead.
Hi, sir. Am I audible?
Yes, please.
Yeah. Just on the confirmation of the high HP opportunity, I think 30% will come from fiscal year 2028 and 50% fiscal year 2029. Is my understanding correct?
No, fiscal year 2030 will test that $100 million, whatever the first initial target. We may see that increasing if new order wins are there with the same customers and similar product lines where the developmental time and the time for testing is lower.
Okay. Those revenues will start from fiscal year 2028, sir? Just to understand.
Yes.
Initial revenue.
Yes, fiscal year 2028.
Okay.
Now it is fiscal year 2027, really speaking, it's too small to talk about it. From fiscal year 2028 onwards, we'll see.
Okay.
A decent-
And-
Yeah.
Just on the standalone CapEx, can I know where are we spending this INR 1,000 crore? Anything particular?
Oh, okay. That's a very important question.
Just to understand, where are we focusing?
Yeah.
Sorry.
Let us take about powertrain, and let us also talk about aluminum. The infrastructure required for a new aluminum project is quite high, and also on the powertrain today. When we go for new locations and new campuses, the base itself is quite high. Two earnings calls away, I think I'd mentioned that the land alone for DR Axion Plant 2 costed us around INR 150 crore, which is around 50 acres of land. To put up a basic infrastructure without any production equipment will easily cost another INR 75 crore-INR 80 crore. When you want to go for a plant of a decent size, not mega size, I think the land and building and infrastructure, the ETP, HT, the power connections, and the road infrastructure there, will touch around INR 150 crore-INR 250 crore, depending on the plant size. Then only comes the production equipment.
We have been holding back this sort of activity for a long time, we are also seeing that just like our customers have been announcing greenfield facilities with 1,500 acres and INR 3,000 crore, INR 20,000 crore.
Ladies and gentlemen, we have lost the line of the management. Please stay connected while I reconnect the management. Thank you. Ladies and gentlemen, we have the management line reconnected. Sir, you can proceed. Thank you.
Thank you. Sorry for the disturbance which has happened in the disconnection. I was just answering on the CapEx, where the CapEx is going. Fundamentally, during the IPO, we were around INR 1,500 crore only on the revenue side. When we are quantum growing almost, say, on revenue, we need more plants, more locations. Our decision to put up a plant will decide whether the customer is going to support us in the long term, and we have to follow our customers across India. Most of the customers have announced greenfield projects and are looking forward to us also investing. Any greenfield project, anywhere between INR 100 crore-INR 250 crore will be the basic infrastructure without the production equipment to have a plant that enough to accept equipment. Unless we fill up the plant with a decent amount of production capacity, the operating leverage will not set in.
That is the reason for the jump in CapEx. Also we see big improvement in the revenue growth. Revenue growth, even after adjusting the aluminum cost, we are seeing higher traction in the growth. Our return ratios will not get affected even though these CapExes are put in place because the base CapEx is quite high now for gross block and net block. Further on, I think our EBITDA itself will carry the day for us.
Thanks for the information, sir. Just to understand, this mostly will be towards aluminum side, sir?
It will be for both powertrain and aluminum in the right proportion depending on the growth opportunities. Powertrain, of course, the station engines are a little new, so there will be some CapEx. Yes, there is a foundry also there. That will take more than 50% of the powertrain. But the powertrain per se is a large amount of capacity installed. You may recall that our depreciation is close to around INR 500 crore now currently. To replace those machinery, the replacement costs are high. Even with a lot of planning and lot of adjustments, reconditioning of old machines still, I think INR 250 crore-INR 300 crore maintenance CapEx itself is required as we speak. You understand that the U.S. dollar, euro, all this has undergone change. The same CapEx is going to be very costly. We did a small exercise for internal and for our board.
We found that the CapEx, what we did in 2016, we want to have the same capacity exactly put up. The CapEx is around 5x-7x more because the land has increased eight, nine times. The construction cost has increased 3x, 4x . All the infrastructure cost has increased. Machinery also has more or less in INR terms, close to double totally over a period of time. The incremental CapEx is quite difficult, I would say.
Thank you, sir. Thanks for the answer. Just on the CapEx front, we are saying we are putting INR 1,500 crore. Funding should be from internal accrual, sir?
Hereafter it will be only internal accruals. Of course, sir, the cash mismatch will be there. As I mentioned, there's no ever need to come to the public markets per se. That is clear. At the EBITDA level of whatever we have projected initially on the growth on EBITDA numbers, not absolute numbers, we do not talk about it, but I think to keep a good net debt- to- EBITDA, I think we are on track.
Okay, sir. Last thing on the land, any updates, sir?
Yes, it is gaining traction. I think something is happening. I think we are close to signing a deal, I would say. That's all.
Okay. Thank you. That's it from my side.
Thank you.
Thank you. Participants, if you wish to ask a question, please press star and one. Participants who wish to ask a question, please press star and one. As there are no further questions from the participants, I now hand the conference over to Mr. Srinivasan Ravi for his closing comments.
Thank you very much for all of you to join the conference. I have some closing remarks. The CapEx cycle has started in India. I think this CapEx cycle is going to continue quite for a long time, I would say in general. Not only the OEMs, but also Tier 1, Tier 2 companies. India is moving towards a manufacturing economy, and I think we have very bright prospects to continue to grow in the coming years. With these closing remarks, I would thank you all once again.
Thank you, sir. On behalf of Craftsman Automation Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.