Craftsman Automation Q1 FY27 beat strengthens aluminium growth and margin outlook

Investment View and Q1 FY27 Highlights

Motilal Oswal Financial Services (MOFSL) described Craftsman Automation's Q1 FY27 performance as stellar, with an all-round earnings beat. The broker retained its Neutral rating and target price of Rs 9,699, as strong operating delivery and an improving growth outlook are viewed as largely reflected in the share price following its recent run-up.

Revenue increased 9.2% quarter on quarter, while EBITDA margin expanded despite rising input costs. This margin improvement was a key positive surprise. Gross margin declined 170 basis points year on year and 100 basis points quarter on quarter to 44.5%.

Segment Performance

All three operating segments outperformed MOFSL's expectations, with segment margins holding up well despite input-cost pressure.

Structural Growth Opportunity

Management remains constructive on the medium- to long-term opportunity from a structural manufacturing capital-expenditure cycle led by OEMs and Tier-1 and Tier-2 suppliers. Customer enquiries are healthy, although Craftsman Automation is retaining execution flexibility amid global macroeconomic uncertainty.

• Aluminium utilisation is above 80%, while Powertrain utilisation is about 70%, leaving scope for operating leverage.
• Higher aluminium prices are expected to be largely passed through.
• Demand is expected to remain sustained in industrial material-handling systems and storage solutions.
• Management considers the improvement in Industrial segment profitability sustainable.

Aluminium Growth and Sunbeam Restructuring

Aluminium is management's fastest-growing business and is expected to outpace the other segments. MOFSL identifies the ramp-up at alloy-wheel facilities in Bhiwadi and Hosur, domestic and export order visibility, and benefits from the Sunbeam restructuring as major FY27E drivers.

Sunbeam's restructuring is mostly complete and is expected to conclude by December 2026. Management targets sequential profitability improvement from Q2 FY27 and a mid-teen EBITDA margin by Q4 FY27. It expects high-teen Aluminium growth, while Powertrain and Industrial Engineering are expected to grow at a high single-digit rate.

FY27 consolidated capex guidance is around Rs 15 billion, with potential for an upward revision if business momentum remains strong in Q2 and Q3.

Business Strengths and New Growth Areas

• Leadership in machining critical MHCV and tractor engine and transmission components.
• In-house engineering and tool-making capabilities.
• Top-three position in storage solutions.
• Strengthened domestic aluminium-castings position following the DR Axion and Sunbeam acquisitions.

The company is setting up a Kothavadi plant for data-centre components. Management expects this business could scale to USD 100 million by FY30.

Earnings Estimates and Valuation

Following the Q1 FY27 outperformance, MOFSL raised its FY27E and FY28E EPS estimates by 8.4% and 3.1%, respectively.

The target price of Rs 9,699 is based on 28 times FY28E EPS. MOFSL's principal valuation concern is that the stock already trades at 40.1 times FY27E and 29 times FY28E earnings, suggesting that most positives are factored in.