Craftsman Automation acquires 76% of DR Axion to supply India’s budding PHEV market

DR Axion, a supplementary board to Craftsman’s existing aluminium business, has reported fast-paced revenue growth in current times attributed to Kia’s entry and diversification, eyeing the PHEV market in India. This has led Craftsman to opt for a 76 per cent stake in the business at INR 3.75 billion with consultations from IIFL Securities analysts.

DR Axion has skilfully traversed beyond Hyundai and Kia with humungous orders from M&M, which would propagate the next phase of the company’s growth. Experts from IIFL Securities project that the acquisition would become 5-7 per cent EPS-accretive in FY24 or FY25.

The acquisition plan was worth 4.4x FY23 estimated EV/EBITDA. Though DR Axion has encouraged large-scale expansions in recent years, its production rate remained low at 65 per cent. Heightening utilisation will result in margin expansion while keeping the capex low and the cash flow uninterrupted in the meantime. DR Axion, a counterpart of Craftsman’s prevailing aluminium business, has an extreme dependency on 2Ws.

DR Axion mainly crafts cylinder blocks and cylinder heads for the PHEV sector in India. It is the sole supplier of cylinder heads to both Hyundai and Kia. The production volume has doubled over FY20-23, directly proportionate to the number of Kia models in India, considering the carmaker entered the sub-continent in FY20. Currently, the company has received hefty orders from M&M, which is going to build its revenue in the next few years.

A successful acquisition might help amplify Craftsman’s quota in the aluminium industry. Its existing business is loaded with 2W customers. After the inclusion, DR Axion’s PHEV exposure will supplement its business, continuously attracting new customers like Hyundai and Kia. To top everything, Craftsman is hyper-skilled in high-pressure die-casting, whereas DR Axion is well equipped to perform gravity and low-pressure die-casting.

Craftsman struck the 76 per cent acquisition deal at around INR 3.75 billion and an EV (100%) at INR 6.5 billion. This roughly represents FY23 PE of 9x and EV/EBITDA of 4.4x. The revenue range is quite superior in comparison to conventional aluminium car component makers. Though the IIFL Securities spokesperson is positive about steady growth, they have not yet confirmed the projection with the final balance sheet disclosure to be done in Q4FY23.