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Craftsman Automation Ltd
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Ladies and gentlemen, good day, and welcome to the Craftsman Automation Limited Investor Call to discuss the financial performance of the company for the quarter and year ended 31st March 2023. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Srinivasan Ravi, Chairman and Managing Director of Craftsman Automation Limited. Thank you, and over to you, Mr. Ravi.
Good afternoon, everybody, and thanks for joining the earnings call. It gives me pleasure to welcome you all for the earnings call for the year ended March 2023. The auto sector has seen a storm of headwinds for the last 4, 5 years, either 1 turbine or other, which has resulted in higher cost of ownership, lower affordability restrictions and vehicle supplies, chip shortages. Of course, [Indiscernible], we all have seen a very turbulent for 5 years. However, most of the headwinds are now receding and now better absorption of the cost of the inflation is accepted by the end customer. There is a realization of print of demand and a lot of improvement taken place in the supply chain. The FY unit volumes were improving significantly has improved, given the improving rate of demand, supply and margins, we expect the auto sector earnings to grow significantly on a flat pace of 5 years. The company has acquired 76% equity of Axiom India Private Limited for a cost of INR 375 crores. And this company is engaged in the manufacturer of about 12 million or parts and mainly cylinder heads and seat blocks. And it is -- I think we have also put up our presentation earlier on this question. I would just walk you through the highlights for the FY '23, the stand-alone elite. The turnover has been the highest that is INR 2,980 crores, 38% growth over the previous year. But in real value addition terms, we have grown by 27% and that is reflected in the EBITDA growth of INR 670 crores over INR 539, -- that is a 25% growth in line with the variation growth of cores, 27%. So the EBITDA growth is 25%. EBIT is 37 million because the absolute depreciation amount has increased by only INR 10 crores. So that has increased in the EBIT margin significantly raising to 37%. PBT has shown a 37%. And PAT, which has been aided by the ship to the new tax regime has shown a quantum jump by 48%. The company has opted for benefit tax rate of 25.168% over FY '23 compared to the normal rate of 34.94%. CapEx stands at INR 309 crores, mainly to enhance technological [Indiscernible] and also just to address all the bottleneck areas and balancing areas. And we are -- as you know that we have doubled the sales in the last 2 years. The key ratios [Indiscernible] ratios, I'd like to mention, debt equity, of course, has moved from 0.6 to 0.72, mainly because of the question of finance, what we were taken. The question [Indiscernible]. But the advantage has been total EBIDTA 1.48, it was all 1.33. And ROC has improved from pre-tax annualized from 20% to 22.5%. EPS has increased from INR 75.94 to NR112.53. Segment-wise results out of our train segment came over as [Indiscernible] by 32%. That is 1,014 last year, and this year has been INR 1,527. [Indiscernible] has grown by 34% from INR 552 to INR 741 Industry Engineering has grown 42% from 500 to 730. Storage business has increased from INR 376 crore from INR 253 crores for 9% growth. Protocol train EBIT has grown by 26%, to 382. And [Indiscernible] EBIT has grown from INR 41 crores to INR 65 crores by 7%. Industry Engineering segment, the EBIT has grown by 8%, it is INR 33 crores to INR 62 crores. Just run through the DRX financials for 2 months, the sales has been [Indiscernible]. EBITDA has been INR 22 crores. EBIT, PBT and PAT of INR 11 crores. And the company, the net worth of the company is INR 253 crores, and it has got a terminal of INR 128 crores. So with this, I will leave the floor open for Q&A.
Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Abhishek from Dolat Capital.
Despite part jump in the commercial vehicle volumes in 4Q, why your revenue was down quarter-on-quarter in power business? And how is the outlook? I had in the power train business in the first quarter, given the net outlook for the CVs and the tractor segment?
On the powertrain on the Q4, there are 2 major point of which like to give. We have own segment, which is domestic one segment, which is towards export that is deemed export and it's also growing in a big way. There have been some margin headwinds in Daimler and Brazil, yes, you may be aware of the polar situation pricing, number one. Number two is that the supply chain, I think Q3 has been a good number. I think the product mix and the other things have not been favorable to Craftsman in Q4. The other point is the -- where the [Indiscernible] segment has done well. Construction machinery and farm sector was very much muted in Q4. There was some adjustment in the farm sector business because of the supply to sales mismatch. I think these are the reasons for some minor correction in Q4. But I think that we are starting Q1 stronger. That means there is some minor adjustments which has taken place. Going forward, we see traction only in the third quarter or fourth quarter for farm sector and construction equipment. The first 2 quarters mainly will be driven by the growth in the commercial vehicle business and the custom business. I hope I answered the core question.
And sir, in fourth quarter, how much value addition in each segment.
Fourth quarter, the value addition for Powertrain was 241 for aluminum was 79% and for industry engineering was INR 73 crores.
And sir, my last question on the Industrial & Engineering business. How much -- in this quarter, there is a 20% growth quarter-on-quarter basis. So what is the reason for the SaaS revenue growth? And how much the export contribution in total industrial engineering business?
No, the industry engineering business export number, I will just give it to you in a minute. And if you look at normally the capital goods sector, we'll see higher sales or I mean the turnover will happen in Q4. That's one of the reasons. The conditional mining export was for the year INR 116 crores. This is a direct exports, yes.
Thank you. The next question is from the line of Senthil Kumar from Joindre Capital Services Limited.
Congrats for the great set of numbers. My first question is, can you give a breakup of exports and domestic revenue for Q4, as well as full year, sir?
Yes. For the Q4, the exports, the total number has been 53 plus 41 plus 116, right?
How much is that?
INR 60 crores has been for Q4. For the full year-- INR 220 crores.
INR 220 crores. And sir in the last con call, you have mentioned about a slowdown in Brazil region. What is the status now sir?
It is not still very clear. We have continued the supply, but I think the economic in the country is not doing internally well, but I don’t know whether there will be some correction going forward at a lower level, or it remain sustained. But as far as now, we don’t see new numbers.
And my last question, sir, on the raw material side, in the last quarter, you mentioned that we don’t have a high cost inventory. But if I see this quarter, raw material costs as a percentage of revenue is still higher on both the sequential as well as y-o-y basis? Can you say what is the reason for etc.?
No, that is mainly because of the product mix, it is not because of high-cost inventory.
Thank you. We have the next question from the line of Jinesh Gandhi from Motilal Oswal Financial Services.
A couple of questions from my side. One is if you look at the margins for — EBIT margins for aluminum and industrial, we have seen a good evolution on Q-o-Q basis with the third quarter. So are there any one-offs in the aluminum business, the margins have improved from 4% to 11.4% of the sales and now normalization of all the costs on the op cost, which is now reflected in the fourth quarter.
No. I think what I would like to mention here is that it is not based on one-off that is pretty clear. I would say that the -- if you look at the network to the capacity utilization. Utilization for aluminum has improved on the overall. I think I’ll just speak to the numbers from the -- I think we look at the net block to-- Yes, I have this number now. On FY 2022, for the full year, the value addition of aluminum business on the network was 42%. For the year FY 2023, we ended up at 67%, so that is the value addition to gross net block on aluminum products. And Q4, it has been value addition to net block has been 76%. Q3, it was 59%. So, I think the operating leverage is the main key for this improvement in margin in the aluminum segment.
And if I look at the value add the numbers which you have given, so second quarter was similar value add slightly better in this quarter. But despite that, margins look substantially ahead. So -- but the key point is that this run rate should sustain, if not improve as value further goes up with utilizations improve.
There are two aspects to it. We had a little problem about the prices to aluminum prices dropping month-on-month a little. So I think there is a small correction, it has happened in the previous segment now it has been pretty steady. So, we are not impacted by that, number one. Number two, the product mix also is faster vehicle parts percentage has slightly improved, and various also improved, that is on two of the reasons. And the product also has kicked in. I don’t want to name customers, but we have started supplying to the EV also. These are currently coming at the normalize prices at the current loans.
This is for EV for two-wheelers or for passenger vehicle?
EV for two-wheelers. So, we are saying that we are getting new orders and new orders have been quoted in the last year or two or something like that at the current trend of the prices which is there on the current operating costs. So, I think part mix is unruly improving, and we will continue to see further improvement also. You can see we see the lower end of the two-wheelers, again, I don’t want to make names here. There are significantly going down even the 100 CC vehicles are going down.So, new models are being introduced as one 100 CC. So there are-- the product pricing also of the two-wheeler segment, I think you’ve seen 44% or 45% increase in the cost of the vehicle, some things are due to the new technology getting introduced. But I think there’s an operation of the vehicle as a whole. So, I think the -- and the EV also has come into the picture. It’s a combination of many things, but they are exports -- not exports, domestic business started.
And similarly for Industrial business, also, we have seen a good margin evolution. Is that also linked to increased value add an increased utilization?
There are two aspects to this area. Normally, we have one stop capital goods sales from -- to our customers were of the order because the tapered there is long, the months, four months, something like this. And also the high-end storage solution business. That is the automated storage solution business has seen some upswing and the exports also have done recently even in --
And what was the revenue for automated state solution for the full year.
For the year, we have done INR 375 crore [Indiscernible] in the storage solutions. In that automated has been 110 and the static storage like has been 265. So there’s a significant change from year-on-year.
And the sub-INR 110 crores in INR50 crore in FY 2022?
On the automated storage, the previous year would have been, I think, has some half of this is what resuscitate numbers. The automated storage. Totally similar, I think we were at 280 or something and mostly towards static.
So does that answer your question?
Not fully, but I think the numbers will address the number. I think I’ll get back to you during this call.
The next question is from the line of Pranay Roop Chatterjee from BCMPL.
So my first question is with regards to overall revenue growth, and I’m seeking more -- so basically, last year, you have consistently maintained -- you had consistent maintained a guidance of 20% revenue growth across segments. And I think you have more or less met that, except probably powertrain over the last couple of years. Now when we look ahead in FY 2024, -- in terms of the auto end segments, market commentary suggest probably high single-digit or low double-digit growth, especially in tractors and your primary MHCV segment, which has a high base effect right now. So I’m just wondering, across segments, can you just qualitatively comment on that 20% growth guidance would you like to adjust that? And what would drive growth in each of the segments individually. If you could just help us.
I’ll just try to read out the numbers now, first of all, we had grown on the top line, on the powertrain last year visas FY ’22 by 32% on the powertrain, 34% on the aluminum products and industrial engineering was 42%. Having said that, as a company, we have top line revenue has grown by 35%. But in my opening statement, I had mentioned the value addition has improved by only 27%. That is a real growth, what we see as a company. But all the segments have done more than the 20% to have an average of 27%. To put a number currently, out of our train has grown by valuation addition by 24%, aluminum products by 300 and industry by 38 totaling to giving the exact weightage of each of the turnovers.As a company, we have grown by 27% on the value. So the number, whatever we say, going forward also, we’ll be growing 20% year-on-year on the value addition on each of these segments. What is driving the segment is the marginally, maybe the growth in the existing product ranges or existing customer volumes. Yes, it is also new product ranges and new customers which are getting added, which have been ordered in have been secured on that. So these are the two key points, which will drive even in the FY 2024, the 20% valuation growth in each of these three segments.
So regarding this, in your aluminum segment, regarding the large TV clients that you won, [Indiscernible], I think, any update on that order, when that would scale up? Because I think that would contribute to a significant growth if that scales up this year?
Yes, it will be scaling up in Q3. Already it’s production started, number one, and the other domestic ACV manufacturer, where we are also supplying some critical items that is also starting by July, the production. Already the engine and part foundry validation. So it will -- from Q2 onwards, we will see upward trend. I think Q3 will be quite a high peak with all the cash on vehicle segment, this is also increasing.
My next question was on DR Axion. So I was looking at --so I remember in the last call regarding the acquisition, you had mentioned April to January 2023, the sales were around INR 890 crores. And gross margin was averaging 32% and EBITDA margin was at 14%, but if I look at your two-month numbers, which you also called out, if I look at the delta between your standalone and consol numbers, the margins seem to have gone down a bit, 27% GM and about 11% EBITDA. Firstly, is this correct what I’ve calculated? And number two, what is the reason for this?
What numbers you are stating is correct. The -- actually, it’s correct. But there is an explanation to the pass-through on some of the die investments which has been done in March, quite significant portion, it’s a pass-through, it is not part of the sales. If you remove that and then look at the -- also the migration into the new accounting system, totally overall a little, so I think the margins will normalize at the -- even in Q1 at the -- we are talking about whatever is the 10-month figure. There will be no change in that. So I would say that the die’s what we received is exactly a pass-through to the customer. So that has only inflated the top line October and March [Indiscernible] because we’re looking at a smaller two-month period and trying to -- and that number has offset the ratios same.
And a couple of very quick data-related questions. You mentioned the value-added number. I assume that the aluminum products value-add number does not include DR Axion for two months.
No. What I’m talking about is always standalone.
And in Q4, can you please split out storage versus industrial? That’s the last question.
Yes. Total industrial for FY ’23 has been INR 713 crores. Out of that, the storage solutions has contributed INR 376 million.
We have the next question from the line of Pritesh Chheda from Lucky Investment Managers.
Sir, could you share the growth outlook for all the three segments for FY ’24?
We will do a 20% growth on value addition, maybe 22% to 25% on the top line or Auto powertrain. Aluminum will be slightly higher because there is norm on the value addition portion of course, more than 20%. But on the top line also, we will be growing at 25%. Industrial and engineering also in a similar range, the 20%, 25% growth will be there on the -- both on the top line and value addition.
Just on the aluminum side. So when you look at this quarter, there is this merger of this for two months, right?
No, the consolidated standalone, it will not be there.
Consol, consol.
Yes. Consol, there is a merger, yes.
Consol, there is a merger, right? So when I look at your top line for the -- yes, for 12 months, it is about INR 935 crores, in which INR 196 crores comes from consolidation, right?
Yes, you’re right.
Right. And then there is a 10-month consolidation, so there would be INR1,000 crores odd consolidation, which has to flow in next year?
Yes, correct.
Right, so INR 1,000 plus INR935 million that itself gives you about INR 1,900 crore type top line and whatever you grow on that? Is that…
We will grow at least more than 20% in Craftsman and maybe 10%, 15% in DR Axion.
[Operator Instructions] The next question is from the line of Yash Agarwal from IIFL Securities.
Could you just give some guidance on capex for FY ’24 for the core business and for DR Axion separately?
DR Axion, maybe it is too premature for me to tell. I think, but the numbers will be maybe around INR 30-odd crore something like this is what we expect for DR Axion totally. And or maybe less sir, I’m not sure there not much change in that. It’s not a significant number. On the Craftsman stand-alone, I think that we are having depreciation of around INR 230-odd crores. I think we are looking at overhauling some of the old equipment for refurbishment and also making it semi-automated in certain cases of material handling.So we’ll be looking at-- we are preparing for FY ’25, so we’ll be looking at INR320 crores or INR330 crores capex. If we are growing at this percentage. So the actual delta capex, which is adding to the net block, I would say, net block will raise by, say, around INR 100-odd crores overall. But whereas the -- our top line or value addition will be growing at above 20%. So we are getting -- improving ROCE as we move forward.
The next question is from the line of Jinesh Gandhi from Motilal Oswal Financial Services.
DR Axion, what would have been the value add for the reporting period?
See, the value add is calculated differently because I don’t want to know confuse the entire equity. There is -- it is a foundry-based business, while Craftsman is also foundry based, but we are not much in the sandcasting mostly in the HVDC of course, there is gravity. But this -- they are at same uses a lot of the cylinder heard business, which is a little -- the consumables are also quite high, apart from the raw material aluminum. So we’ll arrive at a level number how to bring forward because cylinder head is a very critical part and a lot of very critical sand and chemicals are used there.There are some imported sand also used there, which is also partly consumable, of course, recyclable, but chemical is there. So we need to come to the exact percentage. But you asked me on the basic raw material, we are on the aluminum front. We are in line with whatever the current operational level, slightly better than the operational level of Craftsmen because it is a high-end product, we look at it.
And considering that in this quarter, we had some dye related pass-through impact. Any sense just for that, how would have the margins -- EBITDA margins of DR Axion.
I think it would have been closer to around 13% is my feel. But we even after taking over, we may have done, I will not say use a word, which is strong, but I think some of contracts and how they do the inventory calculation, everything, we have to be aligned with Craftsman because, we have gone or we have moved to our peers of April 1st. So we are aligned with that. So when then the period is too small and very small things will take an impact on. That is what I feel. It’s a one-time operation.
And for FY 2024 once we have full control, do you think we should be doing EBITDA margins upwards of 14%, 15% in FY 2024 or that will come little lag?
No, in FY 2024, itself, will be in the region of 14% to 15%. Only in case of very adverse commodity movement because, there the prices are settled on a trailing quarter, so I think you understand that. So if there is any big adverse movement, we have a decent inventory after we have taken over. So we’re not -- and yet, we are accounting, we have the average inventory value. So I don’t think it will be abruptly changing just like one day to another, but I think even that we can withstand even then I say that it will be upward of 13%. And if the aluminum pass-through is more perfect, it will be in the region of 13 plus.
And do you expect DR Axion to grow at above 15%, 20% in FY 2024? I admit that number.
It is too early to say that the 10% to 15% is a given, given the product mix and the customer base, whatever is there. One of the customers is looking at setting up one more new plant in the Western region. There is a new plant because there are a lot of capacities in the Chennai plant. If that happens, and this is awarded to us, I think and when the production starts, if the production starts, in the financial year, we may see better growth. But we know that customers are limited by their own capacities and customers are also improving their capacities. And we are talking about only three customers for their action. So that is a limitation, which is -- will now limit the growth indirectly in proportion with the customer growth.
And what was the utilization for DR Axion for fourth quarter?
We are operating at around 80% on the installed capacity as of December, but some capacity, which has been invested by the earlier management has come into operation only in the late part of to Q4 -- I mean, early part of Q1. But as some conscious step, we have already whatever I mentioned the capex of around INR 35 crores, something like this for DR Axion, we factor in a capacity increase of another 10%. So we can have a -- sorry, by July, we have 80% investment in our fourth operating results.
The line for the current participant in the queue seems to have disconnected, sir. We will proceed with the next question, which is from the line of Pranay Roop Chatterjee from BCMPL.
I just wanted to confirm something with respect to the last question I asked you had mentioned that the Stellantis order is scaling up in Q3. And you also mentioned a Domestic CV Manufacturer. I hear correct, Domestic Commercial Vehicle Manufacturers starting in July.
Domestic CV Manufacturer, we have come in as a second supplier for a critical part that is under validation, the engineers is under validation, we’ll be starting production in July.
And also I just want to tie this to an order win of INR 150 crores you had mentioned a couple of quarters back, I think, in aluminum. What is that for? And when would that start?
That is what I’m now discussing in July, converting is related to the supplier, we need to understand that the volume growth is not as per the customer anticipation, we may not be able to deliver. So -- but we are confident that today customers is bullish. So it will happen in Q2. There is the same order win which I’m talking about.
And one last question is, I understand your overall growth guidance of 20%-plus across segments for the year. My question is more with regards to Q1 and Q2 of next year, right? So in April, we already have seen MHCV volumes declining by 7%, 8%, both for Tata and [Indiscernible] because of the upfronting of demand because of new fuel norms. So how do you see the remaining two months and even Q2 playing out in terms of volume? Do you see your growth in the MHCV portion at least flattening or maybe showing a decline on a Y-o-Y basis? Or how do you expect that to shape up in Q1 and Q2.
No, the supply in the -- one good thing is about the product stock in the market or the retail is not much. So that way, I don’t see any drop in Q1 and Q2, but I’m very bullish about Q3 and Q4. Q3 itself, I’m bullish on commercial rate business.
The next question is from the line of Pritesh Chheda from Lucky Investment Managers.
Just a follow-up. Is there any change in or increase in the working capital cycle because of DR Axion or is it that naturally, the working capital cycle for us has gone up because -- what I see is that the cash conversion cycle for your company between FY ’23 and FY ’24 has gone up by 20 days. Is this the new number that we have to take or there is any one-offs?
In the cash flow conversion cycle has come down from 60 days to 56 days for stand-alone Craftsman, but I think you may be looking at consolidated in quarters. No, console, as I mentioned, they are having a few — three to four days of raw material inventory, which we think is not the right thing going forward given the fluctuation of aluminum and the trailing quarter correction of the rate prices. So we have raised inventory to close to a month. No, we have raised, an improved -- increased the stock of raw material from three days to four days to now to 30 days.
So then your working capital cash conversion cycle will go up further in FY ’24?
No, no. It is only for DR Axion and it’s not Craftsman cycle has come down from 62 56.
No, I am looking at -- inclusive. I’m looking at the consol, so the–
It’s already done. Already inventory is — as of March, the inventory has increased, no further inventory increase.
So which means this is the new increased Craftsman console number, we’ll see higher net working capital cycle, right? What are you --
No, I think what is misunderstood is we have only two days -- two months, we have calculated. Inventory is -- we have taken the two months consolidation for DR Axion. So that is only upsetting the number.But if you look at 12-month number, it will be negligible, even this number will further come down. I think on a consol basis, the 56 days, we may come down because of the DR Axion. DR having -- DR Axion holding lesser inventory than Craftsman.
So we will operate at 55 days and lesser, as we see the next year’s number. That’s how…
That’s correct. Correct. Sure. On a consolidated basis.
And how much debt repayment is possible next year after doing your INR 300 crore capex?
The financial cost, I think, will be — on a consolidated basis, you are asking for consolidated, right?
Consol sir, consol?
Consol, I think all financial costs include increased rent on everything around INR135 crores totally. No, no, INR150 crore to INR160 crore, right?
That’s the debt repayment you will do next year?
No, no. I’m talking about the financial cost outflow. So that is an outflow and the tax outflow will be there. So depreciation, EBITDA will grow in proportionate with the top line growth mostly. So yes, I think debt should come down by at least INR 200 crores on a consolidated basis.
We have the next question from the line of Proline Nandu from Goldfish Capital. Please go ahead.
One, you started the listing question would be a [Indiscernible].
Your line is not clear. Sorry, I’m not able to here anything properly. The line is not clear.
Is it better now?
We have the next question from the line of Devang Patel from Sameeksha Capital.
On DRA IPL, if you can repeat for FY ’23, what was the normalized gross profit and EBITDA margin? And what is the peak revenue margin that we are looking at here over an operating leverage, what do you need in this business?
No operating leverage will -- is improving month-on-month. I don’t think the capacity will also get utilized by September. Full capacity will come into operation. The orders are sufficient enough and for the full year, I think we have closed around 14% EBITDA.
And big revenue, we can do in the capacity?
Capacity utilization has been -- if we look at December capacity, it has been 80%, but some capacity has been already added in Q4. So looking at that, we have a room for growth by 20%, 25%.
So the company was doing 17% EBITDA earlier, if I’m not wrong. So can you reach in the next two years?
Can you please repeat?
Can we go back to 17%, 18% margin in this business?
There has never been 17%, 18% margin in this business. It has been, I think, at a lower level. And I think previously between 15% to 17% is what we look at it, it’s been a good year where capacity inflation is better and of course, it depends on how we do cost management also. It can do better also. But I think 14% is the base of what we are looking at and 15% to 17% is normally achievable. If there are no big headwinds and beyond that, it will be management and operational efficiency.
And sir, you earlier mentioned the EV business is one of the main reasons you also -- for which you looked at this company. So how soon could we be looking at orders for passenger vehicle EV business?
I cannot disclose anything, but we are already in discussion for parts for EV, for passenger vehicle from their end.
This will be for domestic market or for exports also?
No, it is for domestic market. I think, yes,
And you also mentioned for electric two wheelers, you got some orders. What is the content per vehicle of these orders? What is the potential here?
And you also mentioned for electric two wheelers, you got some orders. What is the content per vehicle of these orders? What is the potential here?
And there is some news today about a panel, talking about banning diesel LCV CV digital and CVs in cities. Do we have any diesel LCV exposure in our book across the two segments?
The LCV or...
Diesel Vehicle not the HCV, but other than HCV in the light commercial vehicle?
Light commercial vehicles are all reason. So very few there is there. There are CNG, there are LNG. CNG is there. Yes, many of them will move to CNG. But we are not worried about that because either way the engine is required, the axle is required, the gear box is required. I think ForEx doesn’t make any difference.
That’s also my [Indiscernible].
The next question is from the line of Sushrut Gokhale from Capris Investments.
Can s give the number of new store in Q4 and revenue from the sale?
No, I think that will be competitive data, which I will not like to share, but we are by far the market leader. And the automated storage also are the -- among the top two domestic players in the market. So this is very important in an emerging market. We will not like to when it becomes more mature in a couple of years, I would like to share that out.
[Operator Instructions] The next question is from the Proline Nandu from Gold Fish Capital.
So a couple of questions on DR Axion. Now you mentioned that DR Axion only has two to three customers, if I’m not wrong right now. We have a lot larger customer base — so how will this growth selling happen between our core company and the DR Axion. I mean can you help us understand the pathway for the same?
So I will explain the cost of business. The Craftsman business is predominantly high pressure die casting followed by a Gravity and a very low presence in the low pressure die casting. And industrial engineering business, aluminum business not industry engineering products, which are there is also a [Indecipherable] products, die casting. So whereas DR Axion on the gravity die casting and 20% of the low pressure die casting is exactly complementing or it is giving the benefit of scale on the low pressure and gravity. So I think the high pressure die casting, which there doesn’t have the -- any facility within India, but they have capacities and capabilities and facilities in Korea, that will be leveraged on in Craftsman’s facility, whatever order comes in Craftsman’s way or the DR Axion way. I think but technology will be used both from Craftsman’s side and from DR Axion side orders which gives a lot of comfort to the customer.One added point, which is the little hidden from the public view of the market is that the DR Axion Korea has been one of the key suppliers for the EV Craftsman’s Car vehicles in all the segments of the technologies of the aluminum manufacturing, including pressure die casting and low project casting and gravity. So that confidence for the end customer is there whenever they need to ramp up in India. I think DR Axion and Craftsman combination will have the benefit of the confidence of the customers, I would say.
So I want to understand that some of these Korean customers are already working imported material in their EVs right which can be ultimately substituted with our combined entity. Is that the right way to look at it?
No, sir, I think we have to look at it differently. They have just done seeding with the models on the high-end models, which are totally made in Korea only. They are not made here, so there’s not import of parts and assembly here. But there is a plan for -- there’s not a plan. It is a plan in action already under implementation for grounds-up EV designed for Indian market and to be manufactured in India. So that is where we are targeting. Otherwise, those numbers will be miniscule numbers, which have been already market in India, there are names, whatever you’re talking, whatever you’re thinking about, I think they’re only in seeding numbers. Those products will be remain high end and too costly out of reach of the common man.But the product risk on the Axion vehicles, which are already being produced in India on the IT platforms and these manufacturers are far, far ahead on the game. There have been many years, I think, on the EV game. So they have made similar lines already compatible for EV, plug-in hybrid, hybrid and IC engines. And these vehicles will be launched anywhere between from now onwards to 24. I think 18 to 24 months is realistic to look at it. So those are the products which are being. Otherwise, the import subscription on the current products -- the customers will not do. The OEMs will not do because the numbers are miniscule and there will be continually imported. And those models are not cost viable in India also.
Sure, sir. That’s very clear. And in the previous question, you mentioned that this opportunity of EV within DR Axion, right, -- so is that, again, for the low-pressure die casting? Or is that something which the parent of the existing DR Axion was maybe manufacturing and that we have access to whatever royalty rate of around 2.5%, if I’m not wrong.
So yes, the royalty will come into place. So the technology, whatever is being done on the technology be used on the low pressure die casting or new products getting developed at DR Axion, the 2.5% which is the stated number. What I’m trying to say is, DR Axion in Korea is having high pressure die casting, not low-pressure casting and gravity and they also have some swiss technology, which is they are patented, totally. There are four technologies, totally.In India, their own pressure and have been gravity, as Craftsman is also in high pressure. So we may do the parts according to the technology required to do the parts either in DR Axion or in Craftsman. How would waste and how we are going to manage the development process. We have developed on part we have to look at part on part and then we take decision on this.
How so coming back to our core business, the stand-alone entity, typically, you do a capex of around INR250 crores to INR300 crores, that’s our run rate. Could you break out this capex between how much would be maintenance and how much will it add to the actual capacity?
I will answer that first with the financial number, so that you get a better view of the how efficiently we are doing the capex. I will just look at the value addition to net block, which is a retract number to look at it, because some of the equipment are more than 15, 20 years old. So we look at it for FY ’22, we have reached a level of net block to value addition, 78% totally.
Is it value addition to net block or other way around? I’m sorry, sir.
Value addition to net block as a company…
At 78%, right.
78%. And for FY ’23, we ended the year at -- value addition has been 92% of the net block.
And going forward, we will be going beyond the 100 number. To give one example is, for FY ’22, the out of powertrain value addition has been 106% of the net block. For FY ’23, it is 103%. We’ve seen a dip, but I think that will get corrected, because depreciation is very high on the other powertrain there’ll be the biggest and older segment of the capex related business, I would say. So we are creating some headroom there. So we will be moving as a company to above 100% in the time to come on the value addition net block. So that answers the question of improving ROCEs as we move forward.
That clarifies the question. And sir in basically again coming back to our core business, are there -- I mean, one of the large product is -- one of the large customer is Daimler in some time, which is like a deal export for us, are there more such orders in the pipeline where the share of deal export can increase going forward in the next three to five years without leaving the customer, but are we working on those kind of RFUs, are we working on validation for those kind of orders?
Yes, it is happening or we have ordinations within India, who set up plants are just beginning to start their pile productions or stage of ramping up. All those orders are with us both in the concession equipment, in the SUV segment, in the farm segment is around multi-national companies and more and more companies are setting up this year. And this I would say Make in India policy of the government is also helping us in a great way.The China Plus One policy is really playing out. And we are very small I’ve answered your question, it’s simply we are -- as Craftsman, we are simply too small to grab any big opportunity. So we continue to increase our capacities keeping an eye on improved ROCE, we are not going to make any rush big decision making. But I think there is enough headroom to scale up the company in all the three segments of the business.
The next question is from the line of Joseph George from IIFL Securities.
So just one question. You mentioned that you target growing 20% across the factory, I mean, across the three segments. So in the Powertrain segment, when you look at end market such as tractors, construction equipment, etc. You mentioned that things are soft. And similarly, MHCV segment on a high base of 50% growth last year, the expectation is that it might grow 10%, 12%. So if the underlying industry growth volumes are going to slow substantially compared to last year, how do you target getting to a 20% growth in the Powertrain segment?
I’ll go on the Powertrain segment, segment-by-segment, First, I will talk about the similar segments from the tractor, it will flat or negative this year is what is our opinion. But the contribution of form sector to the entire powertrain will be around 20%. So I think we have added some more new customers, so still we’ll be growing marginally.On the passenger vehicle segment, which is an insignificant looking at it for the powertrain, which is --even if you look at the year FY ’23, we have 10% of the ordering business. There, we are significantly growing with our key domestic customer who is scaling up from their vehicles are selling well, and they’re in the second phase of increasing expansion.Now of vehicles has been already muted in the last financial year, and we see some traction coming back from Q3 onwards, which we are pretty confident. So we will see growth on the off-highway commercial vehicle business, we have grown from significantly in the last few years. There the trucks, which are getting sold now, I think you may be aware that the trucks gaining a lot of traction overall. So the value addition per truck on the higher tonnage trucks is better for Craftsman. So this is one of the key factors.Second thing is about the deal exports is also increasing there. And plus the -- there are some -- the engine also has moved to high horsepower. You might have noticed that 230, 250, 280 horsepower is now declining in sales. And 280 onwards, now up to 300, 350 horsepower is gaining traction. There also the --these are 6.7 liters engine or seven liter engines. Earlier, it was 5.6 and 5.9, so there also we are having higher value addition of the bigger engine capacities. This is also giving the growth in sales cost, revenue costs.
Understood. Thank you for that.
On top of it, sorry, I mean, I fail to mention on the offer vehicles and also the diesel generating sets, the multi-national are setting up a stronger export basis. We have one, two or three major orders, which we will see production starting from Q3 onwards. Orders were won around two years, and these are multinational American companies mainly. I think there, we will see traction from Q3 onwards. These are not for commercial vehicle, these are maybe for generators or for concession equipment for over six markets.
The next question is from the line of Abhishek Jain from Dolat Capital.
[Indiscernible] in terms of the CD.
Sorry, I’m not able to --clarity is not there on the call. Please, I don’t know, it’s speaker phone. I’m not sure, please.
Sir, in powertrain business, how was the mix in FY ’23 in terms of the commercial vehicle, passenger vehicle, tractor and off-highway vehicle?
Yes. Commercial vehicle was 53%, off-highway 20%, tractor 15%, and passenger vehicle mainly SUV is 10%.
And sir, you had one new business from the PSA. So, will it be the part of the standalone or it will be under subsidiary?
It will be stand-alone, it will be on the aluminum product business.
And then it will be reflected?
It started in a small way. Q3, it will start reflecting our numbers.
So what is the current mix in the standalone aluminum business in terms of the two-wheelers and passenger vehicles? In the Aluminum business?
The mixture of two-wheeler yes-- in aluminum business, the percentage commercial vehicle is 10%, two-wheeler is 66%, passenger vehicle is 2%, other automotive aluminum is 5% and the non-auto aluminum is 17%.
And my last question is related with the tax; this quarter, tax has gone down 12.4%. So, have you got any benefit because of the consolidation of the duties? And what would be the effective tax rate in FY 2024 paid?
We adopted permanently to the new tax rate and this will continue. We cannot go back to the old tax rate. We’ve done our calculations that we do very, very big capex only, we stand to lose the tax. Otherwise, we stand to gain as a company. So, I think we have gone to the 26% tax rate. This is a permanent move.
The next question is from the line of Pranay Roop Chatterjee from BCMPL.
A couple of data points. Could you help me with the gross block numbers for Craftsman and DR Axion for FY 2023 end?
There, we have to take it to the pinch of salt because when you move to India setting in 2016 or something number -- at that time, the net loss became the gross block. So, the real gross block is standalone for car sales more than INR3,000 crores but what appears as gross block in our last three, four years in the -- our balance sheet have just reroute the number of gross block. What is -- the current number is INR3,600 will not appear in the gross block, but the -- India is what you’re showing is gross block now? Yes, Craftsman standalone gross block, the actual number is INR3,135 crores, DR Axion I assume is around INR500 crores. So, the actual gross block is INR3,600 crores. But what will appear in the balance sheet for Craftsman will be lower than the INR3,130 crores, which will be INR2,800 crores.
Next is on the employee cost. If I was looking Q-o-Q, last year -- last year I’m saying -- last quarter, the employee cost was INR58 crores. After two months of DR Axion consolidation, it has increased to around INR61 crores. And as a percentage of revenue, it has gone down. So, has the entire two months -- so is that DR Axion operations are less employ intensive, is that the reason which has gone down as a percentage of revenue?
See, this is foundry business. So more of the -- it is coming under the contract, and there’s only two months, which has been added. So we have more of permanent people and of contract. So the I think the -- there it is more of job contracts which are there on the activities which are there, okay? So that will be a distortion of the actual outflow towards man power cost. The total manpower cost is between 4% and 5% of the top line direct and indirect, both put together.
And if I see Dan employee strength, I don’t know which number is this, FY 2022, the number had bought is 38 million -- is that contract plus permanent or only the plan.
That is only the government people, it’s not the contract, yes.
And where would this 387b in March end 2023.
It has been around the same number. There’s no change, no significant change. There may be a 5% plus minus. That’s all.
Perfect. Thanks a lot.
To add to whatever questions you’re asking, consciously Craftsman, stand-alone. And in the future, traction also, which we will implement is that to keep the headcount around the same level, which has succeeded for the last at least in Craftsman was subsidies for the last two, three years because of a judicious investment because inflationary cost on the manpower cost is the most difficult skill mentors availability is a problem. And this is the bigger fixed cost and in the fluctuating markets, -- there’s a big drain on the EBITDA margins. So consciously, we don’t want to increase the headcount. We are investing a little for automation, more modern missionary, better practices to keep that count at the same and keep the growth. So what is the real increase in the outflow of base salaries more related to the wage increases.
Thank you. The next question is from the line of Ruchit Shah, an Individual Investor.
Pardon, can you hear me?
It’s not clear plastic -- can you keep your phone closer to the mine of the speaker, please, if you don’t mind.
So I just wanted to check. So you have mentioned that men will be looking at type of borne.
Sorry to interrupt, sir, but the line for you is breaking up. You’re not clearly audible.
How long -- would the growth runway of 20% be available to us before the growth kind of starts moderating or slows down?
We have clear visibility for at least three years, that is very clear. And I’m corporate in about six years for the simple reason is the geopolitical situation -- and the market in India is growing after many years of subdued growth, [Indiscernible] going to grow. The people’s aspirations are going. And plus China plus one is we are still very, very small compared to the global footprint. If I may tell my learned audience will know better. We are more clue towards the entire global, but I just want to throw a number, it might not be very great -- but China contributes 40% of the global GDP for manufacturing GDP, I would say, and India contributes 5% of the manufacturing GDP for the global.So I think we have good headroom for 50% --70% growth in manufacturing in the country. So as Craftsman, I think the opportunity is much more is not everybody will be trying to grow. I think we are still very, very small in the global size. So I would say that six years is very clear and 10 years has been -- we cannot -- I’m bullish on the 10 years also, but to investors, I would say, three years is firm and six years is surely achievable and we are working towards 10 year growth.
Just on the safer side, like what are the -- what would be the possible scenarios where that might see as challenge?
I think thanks for again question. You touched upon a very touchy subject, but important subject and you ask the question, I think it’s perhaps for me to answer it correctly. I think we are facing some headwinds on the raw material supply of castings. We are still working with our foundry partners. We are trying to leverage as much as our relationships and grow. Yes, we will continue to grow that. But we may be forced to a little backward integrate, but we do not have any impact on our P&L or ROC or anything like that.But to be -- if it’s going to hamper our water pouring growth. Aluminum, we are totally fully integrated, right, top to end to bottom. But on casting it’s impossible for us to be fully integrated. We will cooperate. We will work with our foundry team, the foundry partners to grow their business and grow our business together. But if we find that there’s going to be a bottleneck in our growth of the 20% CAGR out of powertrain in the years to come, we may do a little backward integration, which we are fully careful of.
Ladies and gentlemen, that was our last question for today. I would now like to hand the conference over to Mr. Ravi, and Managing Director, for closing comments. Over to you, sir.
Thank you all for patiently going -- attending the conference and patiently going through the Q&A. And thanks to all of you that I had very, very important questions asking me, asking and being asked to me. I think we are going to be growing very fast as well as in very interesting times. The wind is blowing in India’s direction, that far I can tell you. There is normal hurdles, in fact some tissues, which are there, but the government is focused, the whole world is looking at us. This is the opportunity for India approve story to happen. I’m confident for the first time that the opportunity is open for everybody on a level playing platform. Thank you very much.
On behalf of Craftsman Automation Limited, that concludes this conference. Thank you for joining us, you may disconnect your lines.