Craftsman Automation says aluminium margin drag should end by Q4

Craftsman says its aluminium-related margin drag was concentrated in Q2 and should be absent in Q4, after a marginal residual effect in Q3. Management attributed the pressure to higher-cost aluminium inventory, unresolved customer price corrections and start-up costs at new plants, while an analyst cited an aluminium EBIT margin of almost 6.5% in Q2.

Why did Craftsman’s aluminium margin trail sales growth?

Craftsman’s aluminium margin trailed sales growth because higher material consumption costs and new-plant ramp-up costs arrived before customer price corrections and operating leverage could fully offset them. An analyst said the aluminium segment’s Q2 earnings before interest and tax, or EBIT, margin had fallen to almost 6.5%, and management said margins should return to normal after customer discussions, subject to commodity-price effects.

Management said it bought additional aluminium to protect customer product lines amid concerns about physical material availability and the Middle East crisis. Craftsman ordered more material without certainty over supplies, and lower prices later affected the cost of consuming that inventory in Q2. Management said this was not a mark-to-market loss, but a higher cost of goods sold, or COGS, from continuously buying materials and selling products.

The profitability pressure came during rapid growth. An analyst described aluminium revenue growth of roughly 45% in H1, while management said the change between Q1 and Q2 was mostly real growth rather than commodity-led growth. The comparison indicates that higher aluminium sales did not immediately produce comparable margins because inventory costs and pre-operative expenses rose alongside volume.

When will Craftsman’s aluminium inventory effect disappear?

Craftsman expects the inventory-related aluminium effect to be very marginal in Q3 and absent in Q4. Management said the impact was especially visible in Q2, would be marginal in Q3 and would have no effect in Q4.

The timeline reflects the expected consumption of elevated inventory, not a forecast that aluminium prices will stop moving. Craftsman said it had built safety stock that should dilute in the coming quarter, while some inventory supporting its expanded production pipeline had yet to convert into revenue. Management did not quantify the Q2 effect because materials were bought at different times, some were still in transit and some contracts remained to be secured.

The inventory build also affected working capital. Consolidated gross debt rose from Rs 3,340 crore in March 2026 to Rs 3,618 crore in September 2026, while management put net debt at around Rs 3,000 crore after cash and capital advances. It cited working capital, goods and services tax, or GST, credits, new lines, new plants and safety stock as contributors.

What customer price corrections does Craftsman need?

Craftsman said required customer price corrections can range from 6%-7% to 15%-20% of gross margin or value addition, depending on the commodity, product and timing of the original order. Management said the range does not apply to customers’ top-line revenue and cannot be expressed as one company-wide percentage.

Management said larger resets may be needed for legacy products with uncorrected pricing and lower volumes. Orders placed in the last few quarters may not be candidates for the same adjustment, while other cases relate to manpower, power and regular inflation. Craftsman therefore described the negotiations as customer-specific and product-specific.

Some discussions concern recovery of past impacts and others concern future price corrections, management said. Craftsman did not disclose a target aluminium margin for FY27 or FY28 because negotiations are sensitive, but said margins should return to normal after discussions conclude. It also cautioned that a higher aluminium price does not automatically create a margin on the higher metal value.

How are new aluminium plants affecting Craftsman’s profitability?

Craftman’s new aluminium plants are reducing current profitability because they require working capital and start-up spending before reaching efficient utilisation. Management said operating leverage at these plants would take another two quarters to move into a more profitable position, while mature plants already benefit from operating leverage.

Management contrasted the newer aluminium facilities with powertrain operations, where plants were described as established rather than suboptimal. Not all aluminium plants have reached optimum levels, and management said capacity still needs to be added to reach that point. Pre-operative costs, energy-intensive fuel consumption and accelerated aluminium growth over the past two years have weighed on the segment’s margins.

Craftsman said it is expanding powertrain capacity, aluminium casting capacity and machining capacity, with much of that work already completed. For Q3, management guided to consolidated capital expenditure of Rs 500 crore to Rs 600 crore and said Q4 capital expenditure may be limited as longer-term projects are phased into later years.

What could support Craftsman’s aluminium margins after Q4?

Craftsman expects improved operating leverage, corrected legacy pricing and new products priced on current economics to support aluminium profitability after Q4. Management said newer products will come at newer prices and that the company will be selective in new developments while negotiations continue on existing products.

The company is broadening aluminium component offerings beyond legacy parts, including electric-vehicle applications and wider original equipment manufacturer, or OEM, product ranges. Management also sees an outsourcing opportunity because some OEMs still produce key aluminium parts and machining internally. It did not quantify the outsourcing opportunity, but said supplier capability and customer confidence have improved.

Craftsman’s German operations are separate from the domestic aluminium margin issue. Management described the existing German foundry as profitable, with power, raw-material and labour costs indexed to customers. A possible machine shop would require only around Rs 20 crore to Rs 30 crore for a few machines, according to management, to support the foundry and reduce working-capital intensity.

Conclusion

Craftsman’s Q2 aluminium margin pressure reflected higher material consumption costs from precautionary inventory and the cost of scaling plants that have not yet reached efficient utilisation. The company expects the inventory-related effect to become marginal in Q3 and disappear in Q4, while price corrections and higher plant utilisation remain important to restoring margins.

The next indicators are the outcome of customer price discussions, the Q4 exit rate for working capital and utilisation at new aluminium facilities. Management has not disclosed a quantified aluminium-margin target for FY27 or FY28, leaving the timing and extent of price corrections unresolved despite its Q4 inventory-effect timeline.