IPO Analysis: Jyoti CNC Automation Limited

IPO Rating: Avoid

About the Issue

The company ranks among the top global manufacturers of metal-cutting computer numerical control (CNC) machines. It is launching its initial public offering (IPO) for equity shares valued at Rs 2 each. The IPO price range is set between Rs 315 and Rs 331 per equity share, resulting in a total issue size of Rs 1,000 crore at the upper price band.

The IPO is scheduled to commence on January 09, 2024, and will conclude on January 11, 2024. The market lot size for the IPO is 45 shares, with the option to apply for multiples of this lot. Individual retail investors have the opportunity to apply for a maximum of 13 lots, equivalent to 585 shares or a total investment of Rs 1,93,635 assuming the upper price band.

Objects of the Issue

Considering that the offer is exclusively a fresh issue, it is crucial to emphasize that the company will directly profit from the offer proceeds. The company plans to allocate the net proceeds raised from the fresh issue for the following purposes:

1. Repayment or pre-payment, in full or part, of certain borrowings availed by the company
2. Funding long-term working capital requirements of the company
3. General corporate purposes

Promoter holding

Parakramsinh Ghanshyamsinh Jadeja, Sahdevsinh Lalubha Jadeja, Vikramsinh Raghuvirsinh Rana, and Jyoti International LLP are the promoters of the company. The promoters currently hold a pre-issue shareholding stake of 55.36 per cent in the company.

Company profile

The company ranks among the top global manufacturers of metal-cutting computer numerical control (CNC) machines. The company is a leading producer of simultaneous 5-Axis CNC machines in India. It offers a wide range of CNC machines, encompassing CNC Turning Centers, CNC Turn Mill Centers, CNC Vertical Machining Centers (VMCs), and CNC Horizontal Machining Centers (HMCs).

The company specializes in tailoring solutions to meet the unique needs of clients spanning various industries such as aerospace and defence, automotive and its components, general engineering, EMS (Electronic Manufacturing Services), dies and molds, among others. The company boasts a notable clientele, including esteemed entities such as Space Applications Centre - ISRO, BrahMos Aerospace Thiruvananthapuram Ltd, Turkish Aerospace, Uniparts India Ltd, AVTEC Ltd, Tata Advanced System Ltd, Bharat Forge Ltd, Shakti Pumps (India) Ltd, Shreeram Aerospace & Defence LLP, Rolex Rings Ltd, Bosch Ltd, HAWE Hydraulics Private Ltd, and Elgi Rubber Company Ltd.

The company provides an extensive range, featuring over 200 variants spread across 44 series. It serves a broad customer base, supplying to more than 3,500 clients in India and across Asia (excluding India), Europe, North America, and other regions around the world.

The company operates three manufacturing facilities, with two located in Rajkot, Gujarat (designated as Indian manufacturing facilities) and one in Strasbourg, France. These facilities are equipped with the capabilities for designing, developing, and manufacturing the company's product portfolio.

Financials

In Fiscal 2023, it held the third-largest market share in India, comprising approximately 10 per cent of the market. Additionally, on a global scale in the calendar year 2022, it secured the twelfth-largest market share, accounting for 0.4 per cent of the global market share.

The company maintained strong top-line growth over the last few years, with a 25 per cent rise in revenue in FY23 compared to FY22. On the other hand, the company failed to generate profits in FY21 and FY22 while reporting a modest number for FY23. If the annualized FY24 net earnings are considered, they may fall significantly short of expectations based on FY23 figures.

The company is experiencing elevated interest expenses as a result of substantial borrowings. Repaying loans with the net proceeds from the offer could make it easier for the business to enhance its profitability. The company boasts a return on equity (RoE) and return on capital employed (RoCE) of 18 per cent and 9 per cent, respectively, for the fiscal year 2023.

Valuation and outlook

As per its official documents, the company has referenced several listed peers, including Elgi Equipments Ltd, Lakshmi Machine Works Ltd, Triveni Turbine Ltd, TD Power Systems Ltd, Macpower CNC Machines Ltd.

The issue is priced with a P/BV ratio of 22.64 times, calculated using its Net Asset Value (NAV) of Rs 14.62 as of September 30, 2023. When we calculate the PE ratio for the company by considering the annualized FY24 earnings relative to the post-IPO fully diluted paid-up equity capital, the resulting PE ratio stands at 871.

The valuation of the Jyoti CNC Automation IPO is enormously high, making it too much expensive than its listed peers. The company's impressive geographical reach, substantial order book, and reputable client base are overshadowed by worrisome financials and valuation, prompting serious concerns. Therefore, we recommend investors to avoid this IPO, given its associated risks.