Jyoti CNC Automation Ltd IPO : AVOID

Jyoti CNC Automation Ltd IPO : AVOID
  • Date

    09th Jan 2024 - 11th Jan 2024

  • Price Range

    Rs. 315 to Rs. 331

  • Minimum Order Quantity

    45

Company Overview

Incorporated in the year 1991, Jyoti CNC Automation Limited is one of the world’s leading manufacturers of metal-cutting computer numerical control (CNC) machines. Its range of machines includes CNC turning centers, CNC turning-milling centers, CNC vertical machining centers (VMCs), CNC horizontal machining centers (HMCs), simultaneous 3-axis CNC machining centers, simultaneous 5-axis CNC machining centers and multi-tasking machines. The company has an impressive client base from the defence sector and this includes Space Application Centre (ISRO), BrahMos Aerospace, Turkish Aerospace, Tata Advances System, Tata Sikorsky Aerospace, Bharat Forge, Shreeram Aerospace & Defence, Harsha Engineers, Bosch Ltd etc. In the last 3 years, Jyoti CNC Automation Ltd has supplied more than 7,200 machines to over 3,000 customers across the globe. It has delivered a total of 30,000 plus CNC machines since 2004. For global distribution, Jyoti CNC Automation Ltd leverages the established dealer network of Huron, which as sales and service centers across Romania, France, Poland, Belgium, Italy, and UK. Jyoti CNC Automation Ltd has a total of 3 manufacturing facilities. While two of the facilities are located in Rajkot in Gujarat, the third facility is located at Strasbourg, France. It has a total manufacturing capacity of around 4,521 CNC machines, of which it can produce 4,400 machines annually in India and 121 machines annually at its Strasbourg in France.

Objects of the issue:

The net proceeds from the fresh issue will be used towards the following purposes:

  • Repayment and/ or pre-payment, in full or part, of certain borrowings availed by the company;
  • Funding long-term working capital requirements of the company; and
  • General corporate purposes.

Investment Rationale:

Strong market leadership and global presence fuelling revenue growth

Jyoti CNC Automation Ltd. stands out as India’s third biggest player in CNC machine manufacturing, commanding a significant 10% market share as of FY23. Furthermore, its global footprint is noteworthy, securing the twelfth-largest market share globally at 0.4% in CY22. The strong robust market positioning of the company is backed by a diversified customer base which includes marquee clients such as ISRO, Bharat Forge, and Turkish Aerospace, reflecting deep-rooted customer relationships and trust. The company’s strong market presence translates into sustained revenue growth, evidenced by a 25% rise in revenue in FY23 compared to the previous fiscal year. The well-established track record, coupled with a substantial order book of Rs 3,315.3 crores as of 1HFY24, of which aerospace and defense make up 57%, positions Jyoti CNC Automation for continued financial success. The strategic geographical presence across 16 countries, combined with a focus on technological advancements, positions the company to capitalize on the expected 18.4% global growth in 4-6 Axis machining centers from FY23 to FY27.

Vertical integration and technological innovation enhance the competitive edge

Jyoti CNC Automation Ltd.’s vertically integrated operations, with three manufacturing facilities and a dedicated R&D team, provide a distinct competitive advantage. This integration allows the company to deliver customization and production efficiencies, reducing dependence on third parties and streamlining the production process. The company’s commitment to technological innovation is evident through its diverse product portfolio, including simultaneous 5-axis CNC machines and solutions aligned with ‘Industry 4.0’ trends, incorporating features like the Industrial Internet of Things (IIOT). This vertical integration and emphasis on technology result in a well-diversified product basket, including over 200 variants across 44 series. The company’s ability to offer highly customized solutions, such as the ‘7th Sense’ package (an i4.0 solution capable of performing mundane and repeat tasks independently allowing humans to focus on the outcomes of these operations), further strengthens its position as an industry leader. With a dedicated R&D team of 141 employees and a continuous focus on advancements like ‘Linear Motor Technology,’ the company is well-prepared to meet evolving industry demands. This not only enhances its competitiveness but positions the company to leverage opportunities presented by government initiatives like ‘Make in India,’ ‘Aatma Nirbhar Bharat,’ and PLI schemes, fostering future growth in the CNC machining industry.

Valuation and Outlook:

The CNC Machine Production, Domestic Consumption Market, Import, and Export market in India is poised for substantial expansion between FY2023 and FY2027 at a noteworthy CAGR of 13.7%, 11%, 7.6% and 14.2% respectively. This growth is underpinned by heightened demand from crucial sectors such as automobiles, consumer durables, and aerospace. The industry is progressively shifting towards advanced CNC machines, propelled by the escalating intricacy of tasks. While the 2-3 Axis CNC machines dominate India’s CNC consumption due to their cost-effectiveness, the exigency for precision manufacturing in automotive, defense, and aerospace is projected to drive demand for more sophisticated technologies. Qualitatively, Jyoti CNC Automation Ltd boasts market leadership in India and a substantial global presence in CNC machine manufacturing. Deep-rooted customer relationships, vertical integration for end-to-end operations, and a proven track record in executing large-scale projects add to its strengths. Subsequently, examining the financials of Jyoti CNC Automation Ltd reveals robust revenue growth in the last three years and a recent turnaround in net profits after two years of losses. Due to prior losses, the ROE and ROA are pertinent only for the latest year. The company’s net profit margin remains tepid at 1.58%, while ROE stands robust at 41.5%. In the case of Jyoti CNC Automation Ltd’s business model, the focal points are the client base and the margins generated from clients. Jyoti plans to utilize the IPO proceeds to substantially reduce its long-term debt by approximately 50%, instigating a significant improvement in the balance sheet leverage. While the pricing may appear ambitious, potential investors might view Jyoti CNC Automation Ltd as a strategic investment aligned with the burgeoning defense sector in India. The company’s high growth trajectory positions it as a proxy play on the escalating demand for defense orders, akin to the outperformance witnessed in other defense stocks. The steep P/E ratio of 324x based on the latest year diluted EPS of Rs. 1.02 warrants scrutiny, especially when juxtaposed with the peer group’s P/E ratio. The market’s optimism appears contingent on the company’s anticipated profitability surge in the ensuing years. We, therefore, give the issue an “AVOID” rating.