Jyoti CNC Automation Limited IPO

In this article, we will discuss

• Introduction
• Objects of the Offer
• Key Strengths and Opportunities
• Risks
• Financial Snapshot
• Conclusion

Introduction

Incorporated in January 1991, Jyoti CNC Automation Limited is a manufacturer and supplier of CNC machines. It is one of the world’s leading manufacturers of metal cutting computer numerical control (CNC) machines with the third largest market share in India accounting for approximately 10% of the market share in India in Fiscal 2023 and the twelfth largest market share globally accounting for 0.4% of the market share globally in calendar year 2022. The company is a prominent manufacturer of simultaneous 5 - Axis CNC machines in India and supplies adverse portfolios of CNC machines including CNC Turning Centers, CNC Turn Mill Centers, CNC Vertical Machining Centers (VMCs) and CNC Horizontal Machining Centers (HMCs). The company has 3 manufacturing facilities, two of which are in Rajkot, Gujarat, and the other in Strasbourg, France, which are equipped with capabilities to design, develop and manufacture our product portfolio.

Objects of the Offer:

The company intends to utilize the net proceeds from the fresh issue towards the following objects:

• 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.

Key Strengths and Opportunities:

• One of the leading CNC machine manufacturing companies globally as well as in India with presence across the CNC metal cutting machinery value chain: Jyoti CNC Automation is one of the world’s leading manufacturers of metal cutting computer numerical control (CNC) machines with the 3 ^rd largest market share in India accounting approximately 10% of the market share in India in Fiscal 2023 and 12 ^th largest market share globally accounting for 0.4% of the market share globally in calendar year 2022. It is a prominent manufacturer of simultaneous 5-Axis CNC machines in India and supplies a diverse portfolio of CNC machines including CNC Turning Centers, CNC Turn Mill Centers, CNC Vertical Machining Centers (VMCs) and CNC Horizontal Machining Centers (HMCs).
• Well diversified global customer base spread across end-user industries: Since April 1, 2004, Jyoti CNC has supplied over 30,000 CNC machines globally. Further, during the 6 months period ended September 30, 2023, and the last 3 Fiscals, it has supplied machines over 8,400 machines to more than 3,500 customers in India and across Asia (excluding India), Europe, North America and rest of the world. It generated 20% revenue from Aerospace & Defence, 47% from the automotive space, 20% from general engineering, 9% from Dies and Moulds for the Fiscal Year 2023, recording revenues from varied end-user industries.
• Vertically integrated operations which enables customisation and production efficiencies: The company also has a captive foundry, machining, sheet metal unit, paint-shop and assembly unit. Its integrated operations enable it to manufacture some of the critical machine components such as spindles, tool-changers, pallet changers, rotary tables and universal heads in-house. This reduces the dependence on third parties, streamlines the production process and improves the operational efficiencies. It also enables it to maintain control over the entire manufacturing process and also provide better delivery timelines to its customers at a more competitive cost.
• Experienced Promoters supported by a strong management and execution team: Parakramsinh Jadeja, one of the Promoters as well as the Chairman and Managing Director, is vastly experienced and has been feted by various industry bodies for his entrepreneurship. Further, the Board of Directors is ably supported by a strong and long-standing management team who are vastly experienced.

Risks:

• Jyoti CNC Automation Ltd. has incurred losses and consequently, has had a negative return on equity in the past. Further, a material subsidiary, Jyoti SAS on a consolidated basis, has also incurred losses during 6 months period ended September 30, 2023, Fiscals 2023, 2022 and 2021. Any losses in the future could have an adverse impact on the growth prospects and would also preclude the company from undertaking actions such as declaring dividends.
• By their very nature, CNC machines are not consumer products and, therefore, the company does not generally have repeat customers on an annual basis. While its business relationships with its customers have been built over time, it does not enter into long term contracts with its customers and, the absence of long-term contracts with its customers exposes it to a significant risk of customer attrition. However, while the customers may vary annually, it is reliant on the contribution of the top 10 customers every year.
• The business of Jyoti CNC is capital intensive and it is required to maintain high levels of net working capital as well as a large fixed asset base to operate its business. Jyoti CNC has incurred significant indebtedness and carries substantial debt servicing obligations. Further, it also has high debt equity ratio and a low debt service coverage ratio. If it does not generate a sufficient amount of cash flows from operations, its liquidity and its ability to service the indebtedness could be adversely affected.
• The company does not have long-term agreements with suppliers for the input materials and a significant increase in the cost of, or a shortfall in the availability, or deterioration in the quality, of such input materials could have an adverse effect on the business and results of operations.

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Financial Snapshot:

Conclusion:

The global CNC machining center market is expected to grow at a 10.3% CAGR from CY23-CY27 due to increasing demand from the automotive sector, aerospace & defence, general engineering and EMS space. Examining the Indian context, the domestic production of CNC Machine consumption has shown a consistent upward trajectory from 34.2% in 2010 to 54.1% in 2023 and is further expected to increase to 59.5% by 2027. Jyoti CNC Automation Ltd. is the 3 ^rd largest player in India with approximately 10% of the market share in India. The company with a prominent manufacturer of 5-Axis Machines is well-positioned to capitalize on the increasing demand for CNC machines in India.

Despite the optimistic outlook for the business, the company’s fundamental performance has yet to align with the expanding market opportunities. The company’s PAT and Return on Equity (ROE) reflected negative trends for the Fiscal Years 2021 and 2022. The company, however, turned the tables in 2023 but hasn’t sustained the financials for the period six months ended September 2023.

The company’s Debt-to-Equity Ratio remains significantly high at 10.17 and a suboptimal Debt Service Coverage Ratio of 0.88 times (as of FY23). Even with the repayment of certain borrowings from the IPO proceeds, the debt-to-equity ratio is expected to remain elevated. In comparison to its peers, though not directly comparable, the company’s valuations appear less favourable.

Considering these factors, we recommend investors to avoid investing in this company.