Jyoti CNC IPO review (May apply)

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Review By Dilip Davda on January 5, 2024

•    JCAL has emerged as the world's leading CNC machines manufacturer.
•    It turned the corner in FY23 after suffering a setback on account of the Pandemic for previous two fiscals. 
•    It has order on hands worth Rs. 3315+crore and expecting influx of more orders in coming months with the surge in Aero
•    The issue is priced at a P/E of 501 on the basis of FY23 earnings and at 1103 P/E based on its annualized FY24 earnings. 
•    Only well-informed cash surplus investors may park funds for the long term rewards.

PREFACE:
The company filed its first DRHP in the month of March 2013 for an IPO of 13384826 equity shares of Rs. 10 each for dilution of 31.82% of the post-IPO paid-up capital of the company. However, it did not come with the IPO that was scheduled for 2013 under the pretext of bad market conditions. But now it has refiled DRHP in the month of September 2023, and is going public with its RHP filed in January 2024. For first IPO plans, it had given mandate to Avendus Capital Pvt. Ltd. and SBI Capital Markets Ltd. as joint BRLMs, and now it has Three BRLMs for the IPO and they are Equirus Capital Pvt. Ltd., ICICI Securities Ltd., and SBI Capital Markets Ltd. and this time the IPO is of fresh equity shares issue worth Rs. 1000 cr. having a Face Value (FV) of Rs. 2 each, for a dilution of 13.29% of the post-IPO paid-up capital of the company. The company did pre-IPO placement in December 2023 at a price of Rs. 266 per share and within a month it is asking issue price of Rs. 331 at the upper cap. 

ABOUT COMPANY:
Jyoti CNC Automation Ltd. (JCAL) 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 approximately 10% of the market share in India in Fiscal 2023 and twelfth largest market share globally accounting for 0.4% of the market share globally in calendar year 2022. (Source: F&S Report). It is a prominent manufacturer of simultaneous 5-Axis CNC machines in India (Source: F&S Report) and supply a diverse 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 relies on its expertise built over 2 decades of presence and strong R&D capabilities to deliver customized solutions to customers across diverse set of industries including aerospace and defence, auto and auto components, general engineering, EMS, dies and moulds, and others. 

It offers solutions suited for transitioning towards 'Industry 4.0', including its flagship multifunctional solutions package viz. '7th Sense' - which is geared towards automating sophisticated diagnostic and analytical functions enabling seamless management of productivity, health and tool life of the CNC machine. The CNC machines market is expected to grow globally at a CAGR of 10.3% during CY 2023-2027. This growth is expected to be propelled by a growth in the manufacturing industries due to factors such as industrial automation, and integration of computer aided manufacturing. The surge in demand for high precision machinery from various industries including aerospace, defense and medical sector is expected to result in the increased demand for the machining centers market. (Source: F&S Report).

The company has vertically integrated operations which is consider essential to its ability to provide technologically relevant and customized solutions that has helped it garner customers such as Space Applications Centre - ISRO, BrahMos Aerospace Thiruvananthapuram Limited, , MBDA, Turkish Aerospace, Uniparts India Limited, AVTEC Limited, Tata Advanced System Limited, Tata Sikorsky Aerospace Limited, Bharat Forge Limited, C.R.I. Pumps Private Limited, Kalyani Techno forge Limited, Shakti Pumps (India) Limited, Shreeram Aerospace & Defence LLP, Rolex Rings Limited, Orbit Bearings India Private Limited, Omnitech Engineering Private Limited, Harsha Engineers International Limited, Bosch Limited, HAWE Hydraulics Private Limited, Festo India Private Limited, Elgi Rubber Company Limited, National Fittings Limited, and Aequs Private Limited, to name a few.

JCAL offers over 200 variants across 44 series and during the last 6 months' period ended September 30, 2023, and during the last 3 Fiscals, the Company has supplied over 8,400 CNC machines to more than 3,500 customers in India and across Asia (excluding India), Europe, North America and rest of the world. Since April 1, 2004, it has supplied over 30,000 CNC machines globally. During the last 6 months' period ended September 30, 2023, and during the last 3 Fiscals it has sold products in India and 16 other countries across the globe through its principal offices in India, France, Germany, Turkey and Canada. 

The company sells products in Romania, France, Poland, Belgium, Italy, and United Kingdom through Huron's established dealer network and also have 29 sales and service centres (including its sales offices located within the precincts of one of its Manufacturing Facilities in Rajkot, Gujrat) spread across 12 states in India. As of September 30, 2023, JCSL had an order book of Rs. 3315.33 cr. including an order of Rs. 304.92 cr. from an entity in the electronics manufacturing services (EMS) industry (as per the end-user industries as specified to the company at the time of supply of machines).

It operates out of 3 manufacturing facilities, 2 in Rajkot, Gujarat, (Indian Manufacturing Facilities) and 1 in Strasbourg, France, which are equipped with capabilities to design, develop and manufacture its product portfolio. As on September 30, 2023, it had the capacity to manufacture 4,400 machines p.a. in India and 121 machines p.a. in France. As of September 30, 2023, it had 2339 employees on its payroll and 285 persons on contract basis. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route IPO of fresh equity issue worth Rs. 1000.00 cr. (for approx. 30211470 shares at the upper cap). It has announced a price band of Rs. 315 - Rs. 331 per share of Rs. 2 each. The issue opens for subscription on January 09, 2024, and will close on January 11, 2024. The minimum application to be made is for 45 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 13.29% of the post-IPO paid-up capital of the company. From the net proceeds of the IPO process, it will utilize Rs. 475 cr. for repayment/prepayment of certain borrowings, Rs. 360 cr. for working capital, and the balance for general corporate purposes. 

The company has reserved shares worth Rs. 5.00 cr. for its eligible employees and from the rest, it has allocated not less than 75% for QIBs, not more than 15% for HNIs and not more than 10% for Retail investors. It is offering a discount of Rs. 15 per share to its employees. 

The joint Book Running Lead Managers (BRLMs) to this issue are Equirus Capital Pvt. Ltd., ICICI Securities Ltd., and SBI Capital Markets Ltd. while Link Intime India Pvt. Ltd. is the registrar of the issue. 

Having issued initial equity shares at par, the company issued further equity shares in the price range of Rs. 6 - Rs. 266 (on the basis of Rs. 2 FV) between December 2003 and December 2023. It has also issued bonus shares in the ratio of 1 for 1 in September 2012. The average cost of acquisition of shares by the promoters is Rs. 1.00, Rs. 1.98, Rs. 18.46, and Rs. 26.17 per share.

Post-IPO, company's current paid-up equity capital of Rs. 39.44 cr. will stand enhanced to Rs. 45.48cr. Based on the upper cap of IPO price band, the company is looking for a market cap of Rs. 7527.47 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has (on a consolidated basis) posted a total income/net profit/ - (loss) of Rs. 590.09 cr. / Rs. - (70.03) cr. (FY21), Rs. 750.06 cr. / Rs. - (48.30) cr. (FY22), and Rs. 952.60 cr. / Rs. 15.06 cr. (FY23). For H1 of FY24 ended on September 30, 2023, it earned a net profit of Rs. 3.35 cr. on a total income of Rs. 510.53 cr. According to the management, it suffered a setback in FY21 and FY22 on account of the Pandemic and the general trends for the segment. But now it is on a fast forward mode and is poised to reap benefits with its partnership with Huron and technology upgradation and has many contracts in the pipeline. With reduction in its debt for over 50%, its financial cost saving will be huge and with the additional working capital, it is heading for bright prospects with leveraged inventories.

For the last three fiscals, the company has reported an average EPS of Rs. - (1.38) and an average RoNW of - (40.35) %. The issue is priced at a P/BV of 59.43 based on its NAV of Rs. 5.57 as of March 31, 2023, (the offer document is missing NAV data as of September 30, 2023), and at a P/BV of 6.01 based on its post-IPO NAV of Rs. 55.09 per share (at the upper cap).

If we attribute FY24 annualized earnings to post-IPO fully paid-up equity capital of the company, then the asking price is at a P/E of 1103.33 and based on FY23 earnings, P/E stands at 501.52. Thus the issue is exorbitantly priced discounting all near term positives. 

For the reported periods, it has posted PAT margins of - (11.87) % (FY21), - (6.44) % (FY22), 1.58% (FY23), 0.66% (H1-FY24), and RoCE margins of 0.47%, 4.85%, 9.50%, 5.54% respectively. 

DIVIDEND POLICY:
The company has not paid any dividends for the reported periods of the offer document. It has adopted a dividend policy in May 2023, on the basis of its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per offer document, the company has shown Elgi Equipments, Lakshmi Machine Works, Triveni Turbine, TD Power, Macpower CNC as the listed peers. They are trading at a P/E of 56.34, 37.91, 75.94, 40.25, and 50.42 (as of January 05, 2024). However, they are not comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
The three BRLMs associated with the issue have handled 75 public issues in the past three fiscals, out of which 23 issues closed below the offer price on the listing date.

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