IPO: Jyoti CNC

Jyoti CNC, a CNC (computer numerical control) machine manufacturer, is coming out with its IPO (initial public offering) on January 09, 2024. Here's a breakdown of the company's strengths, weaknesses and growth prospects to help investors make an informed decision.

In a nutshell

• Quality : Its three-year average ROE and ROCE are -33 per cent and 4 per cent, respectively. It reported losses in FY22 and FY21, resulting in a negative three-year average ROE. Moreover, it has a worrying debt-to-equity ratio of 3.2 times (as of September 2023).
  
• Growth : Its revenue grew by 27 per cent annually over the last three years.
  
• Valuation : The stock is valued at a P/E and P/B of 500 and 6 times, respectively.
  
• Overview: Growth in the manufacturing sector and rising demand for high-precision machinery should drive growth. However, high competitive intensity, working capital requirement and debt are concerning.

About Jyoti CNC

Jyoti CNC is India's third-largest manufacturer of computer numerical control (CNC) machines by revenue. For the uninitiated, CNC machines are used to control and automate manufacturing tools. It operates two manufacturing facilities in India and one in France.

Strengths of Jyoti CNC

• It is the third-largest CNC manufacturer in India by revenue (10 per cent in FY22) .
  
• Diverse clientele . It manufactures CNC machines for a diverse array of industries, including aerospace, defence, automotive, and other high-end engineering industries.

Weaknesses of Jyoti CNC

• Revenue concentration . Its top 10 customers accounted for 40 per cent of H1 FY24 revenue.
  
• High working capital requirement . It has a high cash conversion cycle (around 234 days in FY23) and has to rely on debt for working capital requirements.
  
• Loss-making subsidiaries. It incurred losses on a consolidated basis in FY22 and FY21 due to losses incurred by its subsidiaries.
  
• High Debt. Its debt-to-equity ratio was 3.2 times as of September 2023. Also, it consistently had an interest coverage ratio of less than 1.

Risk report

Company and business

• Are earnings before tax of Jyoti CNC more than Rs 50 crore in the last 12 months?
  No. Its profit before tax for FY23 was Rs 28 crore. Adjusting for exceptional items, it incurred a loss of Rs 2.6 crore.
• Will Jyoti CNC be able to scale up its business?
  Yes. Rising demand for precision metal cutting machines should help it scale up.
• Do Jyoti CNC have recognizable brands with client stickiness?
  No, it generally doesn't have repeat customers since the company doesn't enter into long-term contracts. Also, its products are highly replicable.
• Does the company have a credible moat?
  No. It faces significant competition domestically and globally.

Management

• Do any of the company's founders still hold at least a 5 per cent stake in the company? Or do promoters hold more than a 25 per cent stake in the company?
  Yes. Post IPO, the promoters' stake will be 62.5 per cent.
• Do the top three managers have more than 15 years of combined leadership at Jyoti CNC?
  Yes. Key managerial personnel and senior management have more than 15 years of experience.
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. No information to suggest otherwise.
• Is the company's accounting policy stable?
  Yes. No information to suggest otherwise.
• Is the company free of promoter pledging of its shares?
  Yes. No shares have been pledged.

Financials

• Did the company generate a current and three-year average return on equity of more than 15 per cent and a return on capital employed of more than 18 per cent?
  No. Its three-year average ROE and ROCE are -33 and 4 per cent, respectively. In FY23, its ROE and ROCE were 25 and 7 per cent.
• Was the company's operating cash flow positive during the last three years?
  Yes. The company reported positive cash flows from operations in each of the last three years. However, it posted a negative cash flow of Rs 74 crore in H1 FY24.
• Is the company's net debt-to-equity ratio less than one?
  No. Its net debt-to-equity ratio, as of September 2023, was 3.1 times.
• Is Jyoti CNC free from reliance on huge working capital for day-to-day affairs?
  No. Its business is working capital intensive.
• Can the company run its business without relying on external funding in the next three years?
  No, it relies on debt to fulfil its working capital expenses. Further, its subsidiaries are loss-making.
• Is Jyoti CNC free from meaningful contingent liabilities?
  No. Contingent liabilities as a percentage of total equity stood at around 126 per cent.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. The stock offers a 0.8 per cent operating earnings yield on its enterprise value.
• Is the stock's price-to-earnings less than its peers' median level?
  No. The stock is valued at a P/E of 500 times. The peer median is 48.7.
• Is the stock's price-to-book value less than its peers' average level?
  Yes. The stock is valued at a P/B of six times. The peer median is 9.2 times.

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

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