Jyoti CNC
IPO Size: Rs. 1,000 cr
- Entirely Fresh issue for (i) debt repayment of Rs. 475 cr (of Rs. 977 cr gross debt) (ii) working capital Rs. 360 cr
Price band: Rs. 315-331 per share
- 75% reserved for QIB and only 10% for retail, as loss in FY21 and FY22
M cap: Rs. 7,527 cr, implying 13% dilution
IPO Date: Tue 9th Jan 2024 to Thu 11th Jan 2024, Listing Tue 16th Jan 2024
Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.
India’s 3rd Largest CNC Machine Maker
Jyoti CNC makes metal cutting computer numerical control (CNC) machines, used in automotive, heavy engineering, aerospace and defence industries, and enjoys 10% domestic market share and is also the 12th largest globally (0.4% global market share). Due to Rs. 2,987 cr order inflow in FY23, company’s order book rose sharply to Rs. 3,143 cr as of 30.9.23, comprising Rs. 1,896 cr from aerospace and defence, Rs. 305 cr from electronics manufacturing services (EMS), which is guided to be executed over the next 2-2.5 years. However, order inflow slowed to Rs. 495 cr in H1FY24 calling for monitoring order flow over the next few quarters, to judge sustainability of new order wins.
Weak Historical Financials
In FY23, Jyoti CNC reported revenue of Rs. 929 cr, with loss before tax and exceptional items of Rs. 3 cr. This includes Rs. 22 cr forex gain, excluding which, reported loss before tax and exceptional would have been Rs. 25 cr. For FY21 and FY22 too, PBT was negative, at Rs. 72 cr (on Rs. 580 cr revenue) and Rs. 42 cr (Rs. 746 cr revenue) respectively, as the high fixed costs were not completely absorbed. Given the nature of business and high working capital requirement (outstanding inventory is over 10 months, vis-à-vis 2 months for peer Lakshmi Machine Works and 3 months for Macpower CNC), margins are severely impacted when scale is sub-optimal. In H1FY24 however, business achieved break-even, with revenue up, to Rs. 510 cr, and Rs. 75 cr EBITDA (14.7% margin). High debt of Rs. 977 cr led to Rs. 49 cr interest outgo in H1FY24, resulting in net profit of mere Rs. 3 cr.
2nd Attempt at IPO
This is Jyoti CNC’s 2nd attempt at IPO, with its earlier attempt in 2013. In these 11 years, company’s domestic market share has actually fallen from 12.7% in FY12 to 10% in FY23. For FY12, revenue stood at Rs. 600 cr, and has grown at just 4% CAGR in 11 years, to Rs. 929 cr in FY23, highlighting the highly cyclical nature of the industry it caters to. Moreover, it reported loss before tax for 4 fiscals in a row from FY08 to FY11.
Fully Priced, even on FY25E basis
It is inappropriate to annualize H1FY24 earnings as (i) revenue will scale up sharply going forward, as orders get executed over the next 2-2.5 years (ii) interest cost will half, as debt is trimmed from IPO proceeds. These twin factors lead to an estimated PAT of about Rs. 60 cr for FY24E and Rs. 170 cr for FY25E, which translates into a PE multiple of close to 44x, on a one year forward basis, making the IPO fully priced. FY25E RoE may be around 12% on the expanded equity, which is lower than average 17% for peers like Lakshmi Machine Works and Macpower CNC, also ruling lower, at 35-40x PE, on FY25E basis.
FY25E and FY26E may be bumper years for Jyoti CNC, but highly cyclical nature of end-use industries may not sustain long term growth. For the short term, current price offers no margin of safety, for possible risks on order execution, global slowdown etc.
Past Transactions at Significantly Lower Price
In June 2023, shares were issued at Rs. 196 per share to private individuals, while in July 2023, Rs. 38.5 cr was raised from CCPS at an effective price of Rs. 266 per share, even though order book had already surpassed Rs. 3,100 cr by then. IPO price of Rs.331 is a 69% premium to the 6 month old price, while order book increased by barely 10% in the interim.
Even promoter loan of Rs. 140 cr was converted to equity shares at much lower price of Rs. 145 per share in Mar and Aug 2023. This is a related party transaction and ‘fair value’ not easy to determine, but significantly lower conversion price and same price even after 5 months gap (between Mar to Aug) raises questions around corporate governance. Pre-IPO promoter holding of 72.1% will drop to 62.5% post IPO.
9th Jan 2024 at 07:57 pm
9th Jan 2024 at 07:44 pm
9th Jan 2024 at 11:19 am