The public issue of Jyoti CNC Automation opened for subscription on January 9. The stock attracted a 30 percent premium in the grey market over the issue price. Despite sky-high valuation, volatile financials, and comparatively lower return ratios, several analysts have assigned a ‘subscribe’ rating to the issue, citing growing industry demand, improving financial risk profile by repaying certain debt, and a strong order book of Rs 3,315.33 crore to be executed over next few years.

The business

Jyoti CNC Automation is a manufacturer and supplier of metal-cutting computer numerical control (CNC) machines. The customer base includes ISRO, BrahMos Aerospace, Turkish Aerospace, Uniparts India, Tata Advances System, Tata Sikorsky Aerospace, Bharat Forge, Shakti Pumps, Shreeram Aerospace & Defense, Rolex Rings, Harsha Engineers, Bosch Limited, HAWE Hydraulics, Festo India, Elgi Rubber, National Fittings and others.

The company has three manufacturing facilities, two of which are in Rajkot, Gujrat, and one in Strasbourg, France. In November 2007, Jyoti CNC acquired Huron Graffenstaden SAS. The company has the third largest market share in India, accounting for approximately 10 percent in fiscal 2023, and the 12th largest market share globally, accounting for 0.4 percent in calendar year 2022.

Offer details

The offer is entirely a fresh issue of 3.02 crore shares amounting to Rs 1,000 crore. The IPO will close on January 11, and the price band has been fixed at Rs 315-331 per share. The stock is expected to be listed on the NSE and BSE on January 16. The promoters of the company are Parakramsinh Ghanshyamsinh Jadeja, Sahdevsinh Lalubha Jadeja, Vikramsinh Raghuvirsinh Rana and Jyoti International LLP.

The company plans to use the net proceeds to finance long-term working capital needs and for the repayment of some of the borrowings and the remaining amount will be used for general corporate purposes.

Anchor Investors

Ahead of the IPO, the company garnered Rs 447.75 crore from 37 anchor investors. Marquee names like Goldman Sachs, Nomura Funds, Natixis International Funds, Neuberger Berman Emerging Markets Equity Fund, Optimix Wholesale Global, The Master Trust Bank of Japan, Prudential Hong Kong, Carmignac Portfolio, Allianz Global Investors Fund, Eastspring Investments India Fund invested in the Rajkot-based company.

Domestic institutional investors such as ICICI Prudential Mutual Fund, Nippon Life India, Kotak Mahindra Trustee, Axis Mutual Fund, Manulife Global Fund, Canara Robeco Mutual Fund, Invesco Mutual Fund, Bandhan Mutual Fund, Edelweiss Trusteeship, HDFC Life Insurance Company, and Bajaj Allianz Life Insurance Company also participated in the counter.

Financials

The company reported a net profit of Rs 15.06 crore with a revenue of Rs 952.60 crore in FY23, as against a loss of Rs 29.68 crore in FY22. EBITDA (earnings before interest, tax, depreciation, and amortization) grew by 34 percent on-year to Rs 97.4 crore with a margin expansion of 74 bps at 10.47 percent for FY23.

As of September 30, 2023, the total sanctioned and outstanding indebtedness was Rs 1,280.5 crore and Rs 976.8 crore. Net profit for the six months ended September FY24 came in at Rs 3.35 crore on a revenue of Rs 509.8 crore. As of September 2023, the company had an order book of Rs 3,315.33 crore.

Valuation

The price-to-earnings (P/E) ratio based on diluted EPS (Rs 1.02) for FY23 at the upper end of the price band comes at 324.51 times and the lower end, it stands at 308.82 times, which is way more expensive compared to Elgi Equipments (44.3x), Lakshmi Machine Works (37.69x), Triveni Turbine (67.76x), TD Power Systems (46.66x) and Macpower CNC Machines (51.31x).

As of September 30, 2023, Jyoti CNC had one of the lowest RoE (1.33 percent) and RoCE (5.54 percent) in its peer group. The debt-to-equity ratio stood at 10.17x in FY23.

At the upper price band, the company is valued at a P/E of 374.22x, EV/EBITDA of 85.59x with a market cap of Rs 7,527.4 crore post-issue of equity shares.

“Since the company will use the majority of its IPO proceeds to repay its debt which is going to reduce interest costs and hence it will have a positive impact on profitability going forward. . Apart from that there is revenue visibility for the company due to its order book size and nd majority of the revenue is from the aerospace and defence industries which are high-growth sectors. We believe that the issue is fairly priced and recommend a ‘subscribe-long term’ rating,” said Manan Goyal of Anand Rathi.

“With an improved market share, growing industry demand, diversified presence, augmenting capacities at regular intervals, and improving financial risk profile by repaying certain debt, a strong order book of Rs 3,310 crore to be executed over the next few years augurs well for the company. Hence we suggest a ‘subscribe’ rating for the long term,” said analysts at Reliance Securities.

Given the company's historic losses and recovering back to profitability, relying solely on P/E valuation may not be a prudent approach. “Instead, if we analyze it based on Price to Book Value, which stands at 6.2x of FY24 annualized, compared to the industry average of 8-9x, it seems this IPO is reasonably priced to its peers. We recommend investors to ‘subscribe’ from a long-term perspective only,” said Rajan Shinde, Research Analyst at Mehta Equities.