Jyoti CNC Automation IPO - Investment Rationale, Issue Details, Financials, Risks And More: Anand Rathi

Anand Rathi's IPO Report

Jyoti CNC Automation Ltd. will launch its initial public offering today and the investors can subscribe the issue till January 11. The CNC machine manufacturing company has fixed the price band in the range of Rs 315 - Rs 331 per share. The minimum order lot is 45.

The company plans to raise Rs 1,000 crore through fresh issue.

Objects of the Issue

• Repayment and/ or pre-payment, in full or part, of certain borrowings availed by the company

• Funding working capital requirements of the company;

• General corporate purposes

Valuation:

Jyoti CNC Automation is one of the leading CNC machine manufacturing companies globally as well as in India with presence across the CNC metal cutting machinery value chain with well diversified global customer base spread across end-user industries and focus on technology and ability to deliver innovative solutions bolstered by dedicated research and development&D facilities with vertically integrated operations which enables customisation and production efficiencies.

At the upper price band company is valuing at price/earning of 374.22 times, enterprise value/Ebitda 85.59 times with a market cap of Rs 75,274 million post issue of equity shares and return on net worth of 18.35%.

Since company is using majority of its IPO proceeds to repay its debt which is going to reduce interest cost and hence it will have positive impact of profitability going forward.

Apart from that there is revenue visibility for company due to its order book size and company operates under niche segment and majority of the revenue is from aerospace and defense industry which is high growth sector, we believe that the IPO is fairly priced and recommend a 'Subscribe-Long term' rating to the IPO.

Key risk:

• They have incurred losses and consequently, had a negative return on equity in the past. Losses in future could have an adverse impact on their growth prospectus and would also preclude them from undertaking actions such as declaring dividends.

• Their success is dependent on their relationship with their customers, and they do not, generally enter into long term purchase contracts. This exposes them to risk emanating from the inability to retain their established customers as their clients.

• Company have incurred significant indebtedness and carry substantial debt servicing obligations. Further they have high debt equity ratio and a low debt service coverage ratio. If they do not generate sufficient amount of cash flows from operations, their liquidity and their ability to service their indebtedness could be adversely affected.

• Company does not have long-term agreements with suppliers for their 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 their business and results of operations.

• Company is completely reliant on third-party logistics service providers for transport of input materials and finished products.

• Company has delayed in submission of their audited consolidated financial statement in the past. They cannot assure you that no action will be taken against their company.

• Their business is dependent on the performance of the Application Industries with a large portion of revenue being derived from a select few of application Industries. Any downturn in the application industries can adversely impact their business, results of operations, cash flow and financial condition of their company.

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