Very low profitability volatile cash flows

• Jyoti CNC is involved in the business of manufacturing Computer Numerical Control (CNC) Machines, which are automated machines used in large-scale manufacturing across industries such as aerospace, defense, auto components, and the medical sector. The company’s financials have improved in the last two years, but the profit margins reported by the company are negligible. The company reported a profit of Rs 15 crore in FY23, but in H1FY24, the company has managed to generate only a profit of Rs 3.35 crore. If we annualize this, the profit would be 50% less than FY23. Not many investors will be willing to put their money into a company with deteriorating financials.
• Even the cash flows of the company are very volatile, as it reported a CFO of Rs 26 crore in FY21, which increased to Rs 39 crore in FY22 but then fell to Rs 12 crore. In H1FY24, the company reported negative cash flow from operations. Lack of cash flow generation deprives a firm of the ability to expand organically.
• The company also has very high debt of Rs 821 crore as of September 2023, which is significant for a company that had a turnover of Rs 929 crore in FY23. The company is already reporting negligible margins, and with such an amount of debt, it is unlikely that the company could increase profits significantly anytime soon. The company reported losses in FY21 and FY22, while it did report a profit in FY23. We don’t think it can be sustained going forward.

Valuations

• As per FY23, the company is asking for a PE of 501x and a market cap-to-sales of 8x which is very expensive and there is no room for capital appreciation in this IPO. Hence, we recommend avoiding it​