Jyoti CNC Automation IPO - 5 Key Risks to Consider Before Investing

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  • 10 Jan 2024
Jyoti CNC Automation IPO - 5 Key Risks to Consider Before Investing
  • History of Negative Return on Equity in the Past

Jyoti CNC Automation Ltd has a history of negative returns in the past, and future losses could adversely affect the company’s growth prospects. The company’s losses in the fiscal 2022 and 2021 were primarily due to the losses suffered by its subsidiaries. The situation can potentially impact the company’s overall development. The table below shows instances of negative return on equity:

Particulars 6 months period ended September 30, 2023 Fiscal 2023 Fiscal 2022 Fiscal 2021
Profit/(loss) for the year periods
33.52
150.60*
-483
-700.29
Return on equity (%)**
1.33%
18.35%
-117.36%
-62.20%
  • No Long-term Purchase Contracts

The company doesn’t enter into long-term purchase contracts with its customers. It means it can face issues of retaining its existing customers. It can adversely affect the company’s growth prospects if it fails to do so. While it has customers from diverse sectors, the fact that CNC machines are not consumer products means that the company generally doesn’t have repeat customers annually.

  • Substantial Debt Servicing Obligations

The company has incurred significant indebtedness and has a high debt-to-equity ratio and a low debt-service coverage ratio. If it fails to generate enough cash flows from its operations, its liquidity and the ability to service indebtedness could be adversely affected. A high debt-to-equity ratio and a low debt-service coverage ratio could:

Result in a significant portion of the cash flow being directed towards the repayment of existing debt, thus hampering available cash flow to fund business requirements

Impact the company’s ability to raise borrowings at commercially viable terms, which can hinder expansion plans

Result in default of payment and other obligations

No Long-term Agreement With Suppliers for Input Materials

The company’s business depends heavily on the availability of high-quality input materials. These materials must have special properties such as dimensional stability, impact resistance, etc. However, Jyoti CNC Automation doesn’t have long-term agreements with suppliers for input materials. In case of a shortfall or deterioration of the quality of materials, the same could hurt the company’s operations.

Also, the absence of long-term contracts makes the company susceptible to short-term supply challenges and exposes it to volatility in the prices of input materials.

  • Delay in the Submission of Audited Consolidated Financial Statements in the Past

In the past, the company has delayed submitting its audited financial statements for the 2021 and 2022 fiscals. While it has paid late fees for delayed submission, there’s no assurance that a penalty or fine shall be levied on the company as prescribed under the Companies Act 2013. As a company that will be listed on stock exchange(s), it has to ensure that its reporting and disclosure processes work well.

This involves keeping good records of its daily transactions. To do this, the company needs to put a lot of effort and attention into improving and maintaining these processes. However, this might mean that its management gets focused on these tasks instead of other important aspects of business. This shift in attention could negatively impact the company’s business, future opportunities, how well it operates, and its financial health.

In Conclusion

While these are some of the key risks you need to consider while subscribing to the IPO of Jyoti CNC Automation, read the company’s red herring prospectus for a complete overview of the associated risks. This will help you gain more insights into the IPO and make a prudent investment decision.

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