Macpower CNC Machines: Manufacturing a Strong Growth?

  • Rs 180cr market cap company incorporated in 2003. The stock transitioned from NSE SME board in 2020 and is now listed on the NSE main board.

  • Macpower currently manufactures 9 different CNC machines product categories namely Turning Center, Twin Spindle Turning Center, VMC, Twin Spindle VMC, TurnMill Center, HMC, VTL, DTC, Grinder with 60+ different models serving 27 industry segments worldwide with 5500+ installations. The company has long-standing relationship with customers.

  • Sophisticated imported machines used in-house for manufacture of CNC machines.

  • The company achieved a high PAT of around Rs 13 crores in FY19. I estimate the company now has the capacity to generate at least Rs 30 crores PAT.

  • Continuous improvements during the last 3 years (although not reflected in the financials). The company has done more than 2x capacity expansion, implemented backward integration, installed solar power plant and added more products.

  • Cash-rich, zero debt company. All expansions from internal accruals. High asset turnover of ~3x. Negative capital requirement.

  • High promoter holding of more than 70%. Minority investor-friendly, first-generation promoters.

  • Management has projected 25%+ CAGR revenue growth over the next 5 years. Currently, the company has a record-high order book.

CNC Machines Industry

  • Computerised Numerical Controlled (CNC) machines. The manufacturing process using CNC machines is used to control a range of complex machinery and to perform three-dimensional cutting tasks.

  • The desired cuts (shapes) are programmed into the software and dictated to corresponding tools and machinery inside the CNC machine, which then carry out the tasks to be performed.

  • Tremendous market growth is expected. Domestic machine tool manufacturing needs to be increased 5x from current levels to aid the increasing share of manufacturing in the GDP (source: Macpower CNC Company Presentation Aug 2021).

  • Domestic production accounts for 30-40% of total consumption, thereby having significant dependence on imports, which can be substituted by domestic production in the future (source: same as above).

  • Customers in auto sector, defense, general engineering, railways, space, education, agriculture, medical, aerospace, die mould and other sectors.

  • 3D printing is an alternative technology. Production using CNC machines is typically cheaper for large quantities (higher double digits to 100s) (source).

  • Prominent CNC manufacturers/suppliers include Jyoti CNC, Marshall Machines (listed–there is a separate VP thread on Marshall), Ace Designers Ltd, Batliboi Ltd, Lakshmi Machine Works (listed, focused on textile machinery), and Lokesh Machines (listed).

Price and Technicals

  • Strong base is forming around the current levels.

  • Low PAT last quarter (mainly due to increased raw material prices) has offered a window to enter the stock at reasonable prices.

Risks

  • Leverage play on GDP/export growth. Continued low demand for CNC machines can delay stock performance.

  • Standard machines are commoditized and have low margins. The company must continually innovate on its offerings. Jyoti CNC (unlisted) and Marshall Machines are further ahead than Macpower in newer technologies such as robotic automation. Macpower’s growth strategy is to try to convert conventional users over to the CNC technology.

Summary

Macpower has the best-in-class financial metrics. In the last few years, the company has expanded capacity and positioned itself for strong future growth. It remains to be seen if Macpower’s continuous-improvement, wholesome growth strategy can succeed in the face of technologically advanced offerings of some of the competitors.

References

Disclosure: I have investments in Macpower CNC (average price around Rs 100) and Marshall Machines.

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If one is looking for more insights -

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I am concerned with the erratic sales and OPM figures. Any comment on that aspect?

Most of the CNC companies have a large revenue source from the auto sector and they are trying to reduce the exposure to 25%. Last two years have been tough due to the auto sector slowdown and the paucity of financing options (for the customers) after the IL&FS crisis.

Erratic profits are definitely a big concern and needs to be watched. The Indian manufacturing sector does not have established tailwind yet of the kind seen in the chemicals and pharma sectors.

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Any idea what has triggered the recent rally? Stock was suddenly up 20% yesterday and is up 18% today as well. Can’t find any recent news or filing.

Possibly absorption of last results at same price and now trigger getting ready for next results
or may be news is coming soon!!

P.S.
Stock price movements are never predictable
with good results they go down and with bad results they go up

Stocks that are fundamentally undervalued and/or experiencing fresh tailwinds can get re-rated at any time. I would go on to say such stock prices are even open to manipulation. In this case, one has to careful as this stock chart has price spikes in its history.

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An interview with Rupesh Mehta, promoter and MD of Macpower, published on 21/2:

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My Thesis-

  1. Management is very very focused and conservative

  2. Order book will remain always high bcoz Evey month they make around 80 machines and get orders of 90+ machine

  3. Margin will increase due to backward integration by around will be 18-20%.

  4. Advantages over other players are cost-effective, after sells service, high accuracy end products, a good number of the sales team

  5. Supply chain management is doing very great by the company having advance spares for around 1 year

  6. Focus on remaining debt-free - So not taking debt and CAPEX bcoz management saying need infrastructure and selling the team to create a good amount of sales so they are increasing slowly

  7. They have advanced machines for mobile spare manufacturing for future

  8. The Management saying good order bids in gov. Sector also

  9. Customer reorder are 50% approx - This shows belief in company products also Shakti pumps in repeat orders

  10. Slow and good mover for future growth, management says that order book is not a challenge for us this will remain high -They are looking on high accuracy.

  11. Receivables is 0 - Management literally said in concall, “Pehle Paisa lene ka phir machine dene ka”

  12. Currently order book is around 175Cr. M.cap is 200Cr only.

  13. Low float - only 11L shares floating in the market

  14. MIT holds 6%

I don’t find a single negative point considering it’s only a 200Cr Company. Management is good, Manufacturing Industry is going to boom as India will be the manufacturing hub of the world. Now it is a pure execution play.

Disc: Accumulating since Sept 2021. Will buy the last chunk after the Q4FY22 results. Portfolio Allocation - 10%

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Q4FY22 Concall notes:

  • Sold 1046 machines last year.
  • Debottleneck effort to increase the capacity to produce machines from 1000-1100 to 1300-1500.
  • Have pending order book of 1000-1200 machines already.
  • India wide, ~31000 machines were made.
  • Most of the payment is in advance. Thats why there are almost nil receivables.
  • The high inventory is because they produce variety of machines and even though many parts are common, there are still per machine parts requirements and they need to keep inventory for all of them.
  • Employee headcount at 590 people. To grow ~100 per year.
  • NEXA vertical for premium products. 214 machines were sold as part of in the previous year. Although they gave discounts to build the brand. So the rise in margins wasn’t visible.
  • The NEXA is vertical is headed by ex senior VP of Ace micromatic. The co is planning to hire more top level management from outside.
  • May look into exports of products next year. A separate division will be formed, although No concrete plans yet. Ace did 450 machines export to china last year.
  • CapEx boom cycle is very good for the industry. However a recession puts a full stop to the order book.
  • Company plans to keep the dividend payout ratio to in the range of 8 to 15%.
  • Company plans to stay debt free.
  • 20 to 25% cagr growth for the next 5 years as per the mgmt.

–

Disc: not invested, Started reading about CNC machines. Although the area doesn’t look so promising, Macpower alone is sure a great company.

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The last time they guided this industry went into the down cycle.

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The market seems to be bullish on the CNC manufacturing sector growth. The stock price has got re-rated even though the results have been along or below expected lines until now. Whether the next few results will be on the lines of the now higher expectations or not, remains to be seen.

The stock looks good for the long term although the short term is not clear. I have sold a large part of my holdings but may add on dips over the next few months if the strength in stock price sustains.

The last time they guided this industry went into the down cycle.

Can you please provide the source for this?
I haven’t dived deeper than the 2022, 21 presentation and concalls.
I personally feel there is upside but not 20% cagr for 5 year.

The market seems to be bullish on the CNC manufacturing sector growth.
Mapower, lokesh, lakshmi machines all have reach ATH. If at all our domestic producer can offer better quality and versatile CNC machines then there is definitely huge potential.

I’ll remain uninvested until some fund produces a report and explains this industry nicely!

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If you want to understand the industry, you can read the annual reports of IMTMA - Indian Machine Tools Manufacturers’ Association: https://www.imtma.in/

Read page 11 for aggregate growth figures for machine tools production, consumption, import-export in the annual report.

Machine Tools are broadly classified into a 4 x 4 matrix:

  • Metal Cutting (CNC and non-CNC)
  • Metal Forming (CNC and non-CNC)

Other technologies like 3D Printing, Water-Jet, Ultrasonic Machining are too niche and can be ignored for now.

Complexity of CNC machine is usually defined by the following:

  • Number of CNC Axis starting from a single axis CNC to multi-axis CNC machines (can go as high as 5 to even 7-axes in some special purpose CNC machines)
    • Higher the number of axes, greater is the complexity
  • General purpose CNC machine (GPM) or special purpose CNC machines (SPM)
    • GPM can be sold in larger volumes but have comparatively low margins
    • SPMs have very high margins but low volumes
  • High spindle speeds and high-power machines are more complex and expensive to build
  • Large CNC machines which can be used for machining large components in heavy engineering industries such as Oil & Gas, Steel, Shipping, etc. are highly complex and sometimes a high-risk project in itself

Macpower’s machines mainly fall in the category of:

  • Metal Cutting CNC Machines
  • Low complexity (2 to 3 axes CNC machines)
  • GPM
  • Medium speed and medium power machine

Buyer’s Decision-Making Criteria:

Serious buyers will look for the following parameters before finalising a machine supplier:

  • Proven design and existing customer feedback
  • Application engineer to understand the customer’s job
  • Machine & process capability (please read Cmk & Cpk for more details)
  • After sales service capability and spare part availability in their region
  • In-house capabilities for manufacturing, R&D, design and testing
  • Timely delivery of machines as per committed specifications
  • OEM’s honesty and credibility in handling customer’s component design data and advance payments (most of which are unsecured)

If you wish to assess a machine tools OEM as an investment opportunity, then you need to look at them from 3 parameters:

Customer Purchase Process

In a typical buying cycle, the customer will approach a machine tool OEM (Original Equipment Manufacturers) with a component drawing or job sample and the machine supplier needs to tell them the possibility of manufacturing the given component / components on their machine, cycle time, accuracy, repeatability, etc. Based on the nature of the job and production volumes, certain external features such as in-process gauging, automation for job loading & unloading, removal of chips/ fumes from the manufacturing process need to be integrated with the machine.

The OEM’s sales engineers must have very strong application engineering skills. The first sale could typically take you 4-6 months to close the deal. More than the machine features or price, it is the application engineering skills of the OEM that can make or break the deal.

Once the customer is satisfied with the first sale and prove-out, the subsequent machines sales are much easier for the same component. However, the entire application engineering cycle will have to be repeated for making a machine sale if it is a new component.

One of the major decision-making factors for buyers is the after-sales service network of the machine manufacturer. The machine OEM should have a large network of service engineers and easily available spare parts. This is a critical requirement of the buyers because their own production depends on the machine reliability and uptime.

Public sector units (Defence, Railways, Aerospace, Skill Development Centres, ITIs, etc.) are large buyers of CNC machines outside the Automotive & General Engineering Sector. Government tenders do not pay advances and involve large working capital and all the usual issues related to government procurement and delayed payments.

  • Supply Chain:

Almost all the CNC machine tool manufacturers (Indian and Global) are dependent on Siemens and Fanuc for the electronic controllers, servo motors & drives, rotary encoders, etc. It is almost a global duopoly with players like Delta (Taiwan), Mitsubishi (Japan), Allen Bradley (Rockwell Automation) being fringe players. Since most of the users are comfortable with the controllers of Siemens and Fanuc, it is very tough for some new player to enter the market even if they have a better / cheaper product (for example, most people will continue to use MS Excel out of habit even if some other company launches a cheaper/ better spreadsheet). Other critical components like Ball screws and Linear Motion Guideways also have a limited number of global suppliers like THK / PMI. Due to this there is no particular cost advantage for anyone. The cost advantage comes from volume-based purchase as the component suppliers give significant discounts for bulk procurement.

None of these critical components are manufactured in India. Therefore, everyone has to import these components. Supply-side relationships are vital machine tools manufacturers.

How well you can integrate the components as a machine manufacturer and your machine design makes a difference to the end performance of your machine. Usually the machine housing, bed castings and some smaller components are manufactured in-house. The accuracy of the in-house manufactured components will play a major role in the quality of assembly.

  • Competition:

Macpower manufactures turning centres and vertical machining centres (also called CNC Lathe and Milling Machines), where there is plenty of competition.

Bangalore based Ace Micromatic Group (AMS / Ace Designers, etc.) and Bharat Fritz Werner along with Jyoti CNC Automation Rajkot are the market leaders. In terms of technology, Laxmi Machine Works (publicly listed) and Ace Group have a reputation of being at the top, followed by BFW, Jyoti and Lokesh Machine Tools. HMT has a slight advantage in government tenders since it is a public sector unit.

Apart from the 5 names given above, Haas Automation (USA) and several Taiwanese & European brands have a sizable presence in the Indian Machine Tools market either directly or through channel partners. The pricing of Haas and Taiwanese companies is quite competitive for their quality and performance. There are large machine tools importers like Batliboi (listed), Empire Machine Tools, Electronica HiTech, Machine Tools India, Francis Klein, S&T, etc. some of whose sales figures may be comparable to Macpower.

Macpower’s machines are of fairly basic CNC technology, for which there are several small to mid-size competitors apart from the ones mentioned above (example Askar Microns). Many of the MSME buyers also purchase used imported machines, whose prices are lower than the new Indian machines.

Macpower has very little presence in high-end machine tools. Indian companies have very little to nil presence in manufacturing of components in sunrise industries like electronics, telecom gear, medical devices, etc.

Industry 4.0 adoption (IoT, AI-ML, Robotics, 3D printing) is also minimal, although there is some noise and a few demo machines in industry conferences & exhibitions.

While Macpower has progressed over the last several years, my assessment is that Macpower still needs to make significant improvements to match up to Ace Micromatic / BFW / Jyoti / LMW / Lokesh / Haas on the above parameters.

Anyone wanting to study this sector in detail should pay a visit to the week-long annual IMTEX Exhibition held in Bangalore (usually end of January), which is the largest Machine Tools Exhibition in India and also one of the largest in Asia. Several hundred Indian and Foreign OEMs put their machines on live display in running condition.

EMO in Europe is the largest Machine Tools Exhibition in the world. It is held once in 2 years and shifts between Hannover (Germany) and Milan (Italy). Even if you cannot attend it, you can go through the list of Indian exhibitors to know who has the wherewithal to be internationally competitive and global ambitions.

Disc: Not Invested.

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This is very detailed. I am visiting one tools manufacturer in NSEZ who is my vendor and i found they are using LAXMI, JYOTI,HAAS , SOME KOREAN , TIRUPATI etc…they said Laxmi and Jyoti are good…and they are also using foreign make as govt has given some relaxation in taxation .

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Anyone tracking this one? Results are too good for Q2 24. Any idea what was the reason?

Business have improved and as per the commentary it will further improve.
1.The company has manufactured and sold 65 high value machines during the quarter. Against this the company has received orders for 81 high value machines during the quarter
2.The company has manufactured and sold 332 machines during the quarter, which is the highest ever for the company in any quarter. Against this the company has received orders for 393 machines during the quarter
3.As of 30th Sep,’23 company has 285 machine order (combined for VMC, HMC and VTL) as a part of the NEXA vertical for premium products. This constitutes 28% of order book from premium products in unexecuted order book
4.Bids submitted which are under evaluation for Defence and Aerospace Sector – 176 Cr
5.Company plan to grow at 18 to 20% for next 5 year on the base of FY 23 backed by order flow and increase manufacturing capacity

Thanks @sky2018

Looks like company is not having concalls. Any idea on this?

If you have any details please share.

H1FY24 con call: https://www.youtube.com/watch?v=T49Of8LedUU

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It’s truly impressive to witness the remarkable clarity in Mr. Rupesh Mehta’s thought process.

Disc: Invested from lower levels. Biased and no reco

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