Macpower CNC: Multifold profit growth for this company
Strong industry tailwinds and a shifting product mix towards high-value orders are expected to supports profits growth of 35-40% CAGR over the next five years
Macpower CNC is well-positioned to benefit from the growth in the CNC machine industry, backed by strong government initiatives, capacity expansion, and increasing demand from sectors like aerospace & defense and EMS. The company has the potential to more than double its profits over the next two years and is well-positioned to deliver multi-fold returns for investors.
Company Overview
Macpower CNC Machines Ltd is engaged in the manufacture of Computerised Numerically Controlled (CNC) machines.
The company offers a wide range of 27 different series/products including Turning Center, Twin Spindle Turning Center, VMC, Twin Spindle VMC, HMC, VTL, Double Column Machine, Grinders, Pro Turning, Pro Milling, and more.
It currently has 315+ variants and models serving 27+ product segments, making it one of the largest CNC machine manufacturers in India.
Macpower is the 5th largest CNC machine manufacturer in India.
It operates in 39 cities across India with a sales and service network consisting of 195 qualified engineers and 9 business associates.
The company is an approved supplier to the defense sector, working with over 50 companies such as ISRO, Shell Factory, DRDO, and BHEL.
Macpower caters to over 2,300 clients across various industries like automotive, defense, aerospace, capital goods, railways, electronics manufacturing services (EMS), pharmaceuticals, dies & molds, agriculture, and more.
What are CNC Machines?
CNC machines automate the control, movement, and precision of machine tools using preprogrammed computer software embedded in the tools. They are essential for cutting, shaping, and machining metal and plastic parts with precision.
Different Types of CNC Machines
Turning Centre: A CNC lathe where the workpiece rotates while stationary cutting tools shape it. Used for creating cylindrical parts in aerospace, defense, and special-purpose components.
Vertical Machining Centre (VMC): The cutting tool is positioned vertically, ideal for drilling or milling, with gravity assisting in chip removal. Commonly used in defense, power, railways, and automobiles.
Horizontal Machining Centre (HMC): The cutting tool is positioned horizontally, making it suitable for heavy parts. It enhances efficiency and tool life.
Twin Spindle VMC: A vertical machining center with two spindles, doubling productivity by working on two parts simultaneously.
Vertical Turret Lathe (VTL): Used for machining large, heavy parts like engine blocks, where the tool turret moves around the part.
Double Column Machine: A CNC machine used for large, high-precision parts such as molds or heavy equipment parts.
Industry Overview: The Growth Potential of CNC Machines
The CNC machine industry is on the cusp of significant growth due to the government's push for manufacturing. CNC machines are the backbone of manufacturing, and industry size in India is around ₹25,000 crore, with 60% of machines being imported. With the Production Linked Incentive (PLI) scheme and Make in India initiatives, domestic manufacturing is likely to grow, driving demand for CNC machines.
India’s CNC machine demand is approximately 30,000 units annually. Comparatively, in China, individual companies like Foxconn sell 250,000 machines annually.
There are significant entry barriers in the industry, such as the need for over 1,000 different components to build one machine, long-term relationships with clients, and strong R&D capabilities.
The CNC machine industry is expected to grow at 20% CAGR, driven by industrial capex, import substitution, and a manufacturing boom.
Investment Thesis: Why Macpower Will Do Well
Capacity Expansion
Macpower has recently increased its production capacity by 500 machines in July 2024 to reach 2000 machines. In FY24, the company sold 1,235 machines with an average realization of ₹19.5 lakh per machine.
The company is shifting its focus towards high-value machines (4-axis to 5-axis), used in aerospace, defense, EMS, and robotics, where realizations are much higher.
Future Potential in Aerospace & Defense
Peer companies like Jyoti CNC are bullish on the aerospace and defense sectors, with average realizations of ₹50 lakh per machine. Machines in the defense sector can cost as much as ₹1 to ₹2 crore each. Macpower is headed in a similar direction, targeting ₹24 to ₹25 lakh per machine by FY26.
New Manufacturing Facility
Macpower signed an MoU with the Gujarat Government during the 2024 Vibrant Gujarat Summit to establish a new CNC machine manufacturing facility for the aerospace and defense sectors, with a ₹100 crore investment. The new facility, expected to be four times larger than the existing one, could have a capacity of 8,000+ machines once operational.
R&D and New Tech Centers
In August 2024, Macpower started a new R&D center in Bangalore focusing on 5-axis machining, EMS, PCB, and semiconductors. The company plans to present its 5-axis and EMS machines at the IMTEX exhibition in January 2025.
Additionally, Macpower will set up tech centers in Faridabad and Hyderabad by the end of 2024 and is expanding its sales and service teams.
Joint Ventures and International Expansion
Macpower is in discussions with foreign companies for joint ventures to explore technical assistance and export opportunities.
Positioned for Exponential Growth in a Booming CNC market
The company is projected to add 500 more machines by FY26, bringing the total to 2,500 machines. Company has done a CAPEX of 9 crore in FY24 and expects the capex to be in the range of 15-20 crore in FY25E. We estimate an additional 500 machines will be added each year, reaching 3,500 machines by FY29. However, once the new facility becomes operational, capacity could quickly double, and realizations may increase beyond our current estimates. We are taking a conservative approach in our estimates.
As of June 2024 company has an order book of 283 crore, 1.2 times of FY24 revenue. From 1,235 machines sold in FY24, we estimate the company to sell 1,750 machines by FY26 with an average realization of ₹23.5 lakh per machine, slightly below the management's guidance of ₹24-25 lakh per machine. It's important to note that the company only started manufacturing double column machines in 2019. Along with double column machines, VMC and HMC machines are high-value products (called Nexa group), with an average realization of ₹60-80 lakh per machine (below order book breakup). The revenue mix from these high-value machines is increasing rapidly.
Breakup of Q1FY25 Orderbook
Based on these trends, we estimate the company’s revenue to reach ₹411 crore by FY26. With similar growth, we expect revenue to double over the next three years, reaching ₹800+ crore by FY29.
So far as margins are concerned, Management has indicated that 25% operating margins could be achievable in next couple of years on the back of rising share of high value machines, backward integration (manufacture 60-70% components in-house) and operating leverage. We estimate that the company will reach 19% operating margins by FY26, gradually increasing to 25% by FY29. With this, we project the company to generate a PAT of ₹58 crore in FY26 and ₹131 crore by FY29.
In terms of valuation, a company with strong industry tailwinds, growing at 35-40% CAGR, should command at least a 40-45x price-to-earnings multiple. The multiples could be even higher if order inflow from the defense sector and government initiatives supporting the manufacturing sector continue. At a 45x price-to-earnings multiple, the company's market cap could reach approximately ₹2,600 crore on FY26 earnings, nearly double the current market cap (₹ 1,353 crore)
Competitive Landscape
While Jyoti CNC is also well-positioned for growth, however, its current high valuation (123x price-to-earnings TTM) makes it less attractive for investment at this stage. Additionally, with Jyoti already achieving operating margins around 25%, there is limited room for further margin expansion, though it could potentially reach 30%+. In contrast, Macpower has greater potential for margin expansion. Although Jyoti may see higher realizations due to its focus on EMS and defense orders, Macpower’s more favorable valuations and lower base effect suggest it could deliver better returns in the long term.
Disclosure: Please note that I hold this stock in my personal portfolio, and my views may be biased. This is not an investment recommendation, but simply my perspective. I encourage you to think independently and make your own informed decisions before making any investment.
Tam for the company is only 25000 cr. Is that right? Or I'm missing out something.