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Review By Dilip Davda on March 2, 2024

•    JGCL is India's largest zinc oxide manufacturer enjoying virtual monopoly.
•    The company enjoys good long term relationship with end users and gets over 90% revenue from repeat orders.
•    Turmoil in zinc oxide prices globally attributed to degrowth in its top and bottom lines for H1 of FY24. 
•    The company is witnessing reversal in trends and is confident to be on track soon.
•    The issue though appears pricey, based on its FY24 annualized earnings, its worth investing for the medium to long term rewards.

ABOUT COMPANY:
JG Chemicals Ltd. (JGCL) is India's largest zinc oxide manufacturer in terms of production and revenue for zinc oxide manufacturing through French process, which is the dominant production technology for producing zinc oxide and has been adopted by all the major producers in Americas, Europe and Asia (Source: CARE Report). The market share of the Company is around 30% as on March 2022 (Source: CARE Report). It sells over 80 grades of zinc oxide and are among the top ten manufacturers of zinc oxides globally (Source: CARE Report). 

Since its incorporation in 2001, the company has expanded business and scale of operations and have grown into a large, diversified zinc oxide player with a global footprint. Its product caters to a wide spectrum of industrial applications, including in the rubber (tyre & other rubber products), ceramics, paints & coatings, pharmaceuticals & cosmetics, electronics & batteries, agro-chemicals & fertilizers, speciality chemicals, lubricants, oil & gas and animal feed. 

Owing to its legacy of over four decades in manufacturing businesses, it benefits from experience in catering to a wide array of customers and it has built a long-standing relationship with customers across end-user industries in the tyres, ceramics, rubber, paints, cosmetics and batteries industry. Over the last three years, JGCL marketed and sold product to over 200 domestic customers and over 50 global customers in more than 10 countries.

In India, tyre industry accounts for 70% of rubber consumption (Source: CARE Report) and the companies in the tyre industry are the largest consumers of JGCL's product. Along with being suppliers to 9 out of top 10 global tyre manufacturers and to all of the top 11 tyre manufacturers in India, it also supplies to leading paints manufacturers, footwear players and cosmetics players in India (Source: CARE Report). Its Material Subsidiary, BDJ Oxides is the only zinc oxide manufacturing facility in India to have an IATF certification, which is preferred by tyre manufacturers supplying to original equipment manufacturers (Source: CARE Report).

As a manufacturer of zinc oxide, it is a pre-requisite in most of its end-use industries for its products to be customized according to the specifications by customers, which usually acts as a significant entry barrier. Further, high cost of product development, complexity of the chemistry involved in innovating and tailoring products to the customized needs of customers, which requires necessary technical expertise and lengthy and stringent supplier qualification process are the other entry barriers in its business. 

As on December 31, 2023, its aggregate installed capacity of 77,040 MTPA is spread across three manufacturing facilities located at (i) Jangalpur (Kolkata, West Bengal); (ii) Belur (Kolkata, West Bengal); and (iii) Naidupeta (Nellore District, Andhra Pradesh), which is its largest manufacturing facility and is owned and operated by its Material Subsidiary. As of December 31, 2023, it had 112 employees on its payroll and 47 contract workers. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden combo IPO of 113666078 equity shares of Rs. 10 each to mobilize Rs. 251.19 cr. (at the upper cap). The issue consists of fresh equity issue worth Rs. 165.00 cr. (7466078 shares at the upper cap), and an Offer for Sale (OFS) of 3900000 equity shares (worth Rs. 86.19 cr. at the upper cap). The company has announced a price band of Rs. 210 - Rs. 221 per share/ The issue opens for subscription on March 05, 2024, and will close on March 07, 2024. The minimum application to be made is for 67 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 29% of the post-IPO paid-up capital of the company. From the net proceeds of the fresh equity issue, the company will utilize Rs. 91.58 cr. for investment in its subsidiary for repayment of certain borrowings/capex for setting up of R & D center and long term working capital, Rs. 35.00 cr. for working capital for own needs, and the balance for general corporate purposes. 

The joint Book Running Lead Managers (BRLMs) for the issue are Centrum Capital Ltd., Emkay Global Financial Services Ltd. and Keynote Financial Services Ltd, while KFin Technologies Ltd. is the registrars of the issue. 

Having issued initial equity shares at par, the company issued further equity shares at a fixed price of Rs. 100 per share between March 2006 and March 2010. It has also issued bonus shares in the ratio of 25 for 1 in June 2022. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 0.36. and Rs. 0.38 per share. 

Post-IPO, company's current paid-up capital of Rs. 31.72 cr. will stand enhanced to Rs. 39.19 cr. Based on the upper cap of the IPO price band, the company is looking for a market cap of Rs. 866.23 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has (on a consolidated basis) it has posted total income/net profit of Rs. 440.41 cr. / Rs. 28.80 cr. (FY21), Rs. 623.05 cr. / Rs. 43.13 cr. (FY22), and Rs. 794.19 cr. / Rs. 56.79 cr. (FY23). For 3Qs of FY24 ended on December 31, 2023, it earned net profit of Rs. 18.51 cr. on a total income of Rs. 491.10 cr. 

For degrowth in its top and bottom lines for FY24 3Qs, the management clarified that due to turmoil in zinc oxide prices globally, it marked a temporary setback. Now the company is witnessing reversal in trends and it will achieve the stability with growth in margins. As per historical data, it has good relations with the end consumer and gets nearly 90% repeat orders from them. This is cyclical for our business and once in five years, the company face this issue. The company enjoys pricing power and that helped it to curtail drastic fall in margins.

For the last three fiscals, it has reported an average EPS of Rs. 14.10 and an average RoNW of 26.38%. The issue is priced at a P/BV of 3.22 based on its NAV of Rs. 68.68 as of December 31, 2023, and at a P/BV of 2.26 based on its post-IPO NAV of Rs. 97.70 per share (at the upper cap).

If we attribute annualized FY24 earnings to its post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 35.08, and based on FY23 earnings, its P/E comes to 15.25. Thus the issue appears fully priced. 

For the reported periods, it has reported PAT margins of 6.62% (FY21), 7.04% (FY22), 7.24% (FY23), 3.81% (9M-FY24), and RoCE margins of 25.27%, 25.83%, 29.38%, 11.86% respectively for the referred periods. 

DIVIDEND POLICY:
The company has not declared any dividends for the reported periods of the offer document. It has adopted a dividend policy in May 22, based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per the offer document, it has shown Rajratan Global, Nocil, and Yasho Ind. as their listed peers. They are trading at a P/E of 45.4, 37.0, and 42.09 (as of March 01, 2024). They are not comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
The three BRLMs associated with the offer have handled 3 public issues in the past three fiscals, out of which 1 issue closed below the IPO price on the listing date. 

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