J G Chemicals
IPO Size: Rs. 251 cr
- Fresh Issue of Rs. 165 cr for (i) Rs. 95 cr for working capital (ii) Rs. 25 cr to repay entire debt (iii) Rs. 6 cr for R&D
- Offer for sale (OFS) Rs. 86 cr by the Promoters (100% to drop to 71%)
Price band: Rs. 210-221 per share
M cap: Rs. 866 cr, implying 29% dilution
IPO Date: Tue 5th Mar to Thu 7th Mar 2024, Listing Wed 13th Mar 2024
Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.
India’s Largest Zinc Oxide Maker
J.G.Chemicals is among world’s top 10 and India’s #1 zinc oxide manufacturer, with 77,040 MTPA installed capacity across West Bengal and Andhra Pradesh, enjoying ~30% domestic market share. Having B2B operations, company derives 90% revenue from tyre and rubber user segment. While it is the lowest cost producer of zinc oxide, which accounts for <1% of end-product cost, EBITDA margin is only in single digit.
Cyclical Margins
Sales volumes growth has been above-industry, but company margins got impacted, due to volatile raw material (i.e. zinc) prices and lack of complete hedging. Zinc prices have historically been highly volatile.
Margin for fiscals FY21 to FY23 included inventory gains, on account of sharp rise in zinc prices during covid, expanding EBITDA margin from 6.8% in FY20 to 10.7-11.1% in FY21-23. But post covid, as zinc prices declined, company suffered inventory loss, shrinking 9MFY24 EBITDA margin to just 6.8%, with revenue also declining to Rs. 486 cr, from Rs. 785 cr in FY23. Thus, PAT nosedived to 19 cr in 9MFY24 from Rs. 57 cr in FY23, halving net margin to 3.8% from 7.2% respectively, as well as compressing 30% RoE of FY22 and of FY23, to 8% (unannualized) in 9MFY24.
In short, fiscals FY21 to FY23 may be termed as exceptional gain period, while FY20 and 9MFY24 are the more ‘normal’ years for financial performance. Thus, company’s business model is prone to cyclicity of underlying metal price.
Valuation offers No Margin of Safety
When business model itself is weak, question is valuation becomes secondary. Nevertheless, annualizing 9MFY24 EPS of Rs. 5.6, leads to a PE multiple of 28x on current year basis, which is more than fully valued. Considering FY23 EPS of Rs. 17 for valuation purposes can be disastrous, as historic margin don’t look sustainable in the medium term.
Peers Nocil and Yasho Industries are also not exact comparable, as they clock 8-10% net margins as against JG’s 4%.
3rd Mar 2024 at 02:24 pm
2nd Mar 2024 at 07:24 pm