Incorporated in 2001, JG Chemical is the largest manufacturer of zinc oxides in India and among the top 10 manufacturers of zinc oxides globally manufacturing through French process, the dominant production technology for producing zinc oxide adopted by all the major producers in Americas, Europe, and Asia. The market share of the company was around 30% end March 2022. It sells over 80 grades of zinc oxide, thereby enabling it to cater to a wide variety of customers, across various end-use industries. The promoters of the company are Suresh Jhunjhunwala, Anirudh Jhunjhunwala and Anuj Jhunjhunwala. Its material subsidiary BDJ Oxides is the only zinc oxide manufacturing facility in India to have an IATF certification preferred by tyre manufacturers supplying to OEM.

The company’s product caters to a wide spectrum of industrial applications, including in the rubber (tyre & other rubber products), ceramics, paints & coatings, pharmaceuticals & cosmetics, electronics & batteries, agrochemicals & fertilizers, speciality chemicals, lubricants, oil &gas and animal feed. The rubber and tyre industry formed 90.46% of the total revenue, while pharmaceuticals &chemicals formed 6.79%, agriculture 0.92%, and others formed 1.83% in fiscal 2023.Its sales from exports in the nine months period ended December 31, 2023, and fiscals 2023, 2022 and 2021 were Rs 46.242 crore, Rs 72.707 crore, Rs 54.508 crore and Rs 38.690 crore, respectively, comprising of 9.51%, 9.27%, 8.90% and 8.92% of sales of its finished goods in the corresponding period

The company had an aggregate installed capacity of 77,040 mtpa (metric tonne per annum) as on December 31, 2023. It is spread across three manufacturing facilities located at Jangalpur (Kolkata, West Bengal), Belur (Kolkata, West Bengal) and Naidupeta (Nellore District, Andhra Pradesh). The Naidupeta facility is the largest and is owned and operated by its material subsidiary. As on December 31, 2023, the zinc oxide installed capacity was 59904 mtpa, while that of zinc ingot was 7056 mtpa and zinc sulphate and other allied chemicals 10080 mtpa. Further, it proposes to establish a greenfield manufacturing facility in Gujarat.

All its manufacturing facilities have been accredited with ISO 9001:2015, ISO 45001:2018 and ISO 14001:2015. With an intention to supply to customers in the European Union, it has also obtained the REACH (Registration, Evaluation, Authorization and Restriction of Chemicals, Regulation (EC) No. 1907/2006) certification allowing it to supply its products to the European Union. Further, subsidiary BDJ Oxides obtained WHO GMP certificate for manufacture and supply of pharma grade zinc oxide at its Naidupeta facility.

The company procures its raw materials from multiple domestic and global suppliers. Its primary raw materials are virgin zinc metal and zinc dross, a type of zinc scrap. It procures virgin zinc metal and zinc dross from various domestic and global entities. Zinc dross is primarily produced by steel galvanizers as a by-product of steel production. The availability of zinc scrap is a challenge. The biggest constraint for new entrants in the market is to build a global supply network. Most of the zinc dross, which comes from western countries, is through old and established trading houses working on long-term relationships. They refrain from doing business with new entrants due to a wide range of complexities associated with dealing in zinc dross.

The average capacity utilisation across all its manufacturing facilities for all the products was around 52.12%, 57.42%, 63.44% and 61.94% of the total installed capacity per annum in the nine months ended December 31, 2023, and fiscal 2023, fiscal 2022 and fiscal 2021, respectively.

The Offer and the Objects

The offer comprises fresh issue of up to 7466063 equity shares at the upper price band of Rs 221 and 7857143 equity shares at the lower price band of Rs 210, aggregating Rs 165 crore, and an offer for sale of up to 3900000 equity shares, aggregating Rs 86 crore at the upper price band of Rs 221 and Rs 82 crore at the lower price band of Rs 210.

The company proposes to utilize the net proceeds from the fresh issue to invest in its material subsidiary, BDJ Oxides, amounting to Rs 91.06 crore ( repayment or pre-payment, in full or in part, of all or certain borrowings availed by its material subsidiary amounting to Rs 25 crore, funding capital expenditure requirements for setting up of R&D Centre amounting Rs 6.06 crore, and funding the long-term working capital requirements amounting to Rs 60 crore), funding long-term working capital requirements amounting to Rs 35 crore, and the balance for general corporate purposes.

As on January 31, 2024, the total outstanding borrowings of BDJ Oxides amounted to Rs 35.306 crore. The company intends to set up a R&D Centre at Naidupeta, Andhra Pradesh, to undertake complex innovations in its products for making them available to the pharmaceuticals, agrochemicals, and battery end-use industries, among others. The total estimated cost for the proposed R&D Centre is approximately Rs 6.058 crore. The R&D Centre is expected to be completed in fiscal 2026.

Promoter group selling shareholder Vision Projects &Finvest Private Ltd’s stake post-issue will decrease to 21.5% from 32.99% pre-issue shareholding, Jayanti Commercial Limited’s stake post-issue will decrease to 8.1% from 10.04%, Suresh Kumar Jhunjhunwala’s stake post-issue will decrease to 0.1% from 4.1%, and Anirudh Jhunjhunwala’s stake post-issue will decrease to 0.1% from 2.05%.

Strengths

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

In India, the tyre industry accounts for 70% of rubber consumption. The companies in the tyre industry are the largest consumers of the product. Along with being suppliers to nine out of top 10 global tyre manufacturers and to all of the top 11 tyre manufacturers in India, the company supplies to leading paints manufacturers, footwear players, and cosmetics players in India.

The company’s recognition as a two-star export house by the Director General of Foreign Trade, Ministry of Commerce & Industry valid, till March 31, 2028, signifies that it has excelled in international trade and has successfully contributed to country’s foreign trade.

The Indian zinc oxide market is fragmented with limited presence of organized playersconstituting a major portion of the market due to high entry barriers for any new entrant, led by stringent vendor approval process, raw material tie-ups, technical expertise, high working capital requirements, and supplier’s customer relationship.

The company is a supplier to nine out of top 10 global tyre manufacturers and to all the top 11 Indian tyre manufacturers.

The past two decades have seen a significant shift in the speciality chemicals industry. As the specialty chemical applications increases, specifically due to growth in end-use industries like automotive, rubber industry, ceramics, pharmaceuticals & cosmetics, paints & coatings, agrochemicals, nutraceuticals, animal feed and batteries in the Indian market, the demand for zinc oxide will grow exponentially.

The increased production in automotive industry, supported by high disposable income and rise in demand for electric vehicles, will drive the growth of the rubber industry.

The company has successfully built a strong network of domestic suppliers as well as a diverse & global supplier base having procured raw materials from over 100 global suppliers in the last three years. Due to the difficult sourcing pattern of zinc dross, several zinc oxide facilities have faced supply side constraints due to which they have been forced to shut or curtail production. Therefore, new players are often reluctant to enter the zinc oxide business. Its extensive global supplier base enables it to evaluate the various available options and choose according to its commercial considerations. Some of these relationships have been nurtured over the years, enabling it to be termed as a preferred customer for certain global suppliers of zinc dross.

The zinc oxide production in India (in terms of volumes) has been around 100 thousand tonnes, with 115 thousand tonnes in the past five years (FY2018 to FY2022). During this period, the Indian zinc oxide market size was estimated at around Rs.1800 crore to around Rs.20,00 crore. The zinc oxide market in India is estimated to register around 10%-12% CAGR from FY2022 to FY2027.

Weaknesses

The company’s operations are heavily dependent on the rubber and tyre industry as there is a lack of diversification in business across other application industries.

The company derives a significant part of its revenue from select customers. If any customer chooses not to source its requirements from it, business, financial conditions, and results of operations may be adversely affected.

The company’s business is heavily dependent on procurement of raw materials from overseas suppliers.

The company’s manufacturing processes involve manufacturing, storage and transportation of various hazardous substances including zinc oxide and raw materials used to produce zinc oxide, such as, virgin zinc metal, zinc dross, and certain other materials used in production that are corrosive, hazardous, and toxic chemicals, and require obtaining approvals from various authorities for storage.

The company is subject to laws and government regulations, including in relation to safety, health, environmental protection, and labour.Non-compliance with and changes in safety, health, environmental and labour laws, and other applicable regulations may adversely affect the business, financial condition and results of operations.

The company had reported negative cash flows from operations in fiscal 2021.

The company requires various licenses and approvals for undertaking its businesses. Failure to obtain or retain such licenses or approvals in a timely manner, or at all, may adversely affect its operations.

Valuation

For FY2023, consolidated sales were up by 28% to Rs 784.58 crore.The OPM rose 40 bps to 9.6%, leading to 34% increase in OP to Rs 75.5 crore.Other income was down 6% to Rs 9.61crore, while interest cost decreased 20% to Rs 4.98 crore and depreciation rose 28% to Rs 3.44 crore. PBT increased 34% to Rs 76.69crore. Tax expenses were 39% higher at Rs 19.9 crore. Net profit increased 32% to Rs 56.79 crore.

FY2023 EPS on post-issue equity works out to Rs 14.5. At the upper price band of Rs 221, P/E works out to be 15.3

As of 28 February 2023, its nearest available reference listed peers such as Rajratan Global wire trades at FY2023 P/E of 32.5, NOCIL trades at FY2023 P/E of 19.1, Yasho Industries trades at FY 2023 P/E of 37.7 and Himadri Chemicals trades at FY 2023 P/E of 71.7. All the above companies are not perfect peers and they all are suppliers to rubber and tyre industry.

For FY2023, JG Chemicals Ebitda margin and ROE stood at 10.9% and 30.5% respectively, compared to 18.5% and 25.7% for Rajratan Global wire, 16%% and 10% for NOCIL, 18.8 and 33% for Yasho Industries and 10.2 and 11.5% for Himadri Chemicals.