JG Chemicals
- JG Chemicals is coming out with a 100% book building; initial public offering (IPO) of 1,17,57,142 shares of Rs 10 each in a price band Rs 210-221 per equity share.
- Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
- The issue will open for subscription on March 05, 2024 and will close on March 07, 2024.
- The shares will be listed on BSE as well as NSE.
- The face value of the share is Rs 10 and is priced 21.00 times of its face value on the lower side and 22.10 times on the higher side.
- Book running lead managers to the issue are Centrum Capital, Emkay Global Financial Services and Keynote Financial Services.
- Compliance Officer for the issue is Swati Poddar.
Profile of the company
JG Chemicals 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. The market share of the company is around 30% as on March 2022. It sells over 80 grades of zinc oxide and are among the top ten manufacturers of zinc oxides globally. Since its incorporation in 2001, the company has expanded its business and scale of operations and has 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 its 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, it marketed and sold its product to over 200 domestic customers and over 50 global customers in more than 10 countries.
The company’s aggregate installed capacity of 77,040 MTPA is spread across its 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. The installed capacity of its Naidupeta Facility, has recently been augmented by an additional 13,440 MTPA for zinc oxide and 10,080 MTPA for zinc sulphate and other allied chemicals. All processes at its manufacturing facilities are undertaken with modern engineering systems to minimize emissions. It has installed recuperators in most of its furnaces to reduce its carbon footprint. It has also been granted the consent and hazardous waste authorisation order under the ‘Orange Category’ for generation, collection, storage, transport, reuse, recycling, utilisation, processing and treatment or any other use of hazardous or wastes and permissible quantity of emissions per hour at all its manufacturing facilities, by the respective state pollution control boards.
Proceed is being used for:
- Investment in its Material Subsidiary, viz. BDJ Oxides (i) repayment or pre-payment, in full or in part, of all or certain borrowings availed by its Material Subsidiary; (ii) funding capital expenditure requirements for setting up of a research and development centre situated in Naidupeta, Andhra Pradesh (R&D Centre); and (iii) funding its long-term working capital requirements.
- Funding long-term working capital requirements of the company.
- General corporate purposes.
Industry overview
The Indian chemicals industry is widely diversified to include more than 80,000 commercial products. This includes basic chemicals and its products, petrochemicals, fertilizers, paints, varnishes, gases, soaps, perfumes and toiletry and pharmaceuticals. Chemicals industry is significantly important for agricultural and industrial development of India. The industry serves as a building block for several downstream industries, such as textiles, papers, paints, varnishes, soaps, detergents, pharmaceuticals, etc. According to the Government of India’s Department of Chemicals and Petrochemicals, chemical and chemical products sector (industry division 20 of NIC 2008), accounted for 1.42% of the Gross Value Added (GVA) for all economic activity in 2020-21 at constant prices (at 2011-12 prices). The share of GVA in the manufacturing sector during 2020-21 is about 7.98%. The size of the Indian chemical industry (industry division 20 of NIC 2008), in terms of value of output in the year 2020-21 was around Rs 9.87 lakh crore (about $132 billion). The size of chemical industry, including pharmaceuticals, in terms of value of output in the year 2020-21 was around Rs 14.3 lakh crore (about $193 billion). During last six years, i.e. within 2014-15 to 2019-20, real growth rate in output of chemical industry excluding pharmaceuticals industry was 8.1% which was 8.2% for chemical industry including pharmaceutical industry. Growth in value of output for manufacturing sector during the same period was 6.3%.
Zinc oxide is an inorganic compound, white in colour and insoluble in water. The chemical formula for zinc oxide is ZnO. Zinc oxide is present in the earth’s crust as mineral zincite and usually contains manganese and other impurities. Hence for commercial use it is synthetically made. Zinc oxide has a lot of properties that makes it desirable to various end user industries. It is used as an additive to various products like rubber, ceramics, cosmetics, food supplements, plastics, paints, sealants, batteries, animal feed, etc. Zinc oxide is the best activator for sulphur vulcanization for rubber companies and without the use of zinc oxide, rubber products cannot meet safety standards. Apart from rubber, the properties of zinc oxide make it an essential component in various other applications like paints, pharmaceuticals and agriculture etc. Various experiments have taken place globally to reduce zinc oxide usage in some applications. However, the efficiency of the alternatives is still in study phase and not yet implemented.
During the five-year period CY17 to CY21, the global zinc oxide market size grew from $4,472 million in CY17 to $4,923 million in CY21 and increased at a CAGR (compound annual growth rate) of 2.4% backed by demand from end user industries. During CY20, the industry witnessed decline to $3,508 million due to Covid-19 restrictions and lockdown which affected demand from user industries during the year. The situation however improved in CY21, registering around 40% growth to $4,923 million, on account of better economic activities backed by lower Covid-19 cases across various regions. In terms of production, the global output of zinc oxide has been in the range of around 1.40 million tonnes - 1.60 million tonnes during CY17 to CY21. Going forward, growth in the end user industries is expected to fuel the increase of zinc oxide which has properties like high chemical stability, high electrochemical coupling coefficient, broad range of radiation absorption and high photo stability.
Pros and strengths
Leading market position with a diversified customer base: The company is the largest manufacturer of zinc oxides in India and among the top ten manufacturers of zinc oxides globally, with an installed capacity of 59,904 MTPA for zinc oxide, 7,056 MTPA for zinc ingots and 10,080 MTPA capacity for zinc sulphate and other allied chemicals. The installed capacity of its Naidupeta Facility, has recently been augmented by 13,440 MTPA for zinc oxide and 10,080 MTPA for zinc sulphate and other allied chemicals. Production capacities, process of production, grades of ZnO and variety of application segments are some of the factors through which the key players control the market. The company sells over 80 grades of zinc oxide, thereby enabling it to cater to a wide variety of customers, across various end-use industries. In terms of volume, the zinc oxide production in India has been around 100 thousand tonnes - 115 thousand tonnes in the past 5 years from Fiscal 2018 to Fiscal 2022. During this period, the Indian zinc oxide market size is estimated at around Rs 18,000 million to around Rs 20,000 million.
High entry barriers in key end-use industries: The company’s end-use industries have significant entry barriers due to specific factors unique to such end-use industries. Given the nature of the application of its products and the processes involved, its products are subject to, and measured against high quality standards and rigorous product approval systems with stringent impurity specifications. Further, because end products manufactured by its customers are typically subject to stringent regulatory and industry standards, any change in the vendor of the product may require significant time and expense on part of the customers, which acts an entry barrier and disincentives any such changes for them.
Focus on long term sustainability with environmental initiatives and safety standards: The company has a strong focus on sustainability in all aspects of its operations and over the years have adopted various green initiatives. Caring for the environment and sustainable development along with being the core principles that drive its organization is also desired by its customers and accordingly, it constantly strives to reduce emissions and recycle and reuse to conserve natural resources. As a part of its initiatives towards continual improvement, it has also obtained the Environment Management System certification under the new standard of ISO 14001: 2015 for each of its manufacturing facilities. It uses the French process to produce various grades of zinc oxide, and use modern pulse jet bag filters and combustion systems which ensures high productivity, low energy consumption and maintains required standards with respect to emission norms.
Long-term relationships with customers and suppliers & having robust supply chain: The company is establishing a direct relationship with its customers and over 95% of its sales in the last three Fiscals is directly to its customers without involvement of any intermediary/distributor, which helps it to build a strong relationship directly with its customers along with lowering of costs and improvement in its returns. With many of its customers, its relationship extends to several years. In the last three Fiscals, it catered to more than 250 customers, of which around 90% customers were repeat customers. Such long-term association with key customers also offers significant competitive advantages such as revenue visibility, industry goodwill and enables it to demonstrate its quality. As a result of its deep rooted association with its customers, the company often receives new product requirements from such customers which in turn, helps it to expand its product base.
Risks and concerns
Business is completely dependent on the sale of one principal product i.e. zinc oxide: Currently, the company’s business primarily, revolves around sale of over 80 grades of zinc oxide. Its revenue from operations contributed by the sale of all types/ grades of zinc oxide was Rs 4,863.22 million, Rs 7,842.31 million, Rs 6,125.07 million and Rs 4,339.90 million for the nine months period ended December 31, 2023 and Fiscal 2023, Fiscal 2022 and Fiscal 2021, which translates to 99.03%, 98.75%, 98.30% and 98.54%, of its total income, respectively. However, with an intention to expand its production capacity as well as diversify its product portfolio, the installed capacity at its existing manufacturing facility located in the state of Andhra Pradesh has recently been augmented by 13,440 MTPA for production of zinc oxide and 10,080 MTPA for producing zinc sulphate and other allied chemicals. It has also commenced the production and sale of zinc sulphate with effect from September 5, 2022, and November 15, 2022, respectively. Factors affecting the manufacturing and sale of zinc oxide, or any of its customers in particular, could have a cascading adverse effect on its business, financial condition and results of operations.
Significantly dependent on the business operations of material subsidiary i.e. BDJ Oxides: The company is significantly dependent on the business operations of its material subsidiary i.e. BDJ Oxides as it generates a significant portion of its revenue from operations, profits and cash flows. Any deterioration in the business operations of its material subsidiary could adversely impact its business, financial condition and results of operations, on a consolidated basis. The company cannot assure that its material subsidiary will generate sufficient revenues, profits and cash flows, or otherwise prove willing or able to pay dividends to the company. Its business, financial condition and results of operations could also be adversely affected if its equity stake in its material subsidiary be diluted or in the event it ceases to be its Subsidiary.
Maximum revenue comes from limited clients: The company is engaged in the sale of over 80 grades of zinc oxide which 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 and gas and animal feed. Over the last three years, the company marketed and sold its products to more than 50 global customers in over 10 countries and to more than 200 domestic customers. Its top 10 customers contributed Rs 3,745.72 million, Rs 5,969.78 million, Rs 4,634.99 million and Rs 3,337.20 million constituting 77.02%, 76.09%, 75.63% and 76.67% of its revenue from operations, as on nine months period ended December 31, 2023 and in Fiscal 2023, Fiscal 2022 and Fiscal 2021, respectively. It expects that the company will continue to rely on its existing customers for the foreseeable future for a significant part of its revenues. Accordingly, any failure on its part to retain these customers and/or successfully engage with these select customers, could adversely affect its business, financial condition, reputation and results of operations. In addition, insolvency or financial distress or any default or delay in payments by any major customer may have an adverse impact on business, financial condition and results of operations.
Operations are heavily dependent on the rubber and tyre industry: Zinc oxide manufactured by the company finds application in a number of industries in India viz., rubber (tyre & other rubber products), ceramics, paints & coatings, pharmaceuticals & cosmetics, electronics & batteries, agrochemicals & fertilizers, speciality chemicals, lubricants, oil and gas and animal feed and its revenue from operations is directly linked to the performance of the industries in which its product finds application. The rubber industry is directly related to automobile industry and the tyre industry accounts for around 70% of rubber consumption in India. The rubber industry is the biggest consumer of its products and amongst various constituents of the rubber industry, the tyre industry is critical to its business. Further, the company has recently expanded its manufacturing facility in Naidupeta, Andhra Pradesh for the production of zinc sulphate and also intends to gradually increase the production of pharmaceutical grade zinc oxide, with an intention to diversify its existing product portfolio by adding new products which are synergistic with its existing products and chemistries. However, it cannot assure that it will be able to reduce its dependence on the rubber industry in general & tyre industry in particular in the near future to acceptable levels or at all.
Outlook
JG Chemicals was founded in 1975 and is a zinc oxide manufacturer using the French process. The company produces more than 80 grades of zinc oxide. The company operates three manufacturing facilities in Jangalpur and Belur, both in Kolkata, West Bengal and Naidupeta in Nellore District, Andhra Pradesh. Naidupeta is the largest facility, owned and operated by the Material subsidiary. All manufacturing facilities are ISO 45001:2018 and ISO 14001:2015 certified and ISO 9001:2015 accredited. The company has served the needs of more than 200 local and 50 international customers in more than 10 countries. On the concern side, the company’s business is almost completely dependent on the sale of one principal product i.e. zinc oxide (in various grades) and any reduction in the demand of the same may have an adverse effect on its business and financial performance. Moreover, the company is significantly dependent on the business operations of its material subsidiary i.e. BDJ Oxides and any deterioration in the performance of its material subsidiary may adversely affect its business, financial condition and results of operations.
The company is coming out with an IPO of 1,17,57,142 equity shares of face value of Rs 10 each. The issue has been offered in a price band of Rs 210-221 per equity share. The aggregate size of the offer is around Rs 246.90 crore to Rs 259.83 crore based on lower and upper price band respectively. On performance front, the company’s total income increased by Rs 1,711.41 million i.e. 27.47% to Rs 7,941.88 million in Fiscal 2023 from Rs 6,230.47 million in Fiscal 2022. This increase was primarily due to sale of its finished goods. Moreover, the company’s profit for the period, increased by Rs 136.67 million i.e. 31.69% to Rs 567.93 million in Fiscal 2023 from Rs 431.26 million in Fiscal 2022.
The company has existing manufacturing facilities in the eastern and southern part of India. While it has been delivering its products to all parts of India, it intends to increase its production capacities and broaden its manufacturing operations. It has recently expanded its existing manufacturing facility located in Naidupeta, District Nellore in the state of Andhra Pradesh by 23,520 MTPA of which 13,440 MTPA will be utilised for zinc oxide and 10,080 MTPA will be utilised for producing zinc sulphate and other allied chemicals. With this expansion, the company’s cumulative installed capacity, along with its subsidiary, has increased to 77,040 MTPA. Further, it proposes to establish a greenfield manufacturing facility in the state of Gujarat. Establishing a presence in the western part of India by setting up or acquiring a new manufacturing facility will, in addition to augmenting its manufacturing capacity, also enable the company, to capture market share by catering to the needs of the ceramics, pharmaceuticals and tyre industries, which have a presence in the western part of India.
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