What you must know about JG Chemicals IPO?

JG Chemicals Ltd – About the company

JG Chemicals Ltd was incorporated in the year 1975 for the manufacture of zinc oxide using the French process. The company, JG Chemicals Ltd, currently produces more than 80 different grades of zinc oxide. Zinc oxide has extensive industrial applications in industries such as ceramics, paints, and coatings. In addition, it also finds applications in nationally important sectors like pharmaceuticals, electronics, batteries, agrochemicals, fertilizers, specialty chemicals, lubricants, oil and gas, and animal feed. JG Chemicals Ltd has 3 manufacturing facilities, of which 2 are located in West Bengal and 1 in Andhra Pradesh. The West Bengal facilities are located in Jangalpur and Belur, while the facility in Andhra Pradesh is located at Naidupeta in the Nellor District bordering Tamil Nadu.

The Andhra Pradesh facility is the largest. JG Chemicals Ltd currently serves the needs of over 200 domestic and 50 international customers spread across more than 10 countries. It has over 112 employees on its rolls on a permanent basis and almost an equal number on trainee basis. The company also makes zinc sulphate under the Luxmi brand, which finds extensive agricultural applications.  For instance, zinc sulphate heptahydrate is a popular micronutrient fertilizer material for plants and is also an essential component of various enzyme systems for energy production, protein synthesis and growth regulation. Zinc Sulphate Heptahydrate also contributes towards chlorophyll synthesis and supplies sulphur, another essential plant nutrient required for synthesis of two essential amino acids.

The fresh funds will be used to invest in its materials subsidiary, BDJ Oxides for funding capex and for repayment of its loans. Part of the fresh funds will also be used for long term working capital. Promoters currently hold 100% in the company, which will get diluted post the IPO to 70.99%. The IPO will be lead managed by Centrum Capital, Emkay Global and Keynote Financial Services, while KFIN Technologies Ltd will be the IPO registrar.

Highlights of the JG Chemicals IPO issue

Here are some of the key highlights to the public issue of JG Chemicals IPO.

• JG Chemicals IPO will be open from March 05th, 2024 to March 07th, 2024; both days inclusive. The stock of JG Chemicals Ltd has a face value of ₹10 per share and the price band for the book building IPO has been set in the range of ₹210 to ₹221 per share.
   
• JG Chemicals IPO will be a combination of a fresh issue of shares and offer for sale (OFS) component. As you would be aware, a fresh issue tends to bring in fresh funds into the company, but is also EPS and equity dilutive. On the other hand, OFS is just a transfer of ownership.
   
• The fresh issue portion of the JG Chemicals IPO comprises the issue of 74,66,063 shares (74.66 lakh shares approximately), which at the upper price band of ₹221 per share will translate into a fresh issue size of ₹165.00 crore.
   
• The offer for sale (OFS) portion of the JG Chemicals IPO comprises the sale / offer of 39,00,000 shares (39.00 lakh shares), which at the upper price band of ₹221 per share will translate into an OFS size of ₹86.19 crore.
   
• Out of the OFS size of 39 lakh shares, the entire shares will be offered by the promoter group. This will include the sale of 20.29 lakh shares by Vision Projects and Finvest Private Ltd, 12.60 lakh shares by Suresh Kumar Jhunjhunwala, 6.10 lakh shares by Anirudh Jhunjhunwala and a small quantity by Jayant Commercial Ltd.
   
• Thus, the total IPO of JG Chemicals Ltd will comprise of a fresh issue and an OFS of 1,13,66,063 shares (113.66 lakh shares approximately) which at the upper end of the price band of ₹221 per share aggregates to total issue size of ₹251.19 crore.

Promoter holdings and investor allocation quota

The company was promoted by Suresh Jhunjhunwala, Anirudh Jhunjhunwala and Anuj Jhunjhunwala. As per the terms of the offer, not more than 50% of the net offer is reserved for the qualified institutional buyers (QIBs), while not less than 35% of the net offer size is reserved for the retail investors. The residual 15% is kept aside for the HNI / NII investors. The table below captures the gist of the allocation to various categories.

It may be noted here that the Net Offer above refers to the quantity net of employee and holding company employee quota, as indicated above. There is no employee quota in this IPO as stated in the red herring prospectus (RHP). The anchor portion, will be carved out of the QIB portion and the QIB portion available to the public will be reduced proportionately.

Lot sizes for investing in the JG Chemicals IPO

Lot size is the minimum number of shares that the investor has to put in as part of the IPO application. The lot size only applies for the IPO and once it is listed then it can be even traded in multiples of 1 shares since it is a mainboard issue. Investors in the IPO can only invest in minimum lot size and in multiples thereof. In the case of JG Chemicals Ltd, the minimum lot size is 67 shares with upper band indicative value of ₹14,807. The table below captures the minimum and maximum lots sizes applicable for different categories of investors in the JG Chemicals IPO.

It may be noted here that for the B-HNI category and for the QIB (qualified institutional buyer) category, there are no upper limits applicable.

Key dates for JG Chemicals IPO and how to apply?

The issue opens for subscription on 05th March 2024 and closes for subscription on 07th March 2024 (both days inclusive). The basis of allotment will be finalized on 11th March 2024 and the refunds will be initiated on 12th March 2024. In addition, the demat credits are expected to also happen on 12th March 2024 and the stock will list on 13th March 2024 on the NSE and the BSE. JG Chemicals Ltd will test the appetite for such specialty chemical stocks in India. The credits to the demat account to the extent of shares allotted will happen by the close of 12th March 2024 under ISIN (INE0MB501011). Let us now turn to the practical issue of how to apply for the IPO of JG Chemicals Ltd.

Investors can apply either through their existing trading account or the ASBA application can be directly logged through the internet banking account. This can only be done through the authorized list of self-certified syndicate banks (SCSB). In an ASBA application, the requisite amount is only blocked at the time of application and the necessary amount is debited only on allotment. Investors can apply in the retail quote (up to ₹2 lakh per application) or in the HNI / NII quota (above ₹2 lakh). Minimum lot sizes will be known after pricing.

Financial highlights of JG Chemicals Ltd

The table below captures the key financials of JG Chemicals Ltd for the last 3 completed financial years.

Data Source: Company RHP filed with SEBI (FY refers to Apr-Mar period)

There are few key takeaways from the financials of JG Chemicals Ltd:

1. In the last 3 years, revenue growth has been robust with the sales growing nearly 80% in the last 2 years. The growth has been evenly divided, but the profit traction is much better, more than doubling in the last two y ears. This is also evident in the steady uptick to the net profit margins.
    
2. With the net profits growing faster than sales, the net  margins have steadily grown to 7.01% in the latest fiscal year FY23. This is backed by a robust 25.75% ROE reported in FY23 as well as 18.47% ROA. Both these ratios have also been growing steadily in the last two years.
    
3. The company has a robust sweating of assets at 2.63X with the asset turnover ratio consistently above the 2X mark over the last 3 years. This is only magnified by the robust ROA of over 18% in the latest year.

Let us turn to the valuations part. On the latest year diluted EPS of ₹17.32, the upper band stock price of ₹221 gets discounted at a P/E ratio of 12-13 times. Even assuming that this is a commodity driven sector, the P/E is showing an attractive pricing, with the issuers leaving something on the table for the IPO investors.

Here are some qualitative advantages that JG Chemicals Ltd brings to the table.

• The company is a key supplier of its zinc oxide products to some of the biggest tyre manufacturers in the world and catering to all players in India.
   
• Being a mission critical input product, it has high entry barriers since customers prefer to go with tried and tested players; and JG Chemicals has a near 50 year track record.
   
• The matrix of process, product and people is evident in the way the company has maintained consistent improvement in top line, bottom line, and key margins.

Some of the key user industries of this product like automobiles, ancillaries and agri products are slated to grow at aggressive rates in the coming years. That will directly translate into bigger gains for the company. For now, investors can bet on the fact that the company is placed in a valuation sweet spot. However, investors in the IPO must be prepared for higher levels of risk, as well as the possibility of cyclical returns in this sector due to the global competition. Hence, this IPO would be best suited to investors who are mentally prepared to wait for the long haul and prepared for the higher levels of risk.