Investors with an appetite for high risk can subscribe to the IPO of SJS Enterprises. SJS is a player in the decorative and aesthetics industry for automobiles and consumer durables. SJS is a supplier of products such as logos, decals (stickers) and overlays as well as advanced technology products such as 3D dials /logos, optical plastics and injection moulded parts.

Long-standing relationship of 13-25 years with many customers, an EV agnostic product profile and consistent high margins are positives for the company. However, SJS is making the maximum use of the present bull market conditions to seek a partial exit for promoters Evergraph Holdings (stake to come down from 77.8 per cent to 34.8 per cent) and Promoter & MD - KA Joseph (stake to reduce by 5.5 per cent to 15.3 per cent) to the extent of ₹800 crore. The IPO is valued at about 34 times its FY21 earnings, which is not cheap, especially considering the expected market capitalisation of about ₹1650 crore. SJS has no peers in the listed space. This pricing though is comparable with another recent small-cap auto component IPO – Sansera Engineering - which was valued at the same levels of 35 times its FY21 earnings. Sansera has been trading in a narrow range around its IPO price since its listing on September 24 2021. We had recommended an investment in the Sansera IPO based on long-term prospects. SJS too is a long-term play. Investors can restrict their investments to small quantities as it is a small-cap stock.

What works

SJS earns 50-60 per cent of its revenues from two-wheelers, 15-20 per cent from cars and the rest from consumer durables. Growing design consciousness among customers and improving affordability for premium vehicles and durables, which provide more scope for aesthetic enhancements work in favour of the company.

According to CRISIL, while demand from two- wheeler, passenger vehicle and consumer durable applications is expected to grow at CAGR of 10 to 12 per cent each in volume terms over FY20 to FY26, demand for aesthetics is expected to grow 1.6 to 1.8 times - that is, at a CAGR of about 20 per cent in the same period.

From deriving almost half its revenues from decals and body graphics in FY19, SJS has enriched its product mix with the addition of 3D appliques and dials, in-mold labels/decorations as well as lens mask assemblies in the last two years. It has also added chrome plating capabilities through the acquisition of Exotech in April 2021. Key customers include Royal Enfield, TVS, Bajaj Auto, Suzuki, Visteon, Whirlpool, Samsung and Godrej. Unlike many other auto component players, it enjoys high operating margins of over 25 per cent. With value additions to the product mix, operating margins moved up from 28.6 per cent in FY19 to 30.2 per cent in FY21. A recalibration in pricing almost every year in segments such as decals due to changed requirement for vehicles supplied to, helps. Exports, which bring in about 15 per cent of revenues, now (from 10 per cent in FY19) also enjoy higher margins. With chrome plating being a lower margin product, the Exotech acquisition has diluted the proforma margins for FY21 to 26.1 per cent (the acquisition is EPS accretive). However, it has also brought in new customers (Mahindra and Mahindra, John Deere and Volkswagen) and cross-selling opportunities.

Cross-selling improves content supplied per vehicle and in the process, gives some room for pricing power, which is otherwise not easy to come by for suppliers. SJS has successfully deployed this strategy in the past as well, to expand its business from automotive as well as consumer durable clients.

The company has also recently entered into sale of accessories such as vehicle body graphics PU badges and domes in the aftermarkets, which is usually a more profitable segment.

Over FY19-21, its revenues have moved from ₹237 crore to ₹251 crore and profits, steadily from ₹37.6 crore to ₹47.7 crore. This must be seen in the light of the impact of Covid as well as the downturn in the auto industry. It net profit margins are also high at over 15 per cent.

Points to note

SJS is in a highly competitive business and has quite a few peers in the unlisted space. But the company does have a foothold in the segments it is present in. Out of the total market size of ₹1000 crore in FY21 (excluding chrome plating) as estimated by CRISIL, SJS earned revenues of ₹250 crore. (Out of a market size of ₹800-900 crore for chrome plating in FY21, Exotech made ₹70 crore).

Secondly, technology is continuously evolving in this segment, driven by the fast changing preferences of consumers as well as need for manufacturers to keep vehicle weight lighter, for instance. Today, capacitive and food grade overlays that are needed in certain durables, in-mold electronics which reduces weight by doing away with the need for wiring or buttons, digital dials, etc. are the emerging technologies. Wider adoption of 3d printing (now predominantly used for prototyping) also cannot be ruled out. However, the company’s ability to introduce new products, though in-house design and development, as seen in the past, gives confidence.

Investors should note that while the company did not pay dividends in FY19 and FY20, SJS has paid out 40 per cent, 16.5 per cent and 20 per cent dividend in FY21, Q1FY22 and July 2021 – date of filing RHP respectively. A non-executive nominee director was engaged in providing management consulting for a fee earlier this year. Evergraph, the selling promoter will be making certain payments from the sale of equity shares to Sanders Consulting, which is owned by the CEO, in exchange for consulting services. Sanders owns 1.14 per cent stake in SJS. While these may not be significant for a private company, corporate governance post listing must be monitored.

comment COMMENT NOW