JG Chemicals IPO over-subscribed on day 1: Analysts upbeat on its prospects

Analysts have recommended subscribing to the initial public offering (IPO) of zinc oxide manufacturer JG Chemicals as they bet on the company's market-leading position, robust client base and favorable demand outlook for end-use application businesses. 

The company is the country's largest zinc oxide producer and among the top ten globally, as per CARE Analytics. Its domestic market share in the key product was around 30 per cent as on March 2022. 

Tyre and rubber industry is its biggest customer, from which it derived 90 per cent revenue in April-December 2023. Pharma and chemicals, agri, ceramics, paints, electronics, among others are its other end-use industries. 

Expectations of growth in these allied sectors, especially in tyre and auto, and the company's presence in a high-entry barrier industry, which needs high technical expertise are key positives, which have kept analysts upbeat on JG Chem. 

As of 3 pm on day 1 that is Tuesday, the IPO was subscribed 1.67 times led by over 2 times subscription in both retail and NII categories. In the grey market, it held a premium of 27 per cent over the upper price band of Rs 221. 

Of the IPO size of Rs 251 crore, the company is raising Rs 165 crore through a fresh issue with the rest Rs 86 crore being OFS.

It plans to use the IPO proceeds to invest in its material subsidiary BDJ Oxides and to fully or partially repay the arm's debt. It will also fund capex to set up a research and development centre in Naidupeta, Andhra Pradesh.

Here's what brokerages said on the company:

Anand Rathi Research | Subscribe for long-term

Its primary raw materials are virgin zinc metal and Zinc Dross (which is a type of zinc scrap), which it procures from various domestic and global entities. Zinc Dross is primarily produced by steel galvanizers as a by-product of steel production, whose availability is a challenge, and the biggest constraint for new entrants in the market is to build a global supply network. 

Swastika Investmart | Subscribe

The IPO valuation of 12.75x P/E appears fairly priced on a current basis. The company's future growth potential and the positive industry outlook are encouraging. 

BP Wealth | Subscribe

The company benefits from significant entry barriers in key end-use industries, including stringent vendor approval processes and technical expertise requirements. This creates a durable competitive advantage, positioning the company as a trusted and preferred supplier. 

Its consolidated revenue has grown at a CAGR of 34.3 per cent during FY21- 23. It maintains high customer retention rates and explores growth opportunities in Southeast Asia.

The favorable demand outlook in automotive, rubber, and ceramics, along with the expected revival of the chemical industry in early FY25, positions JG Chemicals for sustained growth and market leadership.

The issue is valued at a P/E of 29.6x on the upper price band based on FY24 earnings, which is fairly valued. 

Master Capital Services | Invest for medium-to-long term

The Indian zinc oxide market is fragmented with limited presence of organized players and JG Chemicals is the largest manufacturer. It is planning to expand its production capacities and broaden manufacturing operations, diversify its product offerings and enter new verticals. It is increasing its focus on R&D to support complex chemistries, product innovation and cost efficiencies. 

Arihant Capital | Subscribe

The growth in the automobile and rubber sectors, along with increasing demand for tyres and radial tyres, creates a favorable market for zinc oxide. Additionally, opportunities arise from the expanding ceramics industry and rising demand for skincare products, including zinc oxide's use in sunscreen.

Moreover, the demand for zinc oxide-based paints and coatings is expected to increase, driven by its UV-blocking and corrosion-resistant properties, further contributing to JG Chemicals' growth. 

KEY RISKS

>> Nearly complete dependance on one principal product-zinc oxide (in various grades).

>> Significant dependance on its arm BDJ Oxides

>> Heavy dependance on rubber and tyre industry with lack of diversification in other applications.

>> Does not have long term agreements with its overseas raw material suppliers.