Investors with a high risk appetite can subscribe to the SJS Enterprises IPO. SJS is a player in the decoration and aesthetics industry for automobiles and durable consumer goods. 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 molded parts.
A long-standing relationship of 13-25 years with numerous customers, an independent product profile of electric vehicles and consistent high margins are assets for the company. However, SJS is making maximum use of current bull market conditions to seek a partial exit from promoters Evergraph Holdings (stake will drop from 77.8% to 34.8%) and Promoter & MD – KA Joseph (stake will be reduced by 5%). , 5 percent to 15.3 percent) to the extent of 800 crore. The IPO is valued at around 34 times its earnings for FY21, which isn’t cheap, especially given the expected market cap of around 1,650 crore. SJS has no peers in the listed space. That price, however, is on par with another recent small-cap auto components IPO – Sansera Engineering – which was valued at the same levels of 35 times its FY21 earnings. Sansera has been trading within a narrow range around its IPO price since its IPO on September 24, 2021. We had recommended an investment in the Sansera IPO based on a long-term outlook. SJS is also a long-term game. Investors can limit their investments to small amounts because this is a small cap stock.
SJS derives 50-60% of its income from two-wheelers, 15-20% from cars and the rest from consumer durables. The growing awareness of design among customers and the improved affordability of premium vehicles and durable goods, which offer more scope for aesthetic upgrades, are working in the company’s favor.
According to CRISIL, while demand for two-wheelers, passenger vehicles and consumer durable applications is expected to increase at a CAGR of 10-12% each in volume terms in fiscal years 20-26, the demand for aesthetics is expected to increase 1.6 to 1.8 times – that is, at a CAGR of around 20 percent over the same period.
By deriving nearly half of its revenue from decals and body graphics in fiscal 2019, SJS has enriched its product line with the addition of 3D appliques and dials, in-mold labels / decorations as well as lens mask assemblies over the past two years. It also added chrome plating capabilities through the acquisition of Exotech in April 2021. Major customers include Royal Enfield, TVS, Bajaj Auto, Suzuki, Visteon, Whirlpool, Samsung and Godrej. Unlike many other players in the automotive industry, it enjoys high operating margins of over 25%. With value additions to the product line, operating margins fell from 28.6% in FY19 to 30.2% in FY21. A recalibration of prices almost every year in segments such as stickers due to changing requirements for vehicles supplied to, helps. Exports, which generate around 15 percent of revenue, now enjoy higher margins (up from 10 percent in fiscal 2019). As chrome plating is a low margin product, the acquisition of Exotech diluted pro forma margins for FY21 to 26.1% (the acquisition is accretive for EPS). However, it also attracted new customers (Mahindra and Mahindra, John Deere and Volkswagen) and cross-selling opportunities.
Cross-selling improves the content delivered per vehicle and, in the process, leaves some room for pricing, which is not otherwise easy for suppliers to find. SJS has also successfully deployed this strategy in the past, to expand its business with automotive and consumer sustainability customers.
The company has also recently launched the sale of accessories such as badges and PU domes for vehicle body graphics in the aftermarket, which is generally a more profitable segment.
In fiscal year 19-21, its revenue increased from 237 crore to 251 crore and its profit from 37.6 crore to 47.7 crore. This needs to be seen in light of the impact of Covid as well as the downturn in the auto industry. Its net profit margins are also high, at over 15 percent.
Points to note
SJS is in a highly competitive business and has many peers in the private sector. But the company is present in the segments in which it is present. Out of the total market size of 1,000 crore in FY21 (excluding chrome plating) estimated by CRISIL, SJS achieved sales of 250 crore. (On a market size of 800-900 crore for chrome plating in FY21, Exotech made ₹ 70 crore).
Second, technology is constantly evolving in this segment, driven by rapidly changing consumer preferences as well as manufacturers’ need to reduce vehicle weight, for example. Today, the capacitive and food grade overlays that are required in some durable in-mold electronic components that reduce weight by removing the need for wiring or buttons, digital dials, etc. are emerging technologies. A wider adoption of 3D printing (now mainly used for prototyping) cannot be ruled out either. However, the company’s ability to introduce new products, through internal design and development, as seen in the past, gives confidence.
Investors should note that although the company did not pay dividends in fiscal 19 and 20, SJS paid 40 percent, 16.5 percent, and 20 percent dividends in fiscal 21, first quarter of fiscal 22 and July 2021 – RHP filing date respectively. A non-executive appointed director was hired to provide management advice for a fee earlier this year. Evergraph, the selling promoter will make certain payments on the sale of shares to Sanders Consulting, which is owned by the CEO, in return for consulting services. Sanders owns 1.14% of the capital of SJS. While these may not be significant for a private company, post-listing corporate governance should be monitored.