JG Chem Emerges as Zinc Oxide Leader, Grappling with Risks of Its Zing

At the upper limit of the pricing range, the company is seeking a valuation of 15.7 times earnings for the fiscal year 2023. In comparison, other publicly listed suppliers to the rubber industry, such as Nocil, Yasho Industries, and Rajratan Global Wire, are trading at higher multiples of 30-33 times based on earnings from the same fiscal year. Furthermore, JG Chemicals' operating margin trails behind that of its competitors.

JG Chemicals, a prominent supplier of zinc oxide utilized in various sectors including tire manufacturing, pharmaceuticals, and ceramics, intends to raise INR 251 crore through an Initial Public Offering (IPO). Out of this amount, INR 165 crore will be allocated for a fresh issue of shares, intended for investment in its subsidiary, establishment of an R&D center in Andhra Pradesh, working capital requirements, and loan repayment. The remaining INR 86 crore will be offered for sale by its founders. Following the IPO, the promoter's stake will decrease from 100% to 71%.

As the domestic market leader in zinc oxide production, JG Chemicals benefits from the capital-intensive nature of securing a reliable supply of raw materials and the establishment of long-term relationships with suppliers, creating barriers to entry for potential competitors. Additionally, the company is expanding its production capacity to manufacture higher-grade zinc oxide used in electronics and skincare applications, which is anticipated to enhance profit margins.

However, short-term fluctuations in raw material prices can potentially impact margins, as evidenced by the financial performance in the first half of the fiscal year 2024. Given this volatility, the IPO may be suitable for investors with a higher risk appetite.

JG Chemicals, headquartered in West Bengal, specializes in the production of zinc oxide, a crucial component contributing to the elasticity, hardness, and weather resistance of rubber products and ceramic glazes.

The company possesses annual production capacities of 59,904 tonnes of zinc oxide, 7,056 tonnes of zinc ingots, and 10,080 tonnes of zinc sulphate, totaling 77,040 tonnes. Approximately 90% of its sales volume is attributed to the rubber industry, with the majority sourced by tire manufacturers. The zinc oxide market has an estimated size of 100,000-115,000 tonnes, representing a total market value of INR 1,800-2,000 crore. JG Chemicals commands a market share of around 30%, significantly surpassing its closest competitor in terms of volume.

By capitalizing on vendor consolidation initiatives undertaken by tire manufacturers, JG Chemicals has expanded its market share and outperformed the growth rate of the tire industry in recent years. The company is also diversifying its operations by establishing a new plant in Gujarat with an annual capacity of 12,000-18,000 tonnes to cater to tile manufacturers. This facility is projected to commence operations in the first quarter of the fiscal year 2026. Additionally, JG Chemicals has initiated direct supply of zinc sulphate to consumers, which is expected to enhance revenue realization.