SJS is a decorative aesthetic company; Should you invest in your IPO?
SJS is a decorative aesthetic company that focuses on the design through the delivery of aesthetic solutions. The promoters of the company, Evergraph and KA Joseph, will sell shares worth Rs 800 crore to shareholders through a sell offer. The company will not raise any new shares through the initial public offering.
SJS is a supplier of cosmetic parts for various companies in several sectors, but with a particular focus on the automotive and consumer products sectors.
In 2021, the company supplied 11 crore parts consisting of 6,000 different storage units to approximately 170 customers based in 90 countries.
According to the company’s IPO prospectus, the company’s list of product offerings includes decals and body graphics, 2D appliques and dials, 3D appliques and dials, 3D lux badges, domes , overlays, aluminum badges, in-mold labels or decoration pieces, assembly lens mask and injection molded plastic parts chrome, printed and painted.
In addition, the company offers a variety of aftermarket vehicle accessories under the âTransformâ brand.
Obviously, the business of the company is heavily dependent on the automotive sector. Sales to original equipment manufacturers contributed about 70 percent of the company’s sales. The company’s key customer base includes several large automotive companies such as TVS Motors, Honda Motorcycle, Bajaj Auto, John Deere, Eicher, Suzuki and others.
He has built solid relationships with his top ten clients, with whom he has had relationships of around 15 years on average.
The company had experienced an investment spree between 2018 and 2019. Currently, the company’s operations represent about half of its total capacity, due to the expansion. But the company does not expect immediate capital spending in the future. Therefore, as capacity utilization increases, margins are likely to increase.
The company’s revenue has grown at a compound annual growth rate of around 3% over the past two years, due to the Covid pandemic. In addition, the automotive sector has been slowing for some time.
In terms of operating margins, the company’s margins have remained stable at around 29-30 percent over the past three years. The company has generated positive cash flow over the past three years. In addition, the company has generated positive free cash flow over the past two years.
The company has a net capital turnover of less than two, which implies that for every rupee invested in fixed assets, the business generates less than two rupees in income. However, the low NFAT is due to capital spending over the past three years. The company’s debt ratio also remained fairly low.
Risks associated with customer concentration
The company pointed out that selling to the largest customer accounted for around 21% of revenue in 2021. However, on a positive note, the revenue share increased from 34%.
Sales to the top five customers have accounted for over 60 percent of the company’s revenue, and the top ten customers have contributed over 85 percent of revenue over the past three years.
The company mainly depends on car manufacturers for its profits. Therefore, any setback in the automotive industry could adversely affect the operations of the company.
Sales to two-wheeler OEMs contributed 58% of sales in fiscal 2021, while sales to passenger vehicle manufacturers contributed 16% of the company’s revenue for the same period. The contribution of the automotive sector has remained above 75 for the last three years.
The company faces intense competition from other players in the segment. Strong competition could lead to price-based undercutting. The company does not have long-term supply contracts with its customers, which makes it vulnerable to renegotiations.
Raw material prices have increased rapidly in the past, especially for raw materials like crude, which in turn affects raw material costs and fuel costs. The company’s raw material costs consist of PVC, PC and inks, which contribute about 65% of the company’s raw material expenses. Raw material expenses contribute about 27 percent of the company’s operating revenue.