Investors with an appetite for high risk can participate in the initial public offering of SJS Enterprises. SJS is an industry leader in the decorative and beauty industry for automobiles and consumer durables. SJS is a supplier of products such as logos, decals (labels), and overlays as well as high technology products such as 3D discs/logos, optical plastics and injection molded parts.

The long-term relationship of 13 to 25 years with many customers, the neutral product profile of EVs and consistent high margins are the positive factors of the company. However, SJS is making the most of current bull market conditions to seek a partial exit for promoters Evergraph Holdings (share will drop from 77.8 percent to 34.8 percent) and Promoter & MD – KA Joseph (share will drop 5.5 percent to 15.3 per cent) at around Rs 800 crore. The IPO is valued at around 34 times its FY21 earnings, which isn’t cheap, especially considering the expected market value of around Rs 1,650 crore. SJS has no peers in the listed space. Although that pricing is comparable to another IPO of small-cap automotive components – Sansera Engineering – which was valued at the same levels of 35 times FY21 earnings. Sansera has been trading in a tight range around the IPO price since Listed on September 24, 2021. We have recommended the investment in Sansera’s IPO based on long-term outlook. SJS is also a long-term game. Investors can restrict their investments to small amounts because they are small stocks.

What is working

SJS earns 50-60 percent of its revenue from two-wheelers, 15-20 percent from automobiles and the remainder from consumer durables. Increased design awareness among customers and improved affordability for luxury vehicles and durable goods, which provide greater scope for action on aesthetic improvements for the company’s benefit.

According to CRISIL, while demand for two-wheeled vehicles, passenger cars, and consumer durable applications is expected to grow at a compound annual growth rate of 10 to 12 percent each by volume during fiscal year 2020 to fiscal year 26, demand for beauty is expected to grow. 1.6 to 1.8 times – a compound annual growth rate of about 20 percent in the same period.

Drawing nearly half of its revenue from stickers and body graphics in fiscal year 2019, SJS has enriched its product mix by adding 3D decorations and discs, in-mold stickers/decorations as well as lens mask assemblies in the past two years. It also added chrome plating capabilities through the acquisition of Exotech in April 2021. Its major clients include Royal Enfield, TVS, Bajaj Auto, Suzuki, Visteon, Whirlpool, Samsung and Godrej. Unlike many other auto component starters, it has high operating margins of over 25 percent. With value added to the product mix, operating margins increased from 28.6 percent in FY19 to 30.2 percent in FY21. Recalibrations of prices are helping almost every year in sectors such as badges due to changing requirements for vehicles supplied to. Exports, which generate about 15 percent of revenue, now (from 10 percent in fiscal year 2019) also enjoy higher margins. Because chrome plating is a lower-margin product, the acquisition of Exotech narrowed initial margins for fiscal year 21 to 26.1 percent (the acquisition is cumulative EPS). However, it has also brought in new customers (Mahindra, Mahindra, John Deere, Volkswagen) and cross-selling opportunities.

Cross selling improves the content offered for each vehicle and in the process, gives some room to pricing power, which is not easy to get for suppliers. SJS has successfully deployed this strategy in the past as well, to expand its business from automotive customers as well as regular customers.

The company has also recently gone into selling accessories like PU decals and domes for body graphics in aftermarket stores, which is usually a more profitable segment.

During the 2019-21 financial year, its revenue went from Rs 237 crore to Rs 251 crore and profit, steadily from Rs 37.6 crore to Rs 47.7 crore. This must be seen in light of the impact of Covid as well as the downturn in the auto industry. Net profit margins are also high at more than 15 percent.

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SJS is a highly competitive company with quite a few peers in the unlisted space. But the company has a foothold in the sectors in which it is present. Of the total market volume of Rs 1,000 crore in FY21 (excluding chrome plating) as per CRISIL estimates, SJS generated revenue of Rs 250 crore. (From a market size of Rs 800-900 crore for chrome plating in FY21, Exotech made Rs 70 crore).

Second, technology is constantly evolving in this sector, driven by rapid change in consumer preferences as well as the need for manufacturers to keep the weight of the vehicle lighter, for example. Today, capacitive and food grade overlays required in some durable goods, in-mold electronics that reduce weight by eliminating the need for wires or buttons, digital dials, etc. are emerging technologies. The widespread adoption of 3D printing (which is currently used mostly for prototyping) also cannot be ruled out. However, the company’s ability to introduce new products, despite in-house design and development, as we’ve seen in the past, gives confidence.

Investors should note that although the company did not pay a dividend in FY 2019 and FY20, SJS paid dividends of 40 percent, 16.5 percent, and 20 percent in FY 21 and Q1 FY22 and July 2021 – RHP filing date respectively. A non-executive director participated in providing management consulting for a fee earlier this year. Evergraph, the selling promotion company will make certain payments from the sale of the stock to Sanders Consulting, owned by the CEO, in exchange for advisory services. Sanders owns a 1.14 percent stake in SJS. While these may not be important to a private company, the listing should be monitored after corporate governance.

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