Jesons Industries' IPO: Key Points To Note

Jesons Industries Limited (JIL) recently filed papers for an Initial Public Offering (IPO). According to the papers, the company will issue fresh equity of Rs 120 crore while promoters will offload 1.2 crore shares through an offer for sale.

How Will The Company Utilise The Funds?

The company plans to use Rs 90 crore from the IPO proceeds to repay its borrowings and those of its subsidiary, Jeson Techno Polymers. It plans to use the balance amount to fund its general corporate purposes such as new strategic initiatives, capital expenditure, marketing, brand building and other purposes.

The Business

The company’s main business is manufacturing speciality coating emulsions and water-based pressure sensitive adhesives in the tape and label segments. These products are used in multiple industries such as construction, leather, paint, paper, carpets and others.

According to the company’s prospectus, it is one of the largest suppliers to the paint sector with a market share of around 30 per cent. Its clients in the sector include JSW Paints, Indigo Paints, Shalimar Paints and several other large paint companies.

The company has also increased its focus on exports over the years with the share of export revenues increasing from 20.59 per cent in financial year 2019 (FY19) to 26.91 per cent in financial year 2021.

The company footprint spans across Asia-Pacific, Middle East, and Africa, with brands such as Bondex, Rydmix, Coviguard, Blue Glue and several others.

Out of the company’s product portfolio of around 170 products, 111 are speciality products developed by the company. The company has an in-house research team as well. The team of 27 scientists focuses on development of new products.

Nevertheless, speciality products contributed to around 23.3 per cent of the revenues of the company for the June quarter of FY22.

Financial Snapshot

The company revenues have grown at a compounded annual growth rate of around 8.7 per cent over the last two years. The company’s operating margins have seen an improvement from around 5 per cent in FY19 and FY20, to 11 per cent in FY21.

The company’s fixed asset turnover stands at more than 10 per cent for all three fiscals, indicating that the business does not require heavy investments in fixed capital to increase revenues.

Nevertheless, the company has been making significant capital expenditures to grow its operational base.

The Return on Capital Employed (ROCE) has remained between 25 per cent, to 41 per cent. The company has generated positive cash flows in FY19 and FY21, but saw a net cash outflow due to working capital requirements in FY20.

The company’s borrowings have risen from around Rs 40 lakh in FY19 to Rs 116 crore of the June quarter of FY22.

Key Risks

Dependence On A Few Sectors

The business derives a major portion of its revenues from the paints and packaging sector. Any turmoil in these sectors could affect the finances of Jesons’ adversely. The paints sector, for instance, is dependent on the growth of the real estate sector and growth of discretionary expenses.

Environmental Concerns

The company must abide by several environmental laws to prevent pollution of nearby water bodies, land, air etc. However, in the past, the company has faced issues at its Daman unit, where it had not been compliant with environmental regulations.

Competitive Pressure

The sector has low barriers to entry, and hence is open to competition from multiple competitors. Unless the company is able to differentiate its products, it is unlikely that the company can earn higher margins compared to its competitors.

Therefore, the company’s pricing power against its competitors should be monitored over time.

Debt-Related Issues

The company has incurred “significant indebtedness”, according to the company’s prospectus. As a consequence, there are several constraints placed by the banks on the company.

In 2009, the company had defaulted on a debt payment for a loan that it had taken in 2007. Hence, proper debt management would remain a key concern for investors going ahead.