Anirudh Jhunjhunwala, Managing Director and CEO, J G Chemicals Limited

29 Feb 2024 , 05:32 PM

Please provide insight into the company’s revenue model of the company and the outlook for each segment moving forward?

Currently, about 98% of your revenues come from the zinc oxide business and about 2% from the zinc sulphate business. In the zinc oxide business, we serve a diverse range of sectors, including rubber, which encompasses both tyre and non-tyre applications, cosmetics, pharmaceuticals, agriculture, animal feeds, batteries, paints, additives, specialty chemicals, and more. All these areas are witnessing reasonable growth.

The tyre industry constitutes about 70% of our sales and we have demonstrated notable growth in this segment over the last few years, even during periods of minimal overall industry volume growth. This can be attributed partially to our gains in market share and the ongoing shift from unorganized to organized players within the zinc oxide industry. As larger tyre companies prioritize quality and reliability, they increasingly prefer sourcing from established and reputable suppliers like us. Additionally, our certifications from Indian Pharmacopoeia/British Pharmacopoeia/ United States Pharmacopeia and European Pharmacopeia and several reputed certifications have opened doors for us in the pharmaceutical sector, where zinc oxide is essential for human nutrition and medicinal products.

Our zinc sulphate business stands to benefit from South India, which has a lot of zinc deficiency in South India. We are putting up a plant in Gujarat because there is a large ceramic market in Gujarat where our overall revenue share is very small. We want to that market as well as the tyre capacities coming up in Gujarat.

Why should retail investors consider investing in this IPO?

In today’s landscape, Indian investors are notably well-educated and discerning. Individuals venturing into stocks or equity are inclined towards conducting thorough research. Now, why should one consider investing in JG Chemicals? Well, our company boasts a robust track record spanning over three decades. We hold a dominant position in the market, commanding approximately 30% of the market share. JG Chemicals has evolved significantly since its inception in the early 90s, emerging as India’s largest and among the top 10 companies globally, in our industry. 

The sectors we operate in, as previously mentioned, exhibit promising growth trajectories both domestically and internationally. Consequently, we have garnered significant investor interest. Our return ratios have consistently yielded favorable results for investors. Therefore, we believe JG Chemicals presents a compelling opportunity. 

Top 10 customers contribute approximately 75% of the company’s revenues. While this underscores robust and enduring client relationships, investors may view it as a potential risk due to client concentration. How is the company managing this risk?

So, there are two perspectives to consider here. While some may perceive certain aspects as risks, we view them as significant strengths. Specifically, in our line of business, our customers exhibit a high level of loyalty. It is important to note that these relationships are not transient; they are deeply entrenched and can take several years to establish. The approval process alone can span over five to seven years, highlighting the stability of our customer base. It is a very costly affair even for our customer to choose their vendor. We see this as a testament to the reliability and durability of our partnerships. 

Additionally, our global approvals with major players like Michelin extend beyond regional boundaries, providing further assurance of our credibility. We have also attained the prestigious IATF certification, elevating our status when engaging with automobile manufacturers. 

While we acknowledge the importance of diversification into emerging segments like semiconductors and sunscreens, our commitment to the tyre sector remains steadfast. It is a sector we have excelled in for years, and our understanding of customer needs ensures continued success.

Could you provide insight into the dynamics of how you source your key raw materials, particularly from the perspective of pricing perspective and the consequent impact on the company’s margins?

We primarily utilize two types of raw materials: virgin zinc and zinc scrap, referred to as zinc dross in our industry. Virgin zinc is sourced from global zinc miners and companies such as Hindustan Zinc. This type of zinc is typically employed in high-end applications like pharmaceuticals due to its stringent specifications. On the other hand, zinc scrap is obtained from galvanizers worldwide as a byproduct of steel galvanization. Approximately 60-65% of our raw materials are imported, while the remaining 35-40% is domestically sourced through auctions and direct dealings with galvanizing and steel companies.

As for pricing, our procurement process is heavily influenced by the London Metal Exchange (LME), where zinc is traded. The prices of both virgin zinc and zinc scrap are determined by LME prices. Our business operates on a pass-through mechanism, meaning we buy raw materials based on LME or Hindustan Zinc prices and sell our products at similar rates, with a 1-month lag. This correlation extends to our sales, with prices being determined by current zinc prices at the time of transaction.

In essence, our business model is largely a pass-through model, where day-to-day operations involve buying and selling based on prevailing zinc prices. However, fluctuations in zinc prices can impact our inventory, as the company maintains a fixed inventory that is subject to market changes. Despite this, fluctuations in zinc prices do not significantly affect the company’s margins in terms of day-to-day operations.

Help us understand the growth strategies of the company.

We have a multifaceted growth strategy moving forward. Firstly, we aim to continue serving our existing zinc oxide clients while exploring new application areas such as batteries, specialty chemicals, etc. To cater to the ceramic segment, we are establishing a plant in Gujarat. Additionally, we see potential in the tyre production industry in Southeast Asia and are considering an acquisition to tap into this market. If the acquisition does not materialize, we will proceed with greenfield expansion. Both projects are slated for execution within the next 12 months.

Furthermore, we are diversifying our offerings within the agriculture segment by introducing value-added products like zinc sulphate and EDTA-based solutions. Our recent certifications have opened up new opportunities, positioning us as one of the few global players for zinc oxide production. Additionally, we are exploring the production of active zinc oxide, which caters to niche markets with higher margins. Moreover, we are investigating ways to increase the content per tyre, leveraging our strong relationships in the tyre industry. Sustainability is a key focus, and we are exploring products like replays that align with this ethos.

It is important to note that our growth initiatives entail manageable levels of capital expenditure, which can be funded through internal accruals. This approach mitigates risk by spreading investments across different areas and projects, ensuring a more sustainable and balanced growth trajectory.

Run us through the ESG strategy of the company.

You have raised a crucial point about sustainability, which is increasingly important in today’s business landscape. As a company, we recognize our responsibility to operate in an environmentally conscious manner. In our zinc oxide business, we are proud to state that over 90% of the zinc oxide we produce is derived from recycled zinc, rather than primary sources. This underscores our commitment to sustainability and ecological balance by minimizing our reliance on virgin metals and promoting recycling. This represents a significant milestone for us and positions us as leaders in resource efficiency. 

We are actively investing in waste heat recovery systems to reduce our energy consumption and environmental footprint. By adopting the latest technologies and making enhancements to our systems, we have not only achieved energy savings but also lowered our operational costs per ton. 

There is a growing trend among customers towards green products, such as green tyres manufactured from recycled materials. Given that most of our zinc oxide grades are derived from recycled metals, we can confidently assure customers of the sustainability of our product. In summary, sustainability is integral to our business strategy.

Our promoter family has a strong ethos of community engagement and philanthropy, which extends to both personal and corporate levels. Over the years, we have initiated various projects in healthcare and education to positively impact the communities where we operate.

In terms of governance, we place a high emphasis on maintaining transparency and accountability. Our board comprises experienced professionals and independent directors who bring diverse expertise to the table. As we prepare for our listing, we remain committed to upholding the highest standards of governance and ethical conduct.

Do you have a dividend distribution policy in place? If yes, would you like to give an overview of the same?

As a company, we have maintained 100% promoter ownership thus far and have not yet declared any dividends. However, as we embark on our journey to become a publicly listed company, our board will carefully deliberate and establish a dividend distribution policy. This policy will be designed to align with industry standards and best practices, ensuring that investors are appropriately rewarded based on the company’s performance.