SJS Enterprises IPO: Brokerage houses upbeat, but suggest caution

SJS Enterprises Ltd (SJS), is a decorative aesthetics product company, incorporated in 1987, serving automotive and consumer appliance industry through its ‘design-to-delivery’ business model. Automotive sector contributes 75 percent of its sales, while the rest comes from consumer appliance industry.

Within the automotive sector, two-wheelers and passenger vehicles contributed 58 percent and 16.7 percent to the FY21 sales. Around 84 percent  of sales during the year came from the domestic market. Its product range includes decals and body graphics, 2D and 3D appliques/dials, 3D lux badges, overlays and aluminium badges.

The company is floating a Rs 800-crore public issue on Monday and it closes on November 3. The company has set the price band at Rs 531-542 per share for the offer which represents around 48.49 percent of its post-issue paid-up equity shares. Since the issue is entirely offer-for-sale, the company will not receive any proceeds from the issue. The promoter currently holds 98.86 percent stake in the company and it will come down to 50.37 percent after listing, while public holding will increase from 1.14 percent to 49.63 percent.

On October 29, SJS mopped up Rs 240 crore from 18 anchor investors, including institutions like Tara Emerging Asia Liquid Fund, Societe Generale, Nomura, Goldman Sachs and Citigroup. Domestic investors included Axis Mutual Fund, Franklin MF, Aditya Birla Sun Life Insurance, Avendus and Edelweiss.

ICICI Direct (IDirect) views the company as a leading aesthetics solutions provider with lot of emphasis on premiumisation. It believes that increasingly, aesthetics are emerging as an important purchase consideration (eg LED lights and alloy wheels) and consequently, as a product differentiator for OEMs.

It suggests that the increasing focus on green fuels will push the demand for electric vehicles which can benefit aesthetics players like SJS with increasing adoption of advanced technology and consequently higher kit value.

Strong financials and long-standing client relationships are other key strengths that the company possesses. “As of FY21, the company had cash and equivalents of Rs 119 crore, amounting to 7 percent of sought market capitalisation. The company has generated a healthy 17-21 percent RoCE over FY19-21 along with consistent CFO generation over in that timeframe,”  IDirect said in a report. SJS is one the most profitable companies (compared to peer group) at the EBITDA and PAT levels.

On the flip side, IDirect said, heavy 2-wheeler exposure could act as growth headwind because “the 2-W space is experiencing sluggish demand conditions amid reduced spending propensity for the entry-level segment”. The company earned 58 percent of its revenues in FY21 from the two-wheeler segment.

Client and segment concentration could also pose a threat to the company’s well-being. As per IDirect, the company’s top five and top 10 customers accounted for 62.7 percent and 87.3 percent of FY21 sales. This client concentration poses the risk of significant impact on revenues in case of reduction in demand or loss of any key customer.

“On a consolidated basis (inclusive of Exotech), SJS clocked EBITDA margins of 26.1 percent in FY21 with RoCE at 19 percent. At the upper end of the price band (Rs 531-542) it is valued at 32x FY21 P/E. We assign ‘subscribe’ rating on premiumisation play, strong financials,” the brokerage house said.

Choice broking highlights the company’s strengths as its strong manufacturing capabilities supported by an established supply chain and delivery mechanism, strong innovation and product design and development capabilities. The company is a leading aesthetics solution provider with an extensive suite of premium products in a growing industry which gives it a distinct edge over competition.

However, the brokerage is concerned that company is exposed to risks due to the continued slowdown in the global auto sector, raw material cost pressures, challenges in integrating new acquisition and business seasonality.

There are no peers in the listed space that are engaged in the business similar to that of SJS. “At higher price band of Rs 542, SJS is demanding a P/E multiple of 31.7x (to its proforma FY21 EPS of Rs. 17.1), which seems to be on higher side. We assign a ‘subscribe with caution’ rating for the issue”, it said.

Marwadi Financial Services, on the other hand, finds the valuations ‘reasonable’ and assigns a ‘subscribe’ rating to this offer of the company.