Company Update : JG Chemicals Ltd By Emkay Global Financial Services
We recently met Anirudh Jhunjhunwala (MD) and Anuj Jhunjhunwala (ED & CFO) of JG Chemicals (JGCHEM) to discuss the current outlook for the company as well as the sectoral trends and key developments. JGCHEM is a leading manufacturer of zinc oxide in India with ~30% market share (~60,000mtpa capacity across 3 facilities). It also manufactures a derivative called zinc sulphate with capacity of ~10,000mtpa. The company plans to diversify into pharma, spec chem, agrochemicals, batteries, etc that will allow them to expand their addressable market, improve their margins, and be the first mover to capture larger share in such growth segments. JGCHEM has historically outpaced the growth of its core market, ie the tire industry. Stable outlook for zinc prices and higher capacity utilization bodes well for the company.
Zinc oxide domestic market share is growing; focus on diversification
Zinc oxide is a diverse chemical that has applications ranging from rubber to agriculture to pharma. JGCHEM is predominantly present in the rubber sector, especially in tires. While more than 50% of zinc oxide is used in non-rubber application globally, in India ~70% is used in rubber, giving the sector a huge headroom for growth. JGCHEM is seeing favorable industry tailwinds supported by their position as an industry leader. They now plan to increase their share of business in segments like ceramics, agriculture, pharma, electronics, etc. Accordingly, they are expanding capacities in adjacent products like zinc sulphate and specialty grade zinc oxide, which would entail better margins.
On track with the expansion projects
JGCHEM has been continuously adding capacity to service the demand for zinc oxide. The company started with a capacity of ~600mtpa in 1975 and now has a total capacity of ~70,000mtpa across its 3 facilities today. Their latest plant was set up in Naidupeta in CY16 with an initial capacity of 7,200mtpa, which has now increased to 43,704mtpa. These plants are running at a capacity of ~65-70% with a peak capacity utilization of 85% (the company expects the plants to be fully utilized by FY26). JGCHEM is in the process of setting up a new plant in Gujarat to enter the ceramics industry and service tyre manufacturers present there with a capacity of ~15,000mtpa (by FY26).
Strong balance sheet and prudent hedging mechanism
The company requires low capex for future growth which will allow them to maintain a lean balance sheet. The management has plans to transform the margin profile of the company over time by adding new high margin (~200-300bps) and niche products in the zinc compound market. Zinc oxide prices are linked to that of the Zinc LME index, hence any changes in zinc prices are reflected across the value chain with a lag. JGCHEM’s core raw material for zinc oxide is zinc dross or zinc scrap, the prices of which range to ~90% of the Zinc LME prices. This acts as a natural hedge to mitigate the volatility between raw material and finished goods prices aiding sustainable 11-12% margins across cycles.
1-Year share price trend (Rs)
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