SJS Enterprises Ltd

Business

  • SJS Enterprises Limited is one of the leading players in the Indian decorative aesthetics industry in terms of revenue in Fiscal 2020 and as at March 31, 2021, offered the widest range of aesthetics products in India, It is a “design-to-delivery” aesthetics solutions provider with the ability to design, develop and manufacture a diverse product portfolio for a wide range of customers primarily in the automotive and consumer appliance industries. The Company supplied over 115 million parts with more than 6,000 SKUs in Fiscal 2021 to around 170 customers in approximately 90 cities across 20 countries. it differentiates itself on the basis of the wide range of its product portfolio, quality of its product offerings, product design and development capabilities and the strength of its relationships with customers located across various industries globally.

  • SJS also manufacture a wide range of aesthetics products that cater to the requirements of the commercial vehicles, medical devices, farm equipment and sanitary ware industries. Its product offerings include decals and body graphics, 2D appliques and dials, 3D appliques and dials, 3D lux badges, domes, overlays, aluminium badges, “In-mould” label or decoration parts (“IML/IMD(s)”), lens mask assembly and chrome-plated, printed and painted injection moulded plastic parts. It also offers a variety of accessories for the two-wheelers’ and passenger vehicles’ aftermarket under its “Transform” brand.

  • Key customer base

    • original equipment manufacturers (“OEMs”) such as Suzuki, Mahindra & Mahindra, John Deere, Volkswagen, Ashok Leyland, Honda Motorcycle, Bajaj Auto, Royal Enfield and TVS Motors;

    • Tier-1 automotive component suppliers such as Marelli, Visteon, Brembo and Mindarika;

    • Consumer durables/appliances manufacturers such as Whirlpool, Panasonic, Samsung, Eureka Forbes, Godrej and Liebherr;

    • Medical devices manufacturers such as Sensa Core; and

    • Sanitary ware manufacturers such as Geberit.

  • 75% revenues comes from automotive and 25% from consumer durables in FY21.

  • As at June 30, 2021, SJS had a team of 44 personnel for NPD, representing approximately 8.64% of its total on-roll manpower as at that date. This included a dedicated design and development team of six personnel, which primarily works on the design, development and prototypes of new products and certain product upgrades.

  • Principal raw materials used in manufacturing SJS aesthetic products are plastics, aluminium, plastic polymers such as PVC, inks, chemicals and adhesives. Raw material costs formed ~38.4% of revenues from operations in FY21. Raw material costs are higher for Exotech (~54.5% in FY21) with key raw materials being polymer granules, chemicals, paints, copper, nickel, tapes and packing materials. The company procured ~33.7% of raw materials from outside India in FY21.

  • IPO: Company did IPO in November 2021, issue size was Rs. 800 cr at Rs. 542 per share. Entire issue was Offer for Sale and post issue promoter holding has come down from 98.9% to 50.4%.

Manufacturing facilities

  • Company has 2 state of the art facilities at Bangalore and Pune. Both plants are IATF and ISO certified.

  • Bangalore plant is LEED gold certified which is leadership in energy, efficiency, and design by the US Green Building Council. They generate almost 2 MW of solar power at Bangalore facility and more importantly this Bangalore facility is fungible allowing them to interchange capacity and product mix based on changing customer requirements and optimizing machine productivity and operational efficiency.

  • As at June 30, 2021, the annual production capacity of the Bengaluru and Pune facilities was 209.70 million and 29.50 million products, respectively.

  • manufacturing facilities located in Bengaluru and Pune in India spread across an area of approximately 235,000 and 68,350 square feet, respectively.

Acquisition of Exotech

  • In April 2021, SJS acquired Exotech Plastics Private Limited and Exotech will be a 100% subsidiary of SJSPL. The total amount of investment for acquisition was around Rs. 64.00 crore and the same was done through internal accruals. With this acquisition, SJSPL diversified into chrome plating business and acquiring new customers as well. Exotech had a revenue of Rs. 74.3 crore and PAT of Rs. 4.1 crore in FY2020.

  • Exotech Acquisition has enhanced its product portfolio, increased its manufacturing capabilities and increased its customer base. While chrome-plated parts constituted the second largest product segment within the overall aesthetics market in India in Fiscal 2021, it is expected to be the largest product segment within the overall aesthetics market in India in Fiscal 2026.

  • The demand for chrome plated parts comprised 23.00% to 25.00% of the total demand in India for decorative aesthetics in Fiscal 2021, which is expected to increase to 26.00% to 28.00% of the total demand in India for decorative aesthetics by Fiscal 2026.

  • SJS expects to leverage its existing capabilities, product offerings and customer base to capitalize on this market opportunity. It has started offering products that use chrome-plated, printed and painted injection moulded plastic parts, such as wheel covers, radiator grills and door handles, following the acquisition of its Subsidiary.

  • there has been a margin enhancement in Exotech post acquisition. Exotech business was operating at 10.5% margin. Now it’s in the range of 14% driven by revenue plus operational efficiencies that SJS have brought in the material management and the synergies that their procurements with SJS capabilities and from the process discipline that has been introduced in Exotech.

Management

  • K.A. Joseph, its Managing Director and one of its Promoters, has been instrumental in the establishment and growth of the business. He has been associated with the Company for the last 34 years. Leads the manufacturing operations for the Company and has spearheaded technological and product innovation over the years

  • Sanjay Thapar is the Executive Director and CEO. He has over 30 years of experience in the auto industry. Previously he was Group Chief Strategy Officer with Ashok Minda Group; MD of Minda Valeo Security Systems.

Financials & Valuations

  • At cmp Rs. 360 company has mcap of Rs. 1080 cr and Enterprise Value of Rs. 1000 cr.

  • Company’s consolidated numbers for Q3FY22
    Sales: Rs. 92 cr
    EBITDA: Rs. 26 cr (28% margin)
    PAT: Rs. 14.90 cr
    EPS: 4.85 (quarterly)

  • Based on recent numbers company is available at decent valuations
    EV/Sales: 2.71
    EV/EBITDA: 10
    Price to Earnings: 18.5

  • Company has consistently given high operating margins over the years. Consistent focus on increasing share of exports and increasing share of Consmer Durables and 4 wheelers in overall mix will help them in maintaining these margins and bring incremental growth. Company has better sales growth and margin profile than the competitors.

  • Company did big capex in FY19. Full effect of this is yet to be seen as company is operating at low capacity utilisation.

SJS Product Wise Sale
sjs product segment
sjs export and 2w 4w cd



Strength/Opportunities

  • High Industry growth rate. It is estimated by CRISIL that in 2019, the size of the aesthetic market in North America and Europe was $2.7 bn plus another Rs.19.9 bn in India and growing at a CAGR of 20% and likely to do so for the next five to six years. The Indian market then by itself would be close to about Rs 5000 Crores by the year 2026. This 20% growth in aesthetic market is one and half times the growth of the underlying industries like two wheelers, passenger vehicles and consumer durables estimated to grow at 10 to 12% during the same period.

  • Large scale and High Volumes. What makes SJS unique and very tough for competitors is the fact that they manufacture 11 different types of products, catering to more than 7 end customer segments, have over 6000 SKUs in their portfolio. Annually produce 115 mn parts that they ship to 160 customer location in 20 countries.

  • Continuous focus on new product development. Company has dedicated New Product Development team. In last four years company has developed five completely new products, have in house design, development, engineering capabilities. They collaborate with customers to design their products as per their needs and today have a best in class new product development infrastructure. Recently acquired a chrome plating business. Chrome plating is Rs 1000 Crores business in India and this expands their total market quite massively.

  • Longstanding relationship with customers. So average relationship with the top 10 customers that they have is close to 15 years. This longstanding relationship provides them with an opportunity to cross sell products. Any new product that they develop can very quickly take it to market with our customers and we have not lost a single customer as on date. It has demonstrated the ability to grow, adapt and integrate its products in response to its customers’ needs. The Company’s robust account management processes resulted in an increase in the number of customers with whom it had over Rs.100.00 million in yearly annual sales from five in Fiscal 2016 to eight in the three-month period ended June 30, 2021 and, as a result, deepening their relationship with the Company and it becoming an integral part of their supply chain.

  • Low capacity utilisation offers an opportunity to pursue growth with minimum capex. Capacity utilization rates were of 44.07% in Bangalore and 52.88% in Pune, in Fiscal 2021, and its revenue from operations during Fiscal 2021 were Rs. 2,516.16 million and Rs.685.26 million, respectively. Also, its Bengaluru facility has additional land to undertake further expansion, if required, to capitalize on the growth of the industry.

Risk

  • 75% of SJS sales in FY21 came from Automotive customers. Growth rate of auto industry will directly impact SJS. Low auto growth in past was the reason for their low organic growth from 2018 to 2021. Company has heavy 2W exposure with 58% of sales in FY21.

  • Client concentration: . The company’s client exposure is fairly concentrated, opening it up to the risk of significant impact on revenues in case of reduction in demand or loss of any key customer. Sales to the top customer formed ~21.5% of FY21 sales. Further, the company’s top five and top 10 customers accounted for ~62.7% and 87.3% of FY21 sales, respectively.

  • SJS does not have firm long term commitment agreements with all its customers.

  • Private Equity firm Evergraph Holding Pts Ltd. (part of Everstone) holds 34.83% and are promoters in the company since 2015. They have helped the company a lot in growing in past 6 years by bringing in professional management. Any change in their long term commitment to the company is a key monitorable.

Disclosure: Invested

Sources:

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Great writeup @harshitgoel Sir. Their cross-selling and mining strategies seem to be very interesting.


image

Some examples of this:



In inorganic opportunities, they are looking to use the India operations as a low-cost manufacturing hub for exporting

Exports was around 16% of FY21 revenue and they intend to increase this

Margins are better in exports than in domestic, hence rising share of domestic sales is a lever for margin expansion

Some questions:
Any idea on whether their raw materials are being sourced domestically or imported?
Utilisation seems low around 50% and was low even pre-Covid. Any idea whether/by when they will be able to improve this to 70-80-90%?

Disc- no holdings as of now.

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They have expanded their capacity recently and that is why the utilization is low. Chances of revenues to become double within 3 years with better utilization

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@harshitgoel You have highlighted the point for PE investment Evergraph in the Risks section. I would like to know what if scenario in case Evergraph decides to sell remaining stake and if it does not find any buyer then I think it will be price overhang for long time for this company. I was not able to get any insights in management calls or Pre-IPO Analyst call regarding this point. If we have a commitment from Evergraph that they will stay as Investor in SJS for next 10 years then only it will give a stability but if they decide to sell the entire or partial stake then other investors will have to pay the price for that even after good financials.

Would like to take views of other group members on this.

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Some questions-
How much of the car is contributed by aesthetics components? (E.g. what is SJS’ content per vehicle?)
Can consumer durables become a sizeable portion of revenue in the future to the extent where SJS is not just an ‘auto ancillary’ business?
Since they are also selling to other auto ancillaries like Visteon, Marelli etc- how much of revenue comes from this? (Also, is it right to assume that margins would be lower here than in direct-to-OEM sales?)

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Any idea how one can get 10 years financials of SJS? On screener, it is only 5 years- from FY17 to FY21. DRHP has only 3 years- FY19 to FY21.

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IDBI plant visit note

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Their Raw materials cost about 60% is sourced within India only in FY21 and as per management they don’t have any fixed term contract with their suppliers but due to their long term standing relationship with them they are able to negotiate good deal with them and as volume rises in future they are able to enjoy flexibility in cost.

Utilisation part in one interview Mr.Jospeh had said that before 2019 or in 2018 they had shifted their factory in new place so because of that capacity utilisation is low and after that covid appears which also created difficulty in increasing utilisation so FY22 We have to see wheather they will be able to scale their utilisation or not.

My questions
1.In which segment SJS has high margins.
2.what If their clients started making inhouse products because several OEM and 2W are seeing consumers are preferring premium products so to save their cost they can do in-house production so that their is low cost in making vehicles.

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SJS has higher margins in newly developed premium products like 3D dials, IML, IMD, capacitive overlays and optical plastics. In few products they are the only players in India as per management guidance. After visiting their state-of-the-art plant I feel its highly unlikely that Auto OEM’S or tier 1 suppliers will backward integrate as it is not that easy to setup a plant of their standards. Also with the low value products with tremendous focus on precision as their aesthetic products and dynamic nature of the industry where you have to continuously innovate its not easy to scale up the business for a new entrant I feel.

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Also in the export segment OEM’s are obviously looking for a reliable supply chain apart from China, so backward intergrade every component is not possible, the main part they want to focus & keep making themselves is Design Architecture which is also they are focusing to outsource in near future, Bcoz R&D in Europe in house will cost them 100-200 euro in every hour which is 8-10K per hour & where CMO’s provide them with very minimum cost

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Have you visited the plant which one Pune or Bengaluru ?
I’m asking from business segment perspective which segment has high margins 2W,PV or home appliances?

Okay Can you share some insights related to below mentioned points:

  • How’s their Overall infrastructure of plant is it safe environmentally friendly and whether they follow covid protocols.
  • How many employees works at a time any rough estimate of total workforce in Bengaluru.
  • How they manage their supply chain like their logistics team.
  • Flexibility in plant operations to cater huge Demand.

Please share some more insights besides above mentioned questions.

Got introduced to this company by @Worldlywiseinvestors in their video of Proxy stocks.
The company after investing in a state-of-the-art plant in Bangalore, is sitting on huge operating leverage.
Company is having excellent Margin Profile (25-29%) and as per CRISIL reports the entire Aesthetics industry is expected to Grow @ 20% CAGR till FY26.

Management Guided for doubling the sales in next 3 years which I believe is a conservative guidance.
even if the company finishes FY22 with 350cr of sales, taking the lower end of the Margin guidance (25%), the company should do a EBIDTA of around 87 cr. at a current Mcap of around 1300cr. the multiple comes around 15x which seems to be cheap for a strong Company like SJS. Management also guided that they have buying leverage when it comes to raw materials and indicated that they dont get much affected by inflation and they are looking to increase their export share

Auto Cycle revival, Strong management Team, very strong return ratios, good cash flow and a fast growing aesthetics industry all combines to make a very strong investment case here.

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The only thing concerned me is their raw material cost, They use polycarbonate and polyester film which is derivative of crude oil so may be their is some cost of material pressure in Q4 due to higher crude price.
I’m waiting for Q4 MG comments on the same and their yearly guidance There is no doubt that company is cheap in today’s term.

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Plenty of headwind is there in short term , obviously margin is going to impacted bcoz of crude price, but once tailwind hits in coming years it can generate huge sales with good margin

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Yeah it’s true I also agree with it there is so much value trigger-Sales growth+Margin expansion+Utilisation improvement+exports+New premium products+Turnaround of exotech which further contributes in bottom line.

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@harshitgoel thanks for starting this thread.

I wanted to share something investors may not have gone through. CRISIL wrote a report on the aesthetics industry, and this is where SJS pulled a lot of data for its DRHP. The document has a lot more detail on the breakdown between logos, decals, etc and more importantly, information on the unlisted competitors.

I’ve been trying to understand the Exotech acquisition in more detail. Chrome plating has had a chequered past abroad due to a particular element called Hexavalent Chromium used during the process that is cancerous to humans. Due to this element, companies abroad shifted away from chrome plating, and it is banned in the EU/US. (Similar to leaded petrol vs unleaded petrol in the past)

Those that wanted the chrome plated finish looked for alternative production procedures, and in the recent past, have found success using a non cancerous form of chromium called trivalent chromium, but this comes with its own disadvantages, namely a lower efficiency of the process, as well as the look of the finish.

Countries like India and China continue to use hexavalent chromium, and I’ve not found a definitive answer on Exotech on the process it uses for producing the chrome plated parts. One hopes that it isn’t using hexavalent chromium, and that management has cracked the problems trivalent chromium brings with it, but I’d like to know more definitive details.

Would really value insight from those in the industry :slight_smile:


D: invested.

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Hello everyone,
In their Invetors presentation it shows that they have customers in Russia. Won’t the current crisis affect their sales in that region?
Will this affect them in any other way?

Disc - Not invested (yet)

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Some 16% of the company’s revenue comes from exports. Digging a little deeper, as of FY21, they have two customers that have exposure to Russia as the end user geography. These two clients form ~13.5% of the revenue.

This 13.5% covers Europe, Russia, Mexico, Brazil. Client is called Visteon if you’re interested to look further.

I’d wager the end exposure to Russia is <1-2%.

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