SJS Enterprises Ltd

my take on sjs

SJS ENTERPRISES

Business

• Operates in the high value-add aesthetics market across multiple consumer-oriented end industries.
• One of the leading players in the Indian decorative aesthetic industry, designs products according to the customer’s needs.
• Leading edge technologies and a wide product suite including decals, appliques/dials, overlays, logos/3D lux, aluminium badges, in-mould decoratives (IMD), optical plastics and lens mask covers for diverse applications

• Top 5 customers contributed 63% and top 10 contributed 87% of the total revenues in 2022 (recent data is not provided by the company), although this is reducing with addition of the new clients of Walter Pack and Exotech.

• All their clientele are blue chips and have been with the company for decades.

• The Bangalore facility is fungible, allowing them to interchange product mix based on customer requirements.

• The succession planning of the company is secure with the current managing director Mr. K.A. Joseph’s son Mr. Kevin K. Joseph being active in the business

• SJS has never lost a single customer till date. This indicates some kind of switching costs with their products, also proves the quality and delivery of its products and trust of all its customers in them.

• Bengaluru has additional land available for future capex.

• As the volume of orders increases, customers demand higher discounts.

• None of the peers are in all the aesthetic segments except SJS.

• In Q1 FY23, Exotech won its first export contract with whirlpool.

• The company is trying to get HERO on board as a customer.

• One of the key benefits is that the products are light and easy to ship. This brings down the freight cost as a percentage of sales.

• Open to inorganic acquisitions, but very selective.

• Very interactive products and services, have a whole floor where they do creative work and trials in front of customers and make it as customised as possible.

• On a standalone basis SJS has had the lowest margins since the last 7 quarters, this was due to lower 2 wheeler sales, lower export sales and wage rate hike by approximately 2%.

• The products supplied by Walter are in a near monopoly situation, with them having close to 100% market share.

• The technologies acquired by SJS through the Walter acquisition compared to the current SJS and Exotech technologies.

Financials

• The margins of the company on a standalone basis have been consistent over the years at greater than 25%, indicating some kind of pricing power which prevented the margins crashing in downcycles.

Management

• The management is very experienced and are technocrats.

• The company is run by a professional management, with the promoter guiding and directioning the team.

Guidance

• SJS expects over 50% YoY revenue growth on account of expected positive outlook for 2W, PV and Consumer Durables, , while ebitda and pat growth will be a bit lower at around 40% for FY24. As they plan to balance high growth with margins.

Premiumisation + New Customer Wins + Exports + WPI Acquisition = Higher than industry sales growth for SJS

• SJS has a very high visibility of the with the current order book being over 85% for the FY24 forecasted revenue.
• Organic growth expected at ~20-25% CAGR, with best-in-class margins
• SJS will continue to outperform the industry despite the continuing macroeconomic headwinds in export markets and gradual recovery in domestic 2W market

Entry barriers

• In this industry, the companies need to maintain a large number of SKU’s as clients prefer to choose from a larger collection with many options, SJS has 6000+ SKU’s.
• SJS has Long standing relationships with customers, due to this a newly developed product can be quickly taken into the market and can reach scale comparatively faster than the firm which has recently entered the industry.

Risks

• Client concentration risk, a significant part of their revenues is derived from the top 10 clients.
• As the company deals in aesthetic products and not necessary or critical products, there is a huge risk of changes in trends and tastes of different customers. Right now the company is doing good but maybe tomorrow the trends change and maybe SJS will not be able to adapt or develop these products.
• Heavily dependent on two wheeler sales growth as majority of customers are two wheeler oem’s (although this will reduce as Walter Pack serves the four wheeler industry).
• PE firm Evergraph holds 34.83% of the total equity of SJS. Any change in their long term commitment is a risk.
• Highly competitive industry, with some products being commoditized. Although this isn’t impacting SJS as they seem to be able to maintain their margins even in downcycles.
• No long term contracts with any of their suppliers, this may lead to raw material availability and price volatility in future.

Triggers

• The acquisition of Exotech helped the company gain not only its products, technologies, management team but also its customers. This will provide SJS with various cross-selling opportunities, by selling SJS’s product to Exotech customers and also vice versa.
• Exports is a higher margin business. Currently the exports are in low double digits (less than 20% when reported last), the management wants to focus and grow the exports business. It’s already increasing Q-o-Q except this quarter as there were some demand issues.
• The capacity utilisation at Exotech is close to 100%, but for SJS and Walter Pack is at close to 60-65%. Thus as the utilisation increases the operating leverage will kick in and increase margins.
• Expanding chrome plating capacity to meet higher demand pipeline.

Double the chrome plating capacity to support revenues of Rs 300 crores from the current Rs 130 crores capacity.

Higher capacity will also enable entry into global markets.

• The company is focusing on new product development.

• Chrome plating market in India is currently greater than 1000 crores, Exotech is currently at only 140 crores.
• SJS also serves consumer durable durable manufacturers. As we are currently seeing the real estate demand increasing, also now with the interest rates expected to cut down due to the inflationary period ending. The demand for real estate is expected to increase further thus increasing demand for the consumer durables, in turn benefitting SJS.
• Shift towards premium, more aesthetically pleasing and more technologically superior products, like optical plastics (touch screens) and chrome plated parts. Shift towards higher costing products (analogue to digital speedometer).

• The Walter Pack acquisition will help in diversifying the end industry revenue split as it majorly serves the passenger vehicle segment. It will also provide various cross selling opportunities.
• The Walter Pack acquisition will lead to margin expansion for SJS on a consolidated basis, as EBITDA margins of Walter are at 30% (significantly higher than SJS). Although one thing to note is that just this year the margins touched 30%, previously they were below 20%. Walter also has a ROCE of 50%.
• Speedy integration of Walter into SJS as the SJS management decided to retain the founder of Walter to help with faster integration and better results.