IPO: JNK India

JNK India, a heating equipment manufacturer, is launching its IPO (initial public offering) on April 23, 2024. To help investors make an informed decision, below is a breakdown of the company's strengths, weaknesses and growth prospects.

In a nutshell

• Quality: Its three-year average ROE and ROCE were 53 and 58 per cent respectively, between FY21 and FY23.
  
• Growth: Its revenue grew 72 per cent annually between FY21-23. Further, its PAT (profit after tax) compounded by 68 per cent annually during the same period.
  
• Valuation: The stock is valued at a P/E and P/B of 49.8 and 4.9 times, respectively.
  
• Overview: The growing demand for heating equipment in the oil and gas industry is expected to drive growth. However, the demand for renewable energy might affect the company's financials if it is unable to scale its offerings for the petrochemical and fertiliser industries.

About JNK India

JNK India is the Indian subsidiary of South Korea-based JNK Global. The company manufactures critical heating equipment such as process-fired heaters, reformers and cracking furnaces for use in the oil and gas, petrochemicals and fertilisers industries.

Strengths of JNK India

• Support from promoter company: JNK Global holds a 16 per cent market share (including JNK India) globally and provides customers to JNK India.
  
• High entry barriers: JNK India enjoys a sizable market share in an industry with high entry barriers. New entrants find it difficult to scale up due to the stringent quality norms and high switching costs.

Weaknesses of JNK India

• Working capital intensive: The company operates in an industry with high working capital requirements. As of FY23, it recorded 105 working capital days, with the average trade receivables accounting for 35 per cent of revenue between FY21 and FY23.
  
• High revenue concentration: As of the nine months ending December 2023, the company derived the majority of its revenue from the oil and gas industry.

Risk report

Company and business

• Are earnings before tax of JNK India more than Rs 50 crore in the last 12 months?
  Yes. It reported a profit before tax of Rs 61 crore in the nine months ending December 2023. It also reported a profit before tax of Rs 63 crore in FY23.
• Will JNK India be able to scale up its business?
  Yes. The increasing demand for energy and consumption patterns will help the company scale its business.
• Does JNK India have recognisable brands with client stickiness?
  Yes. The company is a recognisable brand as a manufacturer of heating equipment.
• Does the company have a credible moat?
  No. It faces stiff competition from other players in India and globally.

Management

• Do any of the company's founders still hold at least a 5 per cent stake in the company? Or do the promoters have over 25 per cent stake in the company?
  Yes. Post-IPO, the promoters' stake will be around 68 per cent.
• Do the top three managers have over 15 years of combined leadership at JNK India?
  Yes. Key managerial personnel and senior management have over 15 years of combined experience.
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. No information to suggest otherwise.
• Is the company's accounting policy stable?
  Yes. No information to suggest otherwise.
• Is the company free of promoter pledging of its shares?
  Yes. The promoters have pledged no shares at present.

Financials

• Did the company generate a current and three-year average return on equity of more than 15 per cent and a return on capital employed of more than 18 per cent?
  Yes. Its three-year average ROE and ROCE are 53 and 58 per cent, respectively, between FY21 and FY23. In the nine months ending December 2023, its ROE and ROCE were 28 and 27 per cent, respectively.
• Was the company's operating cash flow positive during the last three years?
  No. It reported negative cash flow from operations in FY23.
• Is the company's net debt-to-equity ratio less than one?
  Yes. Its debt-to-equity ratio, as of December 2023, was 0.4 times.
• Is JNK India free from reliance on huge working capital for day-to-day affairs?
  No. The business is working capital intensive, with a recorded working capital day of 105 days in FY23. Working capital requirements accounted for 29 per cent of the operating revenue as of FY23.
• Can the company run its business without relying on external funding in the next three years?
  Yes. While the business is working capital intensive, the IPO proceeds should ensure that it does not rely on external funding for the next three years.
• Is JNK India free from meaningful contingent liabilities?
  Yes. Contingent liabilities as a percentage of total equity stood at around 0.1 per cent.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. The stock offers a 2.7 per cent operating earnings yield on its enterprise value.
• Is the stock's price-to-earnings less than its peers' median level?
  Yes. The stock is valued at a P/E of 49.8 times compared to its peers' median P/E of 91.7 times.
• Is the stock's price-to-book value less than its peers' average level?
  Yes. The stock is valued at a P/B of 4.9 times as compared to its peers' median P/B of 8.3 times.

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

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