JNK India manufactures heating equipment such as process-fired heaters, reformers, and cracking furnacesrequired in process industries such as for oil and gas refineries, petrochemical and fertilizer industries. Over the years, the company diversified into flares and incinerator systems and has been developing capabilities in the renewable sector with green hydrogen.

Since its inception, the company has been working closely with JNK Global Co (formerly known as JNK Heaters Co), a KOSDAQ-listed company. JNK Global is the only industrial-use process fired heater producer in Korea. It is ranked amongst the top three industrial use process fired heater producers globally. The company acts as a global joint engineering and implementing partner for JNK Global for certain projects in heating equipment.

To strengthen its relationship, the company entered a co-operation agreement on May 17, 2023, with JNK Global to cover among others marketing and geography of operations. The company can use the logo and trademark of JNK Global. JNK Global will be mainly responsible for markets in Asia excluding India,the US, and Russia. JNK India will be responsible for markets in Europe, Africa, South America, and the Commonwealth of Independent States.

The co-operation agreement will facilitate penetration into global markets that otherwise would not have been possible with its limited capabilities. The agreement restricts its entry to certain overseas markets such as the Middle East. Here, the company is required to consult with JNK Global.

JNK Global is one of the corporate promoters of the company, holding a stake of 18.06% (post-issue expanded equity, down from 25.79% pre-issue). Other promoters of the company are Mascot Capital and Marketing (post-issue 32.65%), Gautam Rampelli (8.34%), Arvind Kamath (nil), and Dipak Kacharulal Bharuka (8.92%).

In the over 13 years of presence in the heating equipment industry, the companyhas developed capabilities inthermal designing, engineering, manufacturing, supplying, installing, and commissioning heating equipment. It caters to both domestic and overseas markets.

The company as of December 31, 2023, had served 21 customers in India and eight customers overseas. It caters to both end customers as well as contracting customers (i.e., EPC players). While end customers accounted for 27.29% of the revenue in FY 2023 and 45.37% of the revenue in 9M FY2024, the contracting customers accounted for 72.53% of the revenue in FY 2023 and 54.63% of the revenue in 9m FY 2024.

In the end use industry, the company derived 77.25% of the revenue from the O&G sector, 16.17% from petrochemicals, 0.20% from fertilizers, and 6.38% from others.

In India, the company has completed projects in Andhra Pradesh, Assam, Bihar, Karnataka, Kerala, Maharashtra, Tamil Nadu, West Bengal. Worldwide, it has completed projects in Nigeria and Mexico. Moreover, the company has completed projects in far-reaching locationsincluding projects in India at Numaligarh, Assam; Kochi, Kerala; Barauni, Bihar; and overseas at Lagos, Nigeria. Further, it has ongoing projects in Gujarat, Odisha, Haryana, and Rajasthan in India and in Oman, Algeria, and Lithuania globally.

Some of the domestic customers include Indian Oil Corporation, Tata Projects, Rashtriya Chemicals & Fertilizers, and Numaligarh Refinery. Further the company has catered to overseas customers such as a leading EPC company in Europe, a leading O&G exploration & production company in Oman, and a Middle East arm of a European EPC company in O&G.

Export revenue accounted for 68.8% and 18.34% of the revenue from operations in FY2023 and 9M FY2024, respectively.

The company has diversified into designing, engineering, installing, and servicing waste gas handling systems including flares and incinerators systems. Revenue from flares and incinerators to total revenue from operations was 17.33% in FY 2023 and 7.18% in 9M FY2024.

Similarly, in June 2022, the company diversified into renewable energy systems though a subsidiary, i.e., JNK Renewable Energy(JREPL). JREPL currently supplies grey hydrogen through onsite and offsite production and storage systems and is working towards capabilities of producing and storing green hydrogen systems. JREPL is also building capabilities in the renewable sector, with onsite hydrogen production hydrogen fuel stations and solar photovoltaic EPC, forming part of the green hydrogen value chain. Sales of JREPL was a miniscule Rs 1.96 crore in FY2023 and Rs 0.17 crore in 9M FY2024.

The company operates an in-house fabrication facility at the Mundra Special Economic Zone in Gujarat. This is spread over 20,243 square meters, with an installed capacity of 5,000 tonnesof fabrication and modularization per annum.Fabrication at the Mundra facility is undertaken for exports. So most of the fabrication process is out-sourced to third party fabricators.

The Issue

The issueconsists of a fresh issue of equity shares of Rs 300 crore and an offer for sale (OFS) of up to 8421052 equity shares from the promoter selling shareholders and individual selling shareholders.

Object of the issue

Of the net proceeds from the fresh issue, about Rs 262.69 crore will be utilized for funding working capital requirement and balance towards general corporate purposes. The selling shareholders will be entitled to the proceeds from the OFS (net of its portion of the offer-related expenses). The company will not receive any proceeds from the OFS.

As on January 31, 2024, its borrowings were Rs 157.057 crore on a consolidated basis.

Strength

An established player in heating equipment market, with a market share of 27%

A wide heating equipment product portfolio comprising heaters, reformers, and cracking furnaces.

The order book at the end of December 31, 2023, stood at Rs 845.027 crore [domestic OB Rs 729.202 crore and overseas OB Rs 115.825 crore]. This is 2.07 times of the FY2023 revenue. Of the order book, about Rs 387.257 crore is from contracting customers and the balance from end users.

Weakness

Derived most of its revenue (54.4% in FY2023 and 27.1% in 9M F20Y24) from JNK Global (one of the promoters), whose experience and technology support are used for selected projects. Orders from JNK Global, as a contracting customer, at the end of December 2023 were Rs 88.984 crore (or 10.53%). Any kind of dissociation with JNK Global may have an adverse impact on the business and cash flows.

Heavily dependent on the capital expenditure of O&G refineries and the petrochemical and fertilizers industries as they are the primary customers for heating equipment.Any slowdown or delay in order placement from these industries will impact the fortunes of the company.

Expansion into new business lines may not be successful.

The immediate relatives of one of its promoters (members of Arvind Kamath), who are deemed to be a part of the promoter group under the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements), 2018, have not provided consent, information or any confirmations or undertakings for themselves. This is required to be disclosed by a relative who is part of the promoter group in the Red Herring Prospectus.

Does not have any R&D facility. May have to rely on one of its corporate promoters, JNK Global, for any new technological development.

Valuation

Sales for FY 2023 were higher by 37% to Rs 407.30 crore. With the OPM contracting by 120 bps to 17%, OP was up 29% to Rs 69.26 crore. The growth of PBT was 31% to Rs 62.71 crore. Net profit increased 29% to Rs 46.36 crore.

In 9M FY 2024, net profit was Rs 46.21 crore on an operating revenue of Rs 253.39 crore.

The EPS for FY2023, based on the post-issue expanded equity, stood at Rs 8.3. The PE at the upper price band of the asking price worked out to about 50 times.

In comparison, Thermax and BHEL, which manufacture heatersbut do not makereformers and cracking furnaces,are quoting at a PE of 119.6 times and 195.9 times their consolidated FY2023 EPS, respectively. Patels Airtemp, which is engaged in manufacture of Heat Exchangers quotes at a PE of 25.6 times of its FY23 EPS. Engineers India, the larger EPC player largely focused on the O&G sector, quotes at a PE of 33.5 times.

The company quotes at an enterprise value (EV) of 3.16 times its order book as of end December 2023. In comparison, the EV/OB stood at 5.43 times for Thermax, 4.03 times for BHEL, 3.46 times for Engineers India.