JAT’s journey of innovation and sustainability

Founder/Managing Director Aelian Gunawardene

CEO Nishal Ferdinando

The Daily FT – SC Securities joint multimedia initiative “Market Pulse” today features JAT Holdings PLC Founder/Managing Director Aelian Gunawardene, and CEO Nishal Ferdinando. In this interview conducted by SC Securities Asst. Manager Investment Banking and Marketing Dilusha Gamage, the JAT duo discuss the company’s journey thus far and future plans and prospects of the Sri Lankan construction industry. 

The interview is also available at FT TV at https://www.youtube.com/watch?v=8EUP3txUic&list=PLnJ3NNiAt8tqdqiwB7GGrh4M34E8LWG1E

Following are the excerpts.

Q: Congratulations on completing 30 years and celebrating the 30th anniversary of JAT Holdings. To start off let’s talk a little bit about the inspiring journey of JAT.

Aelian: Yes certainly a very interesting journey. As you said, I founded JAT Holdings 30 years ago. It all started when I was working at another paint company as marketing manager and looking after the industrial market I realised there wasn’t a high-end wood coating in the market. We had a very inferior and primitive kind of system based on nitrocellulose, a single component wood coating. In single component wood coatings, the coating dries when the solvent evaporates. So if any corrosive substance, solvent or any such material falls on it, it dissolves the coating. So I thought it was the right time 30 years ago in 1993, to introduce a more superior wood coating to the market, e.g. the two-component polyurethane. I suggested this to the Board at that time and like most large companies they were discussing the matter but there was a lot of procrastination. That started my entrepreneurial journey. When they were taking time over it, I thought why not do it and that’s when I started JAT. With JAT we introduced two-component, scratch, heat and chemical resistant, polyurethane (PU) coatings to the market, instead of just the normal nitrocellulose. We started as a company of two or three, and today we have expanded to around 400 employees. It’s been a steady and fantastic growth. We started with Sri Lanka being our primary market and now we have reached out to global markets, such as in the subcontinent and African countries with many more plans for the future. In 2021 we listed the company and now JAT is a public quoted company, something we are very proud of. So the journey has been from a typical single owner proprietorship to a listed company that is run by Nishal as the CEO. 

We started as a company of two or three, and today after 30 years we’ve grown to about 400 employees. It’s been a steady and really fantastic growth. We started with Sri Lanka as our primary market and now we’ve gone into different markets in the world such as markets in the subcontinent and African countries with much more plans for the future. In 2021 we listed the company and now JAT is a public quoted company and that’s something we are very proud of. So the journey has been from a typical single owner proprietorship to a professionally run listed company

Q:  As you said JAT is now operating in several countries and is the market leader in Sri Lanka, Bangladesh and the Maldives in wood coating. What is your product portfolio and in each of these markets what kind of a market share do you control?

Aelian: All these markets, whether Sri Lanka, Bangladesh or the Maldives were in the same primitive stage when we entered. In Sri Lanka as I said we had only nitrocellulose. In Bangladesh we didn’t even have nitrocellulose or even a spray gun; they just applied the coating with a wad. In the Maldives they were using French polish on their exterior timber. That was very inferior. As a result when we went into different markets like Bangladesh and the Maldives about 20 years ago, we had to introduce the same as in Sri Lanka, the two pack polyurethane initially to convert what they had to a high-end wood coating. Thankfully those markets were more receptive to change and we sent our technicians and based them there. I personally travel every month to all these markets in order to find the right customer, the distributors and introduce our product. Subsequently, we introduced water base coatings as well. The range of coatings we introduced has helped us to have a good market share. In Sri Lanka we have about 55% market, in Bangladesh about 40% of the total market with about 80% of the high-end market and in the Maldives we control about 45% of the wood coating market. Since we introduced the new technology with good technical service, we’ve been able to control that market share.

Q:  Nishal we’ve heard about the recent addition to the JAT group, the JAT Paints Africa Ltd, in Kenya. What is the objective in JAT expanding to Kenya?

Nishal: As Aelian said initially, when we went to Bangladesh and the Maldives and when we started in Sri Lanka they were primitive markets. Africa at present is in the same stage that Sri Lanka and Bangladesh were probably 20 to 25 years ago. Therefore, we saw this as a potential market which could also be converted to high quality wood finishes. Kenya is placed strategically in East Africa where countries abide by a treaty which allows for preferential tariffs when exporting from one to the other. Though our head office is in Kenya, we are looking at Uganda, Tanzania and Rwanda in East Africa. We have a joint venture with a Kenyan company under the name JAT Paints Africa and have exported two to three containers already. We are very excited about this venture as it’s the right time to be in Africa because of it’s probable double digit growth rate soon. After establishing in Kenya we will reach other surrounding countries. We have started manufacturing there as well and are looking at Africa as one of our next emerging markets.

Q:  Let’s talk about the incorporation of Volt Industrial Company the JV in Saudi Arabia that was announced to the stock exchange recently. It means entering into a totally different market for JAT, i.e. to develop electrical vehicle charges. What is the motive of JAT in entering a totally different market?

Nishal: Our focus on our core business is shown with all the backward vertical integration, forward vertical integration and horizontal integration. Another objective of the Company is that we want our dollarised revenue to reach above 50% of our total revenue. At present we are at around 30%. In about two years we are looking at reaching 50%. JAT being a pioneer in innovation we are not afraid to venture into new areas. Seeing EV charges as a futuristic business and wishing to invest in a futuristic business that would also generate dollarised revenue. What better region for this than the Middle East? We believe the Middle East is now the most thriving region in the world. We collaborated with good partners in Saudi Arabia named Safari Group and QSS and have acquired 40% of this company. Together with our technical partnership with a Sri Lankan firm, headed by Dr Beshan Kulapala, who led the team that developed the super car and the EV charging network in Sri Lanka, we have now expertise in-house. Dr. Kulapala is the head of research and development of Volt Charge, while our JV partners will take care of the Saudi operations and sales. This accounts for about 10% of our total investment while 90% of all investments to date is in the core business. 

Q:  One of the IPO objectives was setting up a state-of-the-art manufacturing facility in Bangladesh. JAT has met that target way before the stipulated time period. How does this manufacturing facility contribute to JAT and what is the contribution you are looking at in the future?

Nishal: As I said before, we have invested a lot in our core business and this is again another example of backward integration. I would say the timing of this was perfect because Bangladesh is also going through a bit of an economic crisis and curtailing imports and encouraging people to manufacture there. In that sense our timing has been excellent and we managed to complete the manufacturing facility one quarter before our target. Thereby we have been able to capture a great market share in Bangladesh because some of our competitors who are importers find it inconvenient to import finished products. So this year is a good year for us in Bangladesh and it reflects in our numbers. Next to our manufacturing facility in Bangladesh, we are setting up our alkyd resin manufacturing plant in the same premises. Alkyd Resin is the main raw material required for the manufacture of NC and PU wood paints. That helps the logistics and helps us with our margins as well. I think this project will be complete in the next four to five months. Thus we are focused on Bangladesh, and are very excited about that market.

About 70% to 80% of our business is in the refinish market. For instance, if anybody has painted their house walls or timber surfaces such as doors and windows with white by JAT or with our Sayerlack wood coatings or JAT wood coating, every few years they would want to refresh the coating and that market will always exist even though the construction industry goes through highs and lows

Q:  We are going through an economic crisis in Sri Lanka, and some would say it is not the right time for business. JAT is catering to the construction sector which is facing a challenging time due to the economic crisis.  Where do you expect the construction sector to lead in the future? 

Aelian: One of the first sectors that suffered when the interest rates went up and when the currency devalued was the construction industry. As a result, the prices of all raw material, such as steel, cement and tiles soared by about 80% while the interest rates were raised to about 30%.  Even if the developers can develop, the buyer needs to be able to borrow at a reasonable rate to purchase. That was a big concern for companies like ours as suppliers to the construction industry. The advantage that JAT has over several other companies is that we cater to a re-finish market. If you are supplying steel, you can only supply a new construction site, however, if it’s paint it is also used for companies or households who wish to refinish. About 70% to 80% of our business is in the refinish market. For instance, if anybody had coated their house with white by JAT or with our Sayerlack wood coatings or JAT wood coating, every few years they would want to refresh the coating and that market still exists as it didn’t drop as much as the new construction market. 

Making a bad situation worse the Government introduced a 15% VAT on new apartment sales. 

At present with interest rates dropping, construction companies and developers including JAT property Group are starting to build again. JAT Property division has started two projects with 103 houses in Hanthana and 112 apartments in Thalawathugoda. Hence, we foresee better times ahead, even though we did well through a tough year.

Q:  Nishal, as the CEO of the company you may have had to face challenges with high inflation, high interest rates and high construction cost. How did you manoeuvre through these challenges while ensuring that JAT is making profits and growing?

Nishal: These were the three main challenges that any company in Sri Lanka faced. Fortunately, we were blessed because when it came to the interest rates and the finance cost, even before the IPO we were cash positive. After the IPO in 2021 our cash reserves increased even more, which meant we had excess funds to invest at very high rates of return at 30% to 35%. Therefore, we gained directly during this period. 

If you consider the high inflation, the disposable income comes down. This is where our investment in our R&D centre really helped us, with focused R&D we introduced many innovative products that lowered the cost of the product, creating value for money while maintaining the required GP for the company. For example we introduced a white paint under the brand name WALLZ at a very good quality at a very low price. This benefited many people because when they were ready to paint they found it difficult to purchase the regular price paint. We also developed a three in one wood coating product, whereas traditionally it consisted of the stain, the topcoat and the base as different products. The three in one incorporates all three elements in one. Naturally this does not have the same clarity as the recommended process, but still has a good enough finish suitable for ceilings and pergolas that are seen at a height. Another interesting initiative was the white by JAT paint which is our flagship brand in the decorative sector. For the first time in Sri Lanka we offered an eight-year warranty on White wall paint. We invested heavily in testing and R&D equipment, probably the best in South Asia, with 15 world class chemists working in the R&D centre. They developed what we call the “colour guard technology” for the first time in Sri Lanka and we introduced it to the market. As a result, in the past when one should have repainted one’s walls within three years one can do so once in eight years now.  These were some of our initiatives. We also did not forget to look after our staff, and did not retrench any staff at JAT in the last three to four years amid COVID, the Easter attack or the economic downturn. In addition, we gave increments and bonuses to the staff every year while expanding, cared for them and relocated some to our overseas projects. We did not downsize as other companies did.  That’s how I managed the company as CEO during the difficult times and as a result we had two of the best years in JAT in terms of top line and bottom line in the last financial year and the previous year. 

Q:  We have seen that the export revenue of JAT has been increasing over the years. What are your plans for the future? Do you have any plans of entering into new markets?

Aelian: Certainly. This year about 30% of our revenue would be export oriented dollarized revenue. Next year we hope to push that to about 50% and then increase year on year. To achieve that we have to make substantial investments to develop markets like we have done in Africa and even in Bangladesh, developing our manufacturing not only for the production of the paint but the alkyd resin and acrylic binder plant as Nishal mentioned. We will produce in Sri Lanka and export at a competitive rate thereby increasing our export revenue. In addition, we are also looking at the Asian region with markets such as Vietnam and Indonesia where we can expand our wood coatings as those markets have huge potential with wood coatings. We have already visited and done some research which we will study seriously. We have also entered Australia with our furniture product range, signed a joint venture to start our showroom to initiate our kitchen business. In Australia the housing market is booming especially in Western Australia. We are working on one project with 11,000 houses and apartments. They like to work with companies such as ours because the Australian furniture manufacturers have not invested in large scale production units and are not well organised. When it comes to large orders, with SEAFORM our supplies from Germany we can easily meet these demands at competitive prices. Improving our export revenue is important and we have invested accordingly. Considering the EV charging business, Saudi Arabia as we all know is investing heavily in renewable energy.  So these investments we made last year and this year will generate results in the FY24. FY25 numbers of JAT.

Another interesting initiative was the white by JAT paint which is our flagship brand in the decorative sector. We gave an eight-year warranty for the first time in Sri Lanka with the help of our R&D centre. We invested heavily in equipment probably the best in South Asia and 15 to 20 world class chemists work in the R&D centre. They developed this for the first time which we call the colour guard technology and we introduced it to the market. Therefore, when before one would repaint within three years one can now do it every eight years

Q:  JAT is investing heavily on technology and at the same time you have to ensure that the company is growing and making profits. How do you strike a balance between high investments and making profits?

Nishal: We need to continuously invest in technology for two main reasons. One is that JAT is on the verge of taking on the world. We have expanded in South Asia and are now targeting Africa, the Asian markets, Australia and the Middle East. When we enter these countries, we need our R&D to be topnotch, because the products reflect what the R&D puts into it and the digitalization process also needs to back our processes especially in these countries. Secondly even in Sri Lanka other than JAT the other top three companies are large multinational paint companies. As a 100% Sri Lankan company we need to compete with them even in our homeland. For this we have to invest in technology. However, as shown in our numbers, though we are continuously investing in the business, we have always achieved the numbers in terms of profitability and turnover, we have promised our investors at the IPO. I believe this is because we do our fundamentals right and have a great strategic plan. We have a robust five-year plan that we are executing at the moment. In certain investments the timing is very important. We know each year the intensity involved in the profitability of these investments, and we counter it by certain other initiatives to balance the profitability. We know which years would have high profitability so that we invest even in subjects like training the staff to match the profitability. It is a result of our great senior management team and a staff that backs us fully. As I said, during tough times when a company stands by their staff the latter would naturally do anything for the company. We managed to pay our suppliers on time, so they have respect for the company and are part of our vision. All that makes it easy for us to invest heavily in technology while balancing the numbers. On top of that we pay a dividend of 40%.

 

Q:  JAT is a listed entity and what can the investors look forward to in the future?

Aelian: In this enviable backdrop, even with all these investments we have a positive cash flow. That’s why we are able to pay the 40% dividend despite the heavy investments. We intend to maintain that every year so the shareholders can depend on it. We’re not paying dividends at the expense of our progress or expansion. We are now number two in the paint industry in Sri Lanka, and we intend to become number one. We intend to expand into different territories with different product ranges in the international market. We have gone into forward and backward integration which would also add to the bottom line of the company. So all our shareholders and stakeholders can really look forward to JAT being a strong, ethical and well governed company. I have no doubt that our long-term shareholders would stand to benefit tremendously.