Anubhav Sahu
Moneycontrol Research
Galaxy Surfactants, the chemical intermediate major with its end market similar to that of as FMCG products, posted another quarter of volume-led growth. Its close client partnerships with fast moving consumer good majors and brownfield expansion assures steady demand visibility in the medium term. The management’s continuous focus on new formulations assures sustenance of margins in the current fiscal. The recent price correction in the stock eases valuation concerns.
Volume-led growth in Q4
Net sales increased 7 percent year-on-year (YoY) led by low double-digit (around 11-13 percent) volume growth. In the domestic market, it continues to witness ahead-of-industry growth and rise in market share. But its international operations witnessed a sequential decline in sales due to seasonality and timing of despatches.
Gross margin improved due to moderate increase in raw materials cost. However, raw material expense surged ahead of topline growth on a quarter-on-quarter basis. EBITDA margin contracted 52 bps YoY due to higher employee cost (higher actuarial valuation of gratuity) and overheads. The management stated that if one does not take into account these one-off costs, then margins were about the same as last year.
Result snapshot
Source: Company
Closure of USFDA inspection
The US Food & Drug Administration (USFDA) has concluded inspections at both plants at Tarapur. As we noted in our earlier note, the inspection was procedural in nature having no financial impact.
Positive tailwind of patents
The company holds 49 patents as of now and is awaiting approval on 37 applications. The company spent Rs 45 crore on research and development in the last three years, which amounts to around a percent of net sales.
Given this context, new product launches remain a focus area. In the current fiscal, the management is focusing on three premium end products - baby care, body wash and hair care - based on sodium lauroyl glutamate.
Major revenue contribution from MNC FMCG customers
Around 55 percent revenue accrues from MNC players, 8 percent from regional and 37 percent from local players. Most of the known names in the FMCG industry are its customers.
Growing market size
The Indian surfactants market is expected to touch $2.28 billion by 2024, a compounded annual growth rate (CAGR) of 6.1 percent. The personal care surfactant market, to which the company majorly caters to, is the fastest growing segment and is expected to reach $0.47 billion by 2024, a CAGR of 7.8 percent.
In specialty products, personal care ingredients have the largest growth potential. Here the company’s products catering to UV absorber sunscreen, preservatives and mild-surfactants hold strong prospects.
Capex guidance
Galaxy Surfactants has guided for capex in the range of Rs 125-150 crore for FY19 which would be funded through internal accruals and utilised for debottlenecking capacity across all plants. Capex guidance includes $4 million investment for Tri-K Industries, where utilisation is at an optimum level. Benefits of capex would be realised in FY20.
Source: Company
Steady volume-led earnings growth
We expect sales growth in the next two years to mimic low double-digit volume growth. The management has guided for sustenance of EBITDA margins (12-13 percent) in the medium term, hence bottomline growth should essentially replicate volume growth.
The company’s dominant market share, long term strategic partnership, R&D focus and sole focus on personal care end market makes it a defensive bet in the chemical industry.
In the recent market turmoil, the stock corrected about 20 percent from its listing highs and trades at a fair 27 times FY19e earnings. Going forward, we expect the stock price to track earnings growth.
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