Company seems well equipped to meet opportunities in terms of higher demand (Unutilized capacity), speciality application (R&D, Patents). However, IPO offer seems priced to perfection compared to fundamentals as well as relative to speciality chemicals peers.
Galaxy Surfactants, a chemical intermediate major with its end market as FMCG products, has called upon primary market once again. Unlike its maiden attempt in 2011, when it had to withdraw its IPO, this time market conditions appear conducive. Further, Galaxy Surfactants itself has scaled up its operations since then and expanded its range of products and patents. Interestingly and not surprisingly, this is coming at a price.
While the year 2011 offer price quoted company at ~14x FY 2011 earnings, now the IPO price is at about 36x FY 2017 earnings. In other terms, while company’s sales have jumped ~3.5, expected valuations have surged ~6.5 times, since 2011.
In last couple of years, broader benchmark indices have re-rated and some pockets like specialty chemicals command premium valuation on earnings visibility. However, investors need to be careful in selecting there investment options as the margin of safety shrinks.
Galaxy Surfactants ltd, incorporated in 1986, is a major manufacturer of Performance surfactants (65% of FY17 sales) and Specialty care products (35%) used for the personal care and home care segments of the FMCG industry. Further, company caters to most of the known names in FMCG sector: Unilever, Himalaya, Colgate, P&G, Dabur, Reckitt Benckiser, L’Oreal etc.
Galaxy has 7 manufacturing facilities (2 overseas), with aggregate capacity of 3,50,860 MT and it sells 66% of goods to overseas market.
Internationally, the company competes with the likes of BASF, Clariant, Croda international, Evonik, Solvay and Innospec. Domestically, company is amongst the key players. Aarti industries, Ultramarine and Pigments, India glycols and Godrej consumers are amongst few in the listed space having exposure to surfactants business.
Performance surfactants (45 grades) are used as raw materials for the personal and home products like shampoos, conditioners, body wash, toothpastes, and detergents. Main function of these products are to stabilise a mixture of oil and water by reducing the surface tension and are utilized to remove dirt from skin, hair and textiles. These products have inelastic demand and considered essential for the end market products.
In contrast, Specialty care products (155 grades) impart specific functional property like UV protection, germicide, proteins for skin care and therefore command higher margins.
This IPO is an Rs 937 crore Offer for sale (based on upper price band), open for subscription from 29th th Jan to 31st Jan’18. Post issue, the issue will constitute ~18 percent of the paid up equity capital and promoters holding would reduce from 77% to 71%.
Company operates in the global surfactants industry, which is estimated to be of market size USD 30.65 billion (Acmite Market Intelligence, 2015). As per Acmite, surfactants usage in the end-markets company cater to, namely, Personal care and Household cleaning, constitute 20% and 35% respectively of the global surfactants industry. At current run rate, Galaxy’s market share in global surfactants industry is roughly about 2 percent, underlining huge addressable market, the company can look up to.
Indian surfactants market size is estimated to be USD 1.35 billion, of which, Personal care and Household cleaning end-markets, together constitute 49 percent share. According to Acmite, Galaxy’s focus market i.e. surfactants usage in Personal Care industry is expected to grow at 7.6% CAGR till 2024.
Risk: Raw material and currency fluctuation
In general, raw material constitutes a significant portion of sales (~70% of sales) and hence remains a key operating business risk parameter. Some of the key raw materials for the company are imported from South East Asia, USA and Europe.
While surfactants can be prepared from either petrochemicals or oleo chemicals; the share of oleo chemicals in the surfactants production is increasing particularly for the personal care usage.
In case of Galaxy, feedstock used is oleo chemicals which is derived from palm oil, palm kernel oil and coconut oil. Of this, lauryl alcohol requires special mention which is derived from Palm kernel, imported from South East Asia. As its pricing trend has been volatile, it would be a key monitorable for the company.
Peers: Valuation elevated
While there are no listed company dealing only in surfactants, Aarti industries and Ultramarine and Pigments cater to surfactant business as well along with other high margin specialty chemicals business. So though there is no exact peer available, these two companies appear to be among the closest peer in the specialty chemical space. While Aarti industries also cater to pharma, polymer additives, rubber chemicals markets; Ultramarine has offerings for pigments, coating industries.
Compared to peers, Galaxy Surfactants’ valuation appear to be elevated.
Table: Peer comparison
Source: Thomson reuters, Moneycontrol,
*Note: Implied market cap, multiples based on upper price band in the IPO
While both the peer companies enjoy relatively higher margins, their return ratios are lower that of Galaxy Surfactants. While we don’t expect any expect any dramatic change in the margin profile of the company considering dynamics of the industry, a volume led growth can be expected due to industry dominance, client reach and the available capacity.
Chart: Capacity utilization ~59-60%
Source: Company presentation
Overall, Galaxy Surfactants is expected to be guided by steady growth in medium term on account of exposure to end markets. Company seems well equipped to meet opportunities in terms of higher demand (Unutilized capacity), speciality application (R&D, Patents). However, IPO offer seems priced to perfection compared to fundamentals as well as relative to speciality chemicals peers. Hence, this IPO is suited only for long term investors with high risk appetite, in our view.
For more research articles, visit our Moneycontrol Research Page.