Moneycontrol
Last Updated : Nov 30, 2018 05:31 PM IST | Source: Moneycontrol.com

Galaxy Surfactants Q2FY19 review: Improved domestic growth outlook offset by weak international show

Company’s capacity utilisation level is near optimum level of 78 percent currently. In in light of the fact that it takes 2-3 years for new capacity to commission, company is primed for new capex plan to cater to steady demand from the FMCG sector.

Anubhav Sahu @anubhavsays
 
 
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Galaxy Surfactants posted another quarter of volume-led growth. Traction in domestic FMCG business was partially offset by the weak performance in AMET (Africa Middle-East Turkey) region. Company’s capex plans are on track and prepare it to cater to emerging demand from the FMCG sector in the medium term. Outlook of low double-digit earnings growth is expected to be led by volumes.

 Volume-led growth in Q2 FY19

Net sales increased 12.3 percent year-on-year (YoY) led by lower than expected volume growth of 7.4 percent. Volume improvement was majorly contributed by specialty care segment which witnessed a 30 percent growth over last year. Combined with Q1 FY19, specialty care witnessed a 25 percent growth in the first half indicating towards improving performance for the higher margin segment.

However, in the case of performance surfactants, there was a decline in volume sold (-3 percent) in Q2 mainly impacted by weak performance in AMET (Africa Middle-East Turkey). EBITDA margins improved to about 12.7 percent (+57 bps YoY) aided by better sales mix offsetting higher other expenses. In terms of EBITDA per kg, the improvement was 9.6 percent YoY.

Standalone business (72 percent of consolidated sales) – improving demand trend

The companyy witnessed strong volume growth in H1 FY19 (18 percent YoY) aided by base effect (GST impact) and improving demand trend in the home and personal care market. Though there were adverse impacts due ta o transport strike (Rs 4 crore) and plant shutdown in Taloja (4 days). It’s noteworthy that 50 percent of India’s business is exports and so effectively, India sales constitute about 36 percent of sales.

AMET business (~35-40 percent)

Macro situation in AMET region remains challenging exacerbated by currency volatility. Volume de-growth was 17 percent YoY amid downtrading which led to market share loss. Sales are expected to improve gradually. Management expects a better H2 for the AMET region compared to H1.

It is noteworthy that business to AMET is catered through Suez plant (25 percent) as well as exports from India operations. Broadly sales to AMET region is about 35-40 percent.

Capex plans

Company’s capacity utilisation level is near optimum level of 78 percent currently. In in light of the fact that it takes 2-3 years for new capacity to commission, company is primed for new capex plan to cater to steady demand from the FMCG sector.

In FY19, company is on track to spend Rs 140 crore which is used for debottlenecking initiatives. In H1 FY19, it has already spend Rs 90 crore which includes acquisition of land for new Tri K plant in USA (Rs 20 crore). New sulphonation capacity should commence in Q1FY20. Further management maintains a capex guidance of Rs 300 cr in next three years.

Intensified competition limits pricing power

Company has a significant market share (60 percent) in domestic business which makes it imperative that a good part of growth is expected from outside India. In India Company benefits from demand revival in FMCG sector and customer stickness due to long held relationships and quality of the product. And hence volume growth can mimic Industry wide growth. Having said that competitive intensity is elevated due to emergence of new players like AR Surfactants, Khurana, particularly on the performance surfactants business. On the high margin and qualitative product offerings MNCs like BASF continues to be a key competitor.

Going forward company may have to look for ways to replicate AMET success in other regional markets of the world.

 Volume led growth expected

 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.

While the stock price has corrected by 32 percent from the 52 week high, it is still trading at elevated multiple of 22x FY20e earnings. What keeps us on sideline is the growth slowdown in AMET region which majorly contributes to sales.  Though expectation for low double digit volume growth by itself is decent, limited pricing power and elevated valuation takes the sheen away.
First Published on Nov 30, 2018 05:31 pm
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