BUY on Galaxy Surfactants - Higher per-unit EBITDA drives earnings - HDFC Securities

Mr. Nilesh Ghuge & Mr. Harshad Katkar, Institutional Research Analyst, HDFC Securities.

Our BUY recommendation on GALSURF with a price target of INR 2,100 is premised on (1) stickiness of business as 55% of the revenue mix comes from MNCs, (2) stable EBITDA margins at >12% since fluctuations in raw material costs (RMC) are easily passed on to customers, and (3) strong return ratios (RoE/RoIC of 22/18% in FY22E).

View on the result: EBITDA/APAT was 74%/2.3x higher than estimates, attributable to (1) 23% higher volumes and (2) 42% higher per-ton EBITDA.

Resilient performance despite the pandemic: 1Q revenue declined merely by 8/9% QoQ/YoY to INR 6bn due to (1) only 11/5% QoQ/YoY decline in overall volumes, (2) 4/-4% QoQ/YoY growth in per-unit realisation. Strong demand for performance surfactants (+8% YoY) was offset by lower demand for speciality care products (-26% YoY). Increased awareness for hygiene, given COVID-19, led to a spike in volume offtake for the former; however, as discretionary spending reduced during the pandemic, the latter suffered a blow. Despite a strong demand, labour shortage and lower production by customers (supply constraints) dragged overall volumes of the company.

Margins: Gross margin dipped by 217bps QoQ to 34.2%. However, EBITDAM corrected merely by 73bps QoQ to 14.9% owing to 199bps dip in opex margins. Lower opex (-21% QoQ) was consequential to curtailed repairs and maintenance, travel, power and fuel expenses, which are likely to recover with volume. The company should be able to retain its GM/EBITDAM at 34.4/14.3% in FY21E (33.9/14.2% in FY20), driven by robust demand for performance surfactants (+12% YoY), given COVID-19.

Performance Surfactants' volume grew 8%YoY despite supply constraints: Total volumes declined by 5%YoY to 52kT, predominantly owing to 26% YoY contraction in Specialty Care volumes to 15kT. Performance Surfactants (70% of vol mix) grew 8%YoY to 36kT. Blended volume growth was driven by the Africa/Middle East/Turkey (AMET) market (mainly, Egypt) that grew 10%YoY (42% of volume mix). Indian demand (37% of the 1Q volume mix) contracted 2%YoY. April and May 2020 were poor for the Indian market. However, volumes picked up in June. Volume declined 27%YoY from the RoW market (rest of the world) that comprised 21% of the 1Q volume mix.

Change in estimates: We raise our FY21E EPS estimate by 44% to INR 62.9, led by (1) faster-than-anticipated recovery in volumes, with improvement in the Egypt and Indian markets, (2) buoyant demand for performance surfactants as COVID-19 acts as a tailwind, (3) higher-than-anticipated per-ton EBITDA margin in 1QFY21. We cut our FY22E per ton EBITDA by 15%, in line with the management's guidance leading to a 10% correction in EPS.

DCF-based valuation: Price target of INR 2,100 is based on Mar-22E cash flows (WACC 10%, Terminal growth 3.0%). The stock is trading at 21.8x FY22E EPS.

Shares of Galaxy Surfactants Ltd was last trading in BSE at Rs.1835.5 as compared to the previous close of Rs. 1887.15. The total number of shares traded during the day was 20444 in over 3319 trades.

The stock hit an intraday high of Rs. 1940 and intraday low of 1745.05. The net turnover during the day was Rs. 38041657.

Source : Equity Bulls

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