Galaxy Surfactants - EBITDA/kg has an upside risk - ICICI Securities

Galaxy Surfactants' gross profit/kg may grow at 2.3% CAGR over FY21-23E to Rs40.6 (6.2% CAGR over FY18-20) on rise in new-age ingredients. EBITDA/kg may rise at 6.3% CAGR to Rs19.6 during the same period (6.3% CAGR over FY18-20). However, H1FY21 performance indicates significant upside risk to our estimates as it has achieved EBITDA/kg of Rs18.4. Our estimates factor EBITDA and net profit growth of 16.6% and 19.4% CAGR, respectively, over FY21-23E, and ROIC reach to 22.4% (up 310bps since FY20) by FY23E. We believe Galaxy's valuations are reasonable at 22xFY22E and 19xFY23E EPS. We raise our target price to Rs2,298 (from Rs2,133) as we rollover our valuations to Sep'22. Maintain BUY.

- What is driving higher gross profit/kg and EBITDA/kg for Galaxy? Galaxy has seen its gross profit/kg and EBITDA/kg rise by 4.1% and 12.1% in H1FY21 (YoY) to Rs40.8 and Rs18.4, respectively. Many investors remain suspicious on improvement in profitability, which they believe may have benefited from higher lauryl alcohol prices. The company has denied any benefit from higher lauryl alcohol prices to gross profit. Nonetheless, we have analysed the sensitivity of the movement in lauryl alcohol prices to gross profit/kg since FY13; and we have not seen any relationship as verified by the company. Moreover, large FMCG companies are well-informed customers. These companies are unlikely to allow Galaxy make any transitional profit while they fight cost inflation.

The analysis of specialty care contribution and gross profit/kg has shown strong relationship during the same period. During FY15-19, 100bps rise in specialty care contribution has added Rs0.8 to gross profit/kg and vice-a-versa. But in the past 18 months, gross profit/kg has improved despite fall in specialty care contribution; the company assigned the benefit from rise in contribution from new-age ingredients.

- New-age ingredients have long runway for growth. Preservatives and mild surfactants contributed 35% to specialty care and 13% total revenue for Galaxy in FY21. 1) Regulatory push and rising consumer awareness on paraben-free products (due to suspicion of paraben being carcinogenic) are driving higher demand for non-toxic preservative. Non-toxic preservative adoption has been rising in Europe due to regulatory push; but US and other developing countries may also follow soon; and 2) mild surfactants are sulphate free and have pH equal to skin. The demand for total surfactants is 10mn TPA of which SLES is ~4mn. The contribution of mild surfactants is just 5% of SLES and therefore, it has long runway for growth in next decade. We believe revenues from preservatives and mild surfactants will grow at 2x (15-18%) of Galaxy's growth in next decade.

- Gross profit/kg and EBITDA/kg will grow at CAGR of 2.3% and 6.3% over FY21-23E. Last three years' volume growth has suffered from weakness in AMET from currency depreciation in Egypt and Turkey, two key markets, and slowdown in India. We expect demand to normalise in AMET and India over the next two years on favourable base in FY21 due to Covid-19 pandemic. We are assuming volume to grow at 9% and 11% CAGR over FY21-23E in performance products and specialty care, respectively. Gross profit/kg may rise by 2.3% CAGR during the same period to Rs40.6 in FY23 (from Rs38.8 in FY21). This is in comparison to Rs40.8 in H1FY21, thus, we believe our estimates are conservative. We expect EBITDA/kg to grow at 6.3% CAGR over FY21-23E on flattish operating cost/kg, which should benefit from rise in plant utilisation.

Shares of Galaxy Surfactants Ltd was last trading in BSE at Rs.1926 as compared to the previous close of Rs. 1944.15. The total number of shares traded during the day was 2387 in over 553 trades.

The stock hit an intraday high of Rs. 1966.3 and intraday low of 1903.05. The net turnover during the day was Rs. 4600625.

Source : Equity Bulls

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