Galaxy Surfactants - GSL upgrade EBITDA guidance - ICICI Securities

Galaxy Surfactants' (GSL) Q3FY21 adjusted EBITDA/kg at Rs18.1 raises confidence on sustainability of higher profitability, and management has increased its guidance under this parameter by 6-7% to Rs16-18 (from Rs15-17). We take it that the guidance upgrade has come from strong performance in new-age products including mild surfactants, preservatives and proteins. We expected these product-categories to sustain >20% revenue growth in the foreseeable future, and create more headroom for EBITDA/kg expansion. Volume growth is likely to stay in the range of 8-11% p.a. GSL is investing in expansion of its R&D facility to enhance focus on innovation, which should boost new product funnel. We increase our FY21E EPS estimate by 12.3%, but maintain our FY22E EPS. We raise our target price for the stock to Rs2,583 (from Rs2,298) at 25x P/E (vs 24x) on rollover of valuation to FY23E. Maintain BUY.

- Specialty chemical volumes rose 12% YoY. GSL revenues rose 7.8% YoY to Rs6.7bn driven by strong volume growth in India and recovery in RoW. Volumes grew 7.3% YoY to 58kte driven by India volume growth of 14.4% YoY and AMET 2.9% while RoW, which was declining, has grown 4.3% (vs dip of 4% YoY in Q2FY21). Performance product volumes rose 4.7% YoY, but shrunk 11.6% QoQ as Q2FY21 had benefited from pent-up demand from channel inventory filling in India. Specialty care volumes rose by a strong 12% YoY due to normalisation of demand and better performance in RoW.

- EBITDA rose 45% YoY to Rs1.2bn. Gross profit rose 24.7% YoY to Rs2.5bn, and benefited from Rs140mn export incentive received in Egypt; adjusted gross profit increased 17.8% YoY. Adjusted gross margin improved 380bps YoY to 36.4%. It benefited from better product mix, acceleration in new-age products, better customer mix (tier-1 contribution dipped to 54% from 63% in Q1FY21), and some likely inventory gains. EBITDA rose 45% YoY to Rs1.2bn and adjusted EBITDA jumped 28.4% YoY. EBITDA/kg (adjusted) was at Rs18.1, up 19.7% YoY, and GSL has revised its guidance under this parameter to Rs16-18/kg (from Rs15-17 earlier). Net profit grew 78% YoY to Rs852mn.

- Conference call highlights. 1) AMET volumes were hurt from logistic issues. 2) Specialty portfolio benefited from strong performance in new-age products such as mild surfactants, preservatives and proteins. In fact, sulphate-free products and proteins contributed 5% to revenues in Q3FY21. Company believes these new-age product revenues can continue to grow at 20% for next few years. 3) New-age products are witnessing progressive growth with new customer acquisitions, and GSL's strength lies in vegetable proteins, sub-divisions of mild surfactants (spread of variants), and by gaining traction in syndet and transparent bathing soaps. 4) Though the company has increased its EBITDA guidance by 6-7%, it sees scope for higher growth in EBITDA/kg as new-age products' contribution rises. 5) Growth in performance products would be led more by geographical expansion. 6) Capex for FY21 is seen at Rs0.8bn (vs Rs1bn-1.5bn) due to lockdown, and should catch up in FY22.

Shares of Galaxy Surfactants Ltd was last trading in BSE at Rs.2177 as compared to the previous close of Rs. 2228.95. The total number of shares traded during the day was 2766 in over 754 trades.

The stock hit an intraday high of Rs. 2232.7 and intraday low of 2170.25. The net turnover during the day was Rs. 6075435.

Source : Equity Bulls

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