Incorporated in 1986, Galaxy Surfactants Ltd (GSL) (NSE: GALAXYSURF, BSE: 540935) is the leading manufacturers of Performance Surfactants and Specialty Care products. These products are used in consumer-centric Home and Personal care products (HPC) like hair care, oral care, skin care, cosmetics, soap, shampoo, lotion, detergent, cleaning products etc. Currently, GSL’s product portfolio comprises over 200+ product grades, which are marketed to more than 1,750+ clientele in over 75+ countries. The company has five manufacturing facilities in India. Three in Taloja and one each in Tarapur and Jhagadia. Additionally, it has one facility in Suez (Egypt) and one in New Hampshire (USA). The company exports to Africa, Asia Pacific, North and South America and Europe.

Key Positives

Established supplier to major FMCG brands – Over the years, GSL has evolved from a local supplier catering to an Indian FMCG company to a global supplier to FMCG companies across major geographies. The company has a strong customer base catering to big names like Cavinkare Pvt Ltd, Colgate-Palmolive (India) Ltd, Dabur India, Henkel, Himalaya, L'Oréal, Procter & Gamble, Reckitt Benckiser, Unilever etc.

HPC brand owners (FMCG giants) impose strict quality standards on suppliers. GSL is not merely a contract manufacturer but is also closely involved in the HPC product development process with its clientel.  This intimate relationship virtually makes GSL a backward integrated facility for a FMCG companies and ensures stickiness of business.

Diverse Products and focus on high margin products – GSL’s total volume in 9MFY20 were at 166.1 MTPA with the share of performance products at 63% and speciality care products at 37%. Its speciality care products have historically offered higher margins vis-à-vis performance surfactants. GSL’s range of speciality care products currently comprises over 155 products with a number of patents are in its final processes. Going forward, the company intends to focus more on increasing the share of speciality care products in its overall sales mix. The company plans to achieve this by cross-selling the same to its existing customers procuring performance surfactants.

The diversity in GSL’s product portfolio enables it to provide customised solutions to multinational FMCGs that market varied products across diverse geographies. GSL’s performance surfactants are primarily utilised as raw materials for end products that can be considered as consumer staples. As these products cater to basic needs such as personal hygiene and sanitation, consumers are often unable or unwilling to cut them out of their budgets regardless of their financial situation. The relatively inelastic demand for these end-products helps ensure a demand for the GSL’s products. On the other hand, speciality care products find applications in end-products designed for the ‘prestige’ socio-economic segment, where purchasing decisions are often driven by the functionality of the end-product.

Financial and Operational Performance

• Rise in demand for Home and Personal Care (HPC) products implicitly induces growth for GSL. Owing to the inherent nature and universal consumer usage of these products, their demand is largely inelastic.
• Operating revenue has grown at a CAGR of 18.74% over the period of FY10-19.
• Total volume has grown at a CAGR of 9% in FY15-19.
• Consumers of HPC products are extremely sensitive on user experience. Product differentiation is chiefly led by surfactants. Naturally, certifications and approvals from buyers are critical for any supplier. As on March 31, 2019 MNC customers contributed to 56% of the company’s revenue. Regional and local & niche players contributed 10% and 34% respectively.
• The company has long term partnerships with all of its top 10 customers.

	Mar-15	Mar-16	Mar-17	Mar-18	Mar-19
Operating Revenue (INR Cr.)	1,871.79	1,801.43	2,161.34	2,433.91	2,762.99
ROCE (%)	19.46	23.36	25.79	24.51	27.38
ROE (%)	20.43	25.21	29.04	24.43	23.94
Operating Margin (%)	10.38	13.29	13.04	12.24	12.96
Net Margin (%)	3.63	5.60	6.80	6.47	6.89
Asset Turnover	1.88	1.73	1.89	1.80	1.83
Debt to Equity	1.25	0.93	0.68	0.48	0.34
Interest Coverage	4.07	5.92	8.62	8.16	10.23
Cash Conversion Cycle	40.21	50.14	50.49	55.46	53.08
Cash Flow from Operating Activities (INR Cr.)	41.06	169.75	111.04	145.39	282.39
Free Cash Flow per share (INR)	4.16	39.84	10.40	17.20	20.98
Cash EPS (INR)	31.90	41.28	54.94	58.27	68.32

• The current capacity of the company stands at 436,488 MTPA. The overall capacity utilisation increased from 68% to 72% in FY19, with utilisation in select few product lines exceeding 90%. The capex till December 2019 was INR 110 Cr.
• Since 2002, the company has won 68 patents. Presently 18 new patent applications are pending worldwide. The current patent breakup is 15/15/4/7 in India/USA/Europe/Rest-of-the-World respectively.

• As on December 2019, the company has cash of INR 34.19 and total debt of INR 289.09. The company has also been reducing its debt over the years and this is evident in its reducing debt to equity ratio.
• Both margins and earnings per share of the company have been showcasing an upward trend over the past 5 years.

Risks/Concerns

• Revenues are derived from a select few customers
• Lack of long-term agreements with suppliers may subject the company to price and demand-supply volatility.
• Dependence on a single key supplier for one of its raw material. Any disruption in supply would have a material adverse effect on the business.
• Higher exposure to foreign currency fluctuations

Industry Overview and Impact of COVID-19

The global surfactants market, which was a US$30.7 billion market in 2015, is projected to grow at a CAGR of 4.4% to $45.16 billion in 2024 In terms of volumes, the surfactant market is expected to grow at a CAGR of 4% from a 16.4 million metric tonnes (MMT) market in 2015 to a 23 MMT market in 2024.

The Indian surfactants market was at $1.4 billion in 2015. This market is expected to grow at 6% CAGR to US$2.3 billion by 2024. On the volumes front, the market, which was at 778 thousand metric tonnes (TMT) in 2015, is expected to grow at a CAGR of 5.8% with volumes at 1221 TMT by 2024. Also, GSL has made a considerable bet on the African and Middle East markets as a part of its strategy. The African Middle East market, which was worth US$0.9 billion in 2015, is expected to grow at 4.0% CAGR to US$1.2 billion by 2024.

In terms of application, household cleaning and personal care together made up 49% of the total surfactants market. Also, in line with the application market, the personal care surfactants market is expected to be the fastest growing market growing at a CAGR of 7.6% till 2024.

The growing awareness about cleanliness and hygiene shall have a positive impact on the demand for cleaning products. GSL’s products are specialised but lack branding and pricing power. The company does not have any credible moat since it operates in the B2B segment. However, quality, installed capacity, regulations, long-term customer relationships and technological expertise provide significant entry barriers. A new player entering the market will find it difficult to scale up rapidly and gain market share. While no other Indian company exclusively caters to the HPC segment, global companies that currently manufacture surfactants are BASF Corporation, Clariant Limited, Croda International Plc, Evonik Industries, Solvay S.A., Stepan Company and The Dow Chemical Company.

As per management, the company has not seen any significant impact in the demand side during the COVID-19 outbreak and the subsequent lockdown. However, they have hinted that if the lockdown is prolonged external supply chain or logistics will emerge as an issue and may affect the company’s ability to meet consumer’s demand.

The company is also expected to restart its operations in its Tarapur plant which was hit by a blast recently, just after the relaxation of initial lock-down. Since the plant was operating at sub-optimal utilisation the management does not expect any significant financial impact. Damages are most likely to be recovered from insurance.

The company is currently available at a CMP of INR 1,353.50 (as on May 05, 2020) at a PE of 21.30, which is just below its 1-year median PE of 23.34. Promoters held 70.94% stake in the company as of Dec 2019.

Team 3C Capitals

Sources

• Value Research Online
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• Investor conference calls