The Indian surfactants market is estimated to post a CAGR of 6% over FY15-24 and oleochemical-based surfactants could continue to gain market share. Galaxy is well-positioned to take advantage of this.
Surfactants are chemicals used to separate dust and oil from a substrate. Over the years, increasing awareness on and concern about the harmful impact of chemicals has helped oleochemical-based surfactants gain consumer preference. The Indian surfactants market is estimated to post a CAGR of 6% over FY15-24 and oleochemical-based surfactants could continue to gain market share. Galaxy is well-positioned to take advantage of this.
Sharp focus on R&D & innovation
Galaxy has a strong technical focus, as evidenced by its 47 patents held globally. These innovative products (categorised under the specialty care ingredients segment) typically have better margins than performance surfactants (we estimate c.2x) and management intends to increase the share of this segment going forward.
Initiating coverage with BUY
We estimate sales/Ebitda/PAT CAGR of 11%/16%/19% over FY17-20 after factoring in the following: (i) volume growth of 15%/8% for the performance surfactants/specialty care segments, (ii) margin expansion of 150 bps over FY17-20 and (iii) debt repayment resulting in lower financing costs. We initiate coverage with Buy and a target price of Rs 1,760.
Incorporated in 1986, Galaxy Surfactants Ltd (Galaxy) is one of India’s leading manufacturers of surfactants and other speciality care products for the personal care and home care industries. The company has evolved from being a local supplier to FMCG companies in India to becoming a global supplier to multi-national FMCG companies, which highlights its focus on technology and quality. Therefore, we believe Galaxy can grow faster than the FMCG sector in India. It has more than 200 product grades that are marketed to more than 1,700 customers in over 70 countries. These can be categorised under two business segments: (i) performance surfactants and (ii) speciality care products.
Performance surfactants: In this segment, Galaxy manufactures anionic and non-ionic surfactants. Key products include
sodium lauryl ether sulphate (SLES), fatty alcohol sulphate (FAS) and ethoxylated products. Galaxy has c.60% market share for SLES and FAS in India, and has c.35-40% market share for SLES in Africa, the Middle East and Turkey (AMET). The products within this segment reflect large volume consumption. Competition in the segment is rather high (in certain customer segments), and hence, there exists limited scope for an improvement in margins.
Specialty care products: In this segment, Galaxy manufactures cocoamidopropyl betaine (“CAPB”), benzalkonium chloride,
UV filters/sunscreens (octyl methoxycinnamate — OMC and octocrylene — OCR) and preservative blends (such as phenoxyehtanol). The products within this segment are niche and premium in nature and competition in the segment is also limited. This enables the company to quote a premium on the products and hence earn and maintain higher margins.
We initiate coverage on Galaxy with a Buy rating and target price of Rs 1,760. We base our rating on the following rationale:
Favourable macros with share of oleochemicals in the home care and personal care segments on the rise: Over
the past few years, the use of oleochemicals in the surfactants sector has continued to rise as the advantages and opportunities offered by natural oil and fatbased products are further explored as awareness on natural products increases. Galaxy is primarily engaged in the manufacture of natchem (oleo) based surfactants (c.70% of Galaxy’s portfolio is natchem-based) and is hence clearly in a position to benefit from this shift.
Strong R&D capabilities: In line with its motto ‘Consumer to chemistry’, Galaxy undertakes collaborative product
development with its customers, which helps its customers choose the right technology with the right applications.
Skilled promoters: Galaxy is a professionally managed organisation driven by a qualified management team. Its promoters have had an average work experience of over 35 years, of which an average of over 30 years has been with the company.
Substantial capital expenditure out of the way; future capex likely to be met through internal accruals: During FY12-14, Galaxy undertook a major capex plan (c. Rs 3 bn) and set up a Greenfield expansion at Jhagadia as well as a new production facility in Egypt. These facilities are still in the process of being fully utilised. Overall capacity utilisation for Galaxy (including Egypt) is c.65%. Additionally, the Jhagadia unit has plant only on c.1/3 of the land while the effluent treatment approval is for the full capacity. Therefore, to increase the Jhagadia capacity to c.3x, Galaxy just needs minimal brownfield capital expenditure. Given strong FCF generation of c.Rs 2 bn, it is likely that capex over the next 2-3 years can largely be funded from internal accruals.