Galaxy Surfactants

IPO Snapshot:

Galaxy Surfactants is entering the primary market on Monday 29^th Jan 2018 with an offer for sale (OFS) of up to 63 lakh equity shares of Rs. 10 each by promoters and close to 300 individual investors (some invested for over a decade), in the price band of Rs.1,470 to Rs. 1,480 per share. Representing ~18% of the post issue paid-up share capital, issue size is Rs. 937 crore at the upper end of the price band. Issue closing, one day prior to the Budget, is on Wednesday 31^st Jan and listing on BSE/NSE is likely on 8^th Feb 2018.

Company Overview:

Galaxy Surfactants manufactures speciality chemicals used as input in FMCG sector, under two business segments:

1. Performance surfactants: Comprises 2.43 lakh MTPA installed capacity of surface active ingredients, segment accounts for 65% of revenue
2. Speciality care products (like preservatives, UV filters, mild surfactants, fatty alkanolamides, fatty acid esters etc.): Installed capapcity of 1.08 lakh MTPA, accounts for 35% of revenue, higher margin vertical vis-à-vis surfactants

Company has seven manufacturing facilities – 5 in India (4 in Maharashtra, 1 in Gujarat) and 1 each in Egypt and US, catering to 1,700 customers in 70 countries. Top 10 customers account for little over 50% of annual sales, with 52%, 8%, 40% of revenue coming from MNCs, regional and local customers respectively, such as Unilever, P&G, Colgate, Dabur, Himalaya, Loreal, Henkel, Ayur Herbals, Jyothy Labs. Geographically, India accounts for ~35% of sales volume, while Africa, Middle East, Turkey region is 45%, and rest of the world accounting for balance 20%. Company has 47 patents to itself.

Financials:

Company’s financial growth has been healthy with 8% revenue and EBITDA CAGR and 24% PAT CAGR between FY14-17. On FY17 consolidated revenue of Rs. 2,161 crore, it earned an EBITDA of Rs.278 crore, leading to 12.8% EBITDA margin. On PAT of Rs. 146 crore, net margin of 6.8% was earned, leading to an EPS of Rs. 41.27 for FY17. While softening of raw material prices aided FY16 EBITDA margin to 13.2%, GST dented H1FY18 margins a bit, with EBITDA slipping to 12.1%. For H1FY18, on a revenue of Rs. 1,193 crore, EBITDA of Rs. 145 crore was clocked while PAT stood at Rs.75 crore, leading to PAT margin of 6.3% and EPS of Rs. 21.20. 

As of 30-9-17, net worth stood at Rs.635 crore, translating into BVPS of Rs. 179. Total debt stands at Rs. 370 crore, while cash and equivalents is Rs. 32 crore, indicating net debt-to-equity ratio of 0.5:1 which is not too high, given that previous capex of nearly 1.6 lakh MTPA of greenfield expansion (90% hike of then capacity, 5 years ago) was funded via debt. Moreover, since current capacity utilization is close to 60% for both the segments, significant headroom exists for future growth without straining the balance sheet much. Company’s working capital cycle is also well controlled, leading to high return ratios – average RoE of past 3 years at 24% with average RoCE at 22%. Thus, financial position is strong.

Shareholding Pattern and Objects of Issue:

Since the IPO is a 100% OFS, there is no equity dilution and company will not receive a single penny from the IPO. 4 promoters currently hold 76.97% in the company, whose holding will reduce to little less than 71% post the OFS. Some 2,300 public shareholders own balance 23.02% stake, pre IPO. About 300 of them are looking to exit their decade long investment. Combined holding of these public shareholders will contract to approximately 11% post IPO.

Valuation:

At Rs. 1,480 per share, company’s market cap will be Rs. 5,247 crore with enterprise value will be Rs. 5,586 crore, which discounts FY17 earnings by EV/Sales, EV/EBITDA and PE multiples of 2.6x, 20x and 36x respectively. Based on FY18E earnings, these multiples are 2.2x, 18x and 33x respectively which is not expansive.

While there is no direct peer to Galaxy, rough comparison can be drawn with another company catering to the FMCG sector - S H Kelkar, which is present in the niche flavouring ad fragrance space. Although S H Kelkar’s topline of Rs. 1,000 crore is less than half of Galaxy’s, its margins are much stronger (17-18% versus 12-13% for Galaxy) with negligible debt level. S H Kelkar is currently ruling at an EV/Sales, EV/EBITDA and PE multiples of 4x, 22x and 40x respectively, based on FY18E earnings, which makes Galaxy’s asking price not expensive. Galaxy Surfactants has positioned itself in between a speciality chemicals company and an FMCG company, which is rightly reflected in its valuation too.

Company had attempted to raise primary money of close to Rs. 200 crore at a valuation of about Rs. 800 crore in May 2011 via an IPO, which was withdrawn, due to tepid HNI and retail response. However, it went ahead with the then proposed Gujarat and Egypt expansion with infusion from IFC, Washington and has since emerged stronger financially, to be now looking at a valuation of Rs. 5,250 crore (which is 31% CAGR in roughly 7 years). Company clearly seems to have done its homework well this time around.

Conclusion:

Extensive manufacturing capabilities, healthy earnings growth, consistent margins and reasonable pricing make the issue a subscribe. While listing gains is a function on market sentiments post budget, probability of the stock rewarding over the long term gains looks high.

Disclosure: No interest.