Galaxy Surfactants has entered the capital market on 13^th May 2011 with a public issue of 59.3 lakh equity shares of Rs.10 each, in the price band of Rs. 325 to Rs. 340 per share, aiming to raise Rs.193-202 crore. The issue, comprising of 25.07% of the company's post issue paid-up capital, closes on 18^th May for QIB bidders and on 19^th May for HNI and retail investors.

The company manufactures surfactants (surface active agents) and specialty chemicals used in the personal and home care industry at 5 manufacturing facilities in India (3 in Tarapur and 2 in Taloja) and one facility in US, having installed capacity of about 1,40,000 MTPA for organic surfactants, 9,000 MTPA for fatty acid esters and about 7,000 MTPA for other specialty chemicals.  With a portfolio of 66 products, the company has 18 patents in India and 10 patents in US, besides having applied for 8 patents in India & 1 in Europe.

It sells its products in over 70 emerging markets globally, with exports accounting for over half of consolidated revenues. Leading FMCG companies, both global and domestic, are its clients such as Beiersdorf, Ecolab, Henkel, L'Oreal, Reckitt Benckiser, Unilever in the export markets and Ayur, CavinKare. Dabur, Emami, ITC, Marico and P&G in India. The company enjoys 60% market share in the country in the personal care performance chemicals space while its share in global markets is insignificant due to stiff competition from larger and more established competitors such as Stepon, Rhodia, Huntsman Corp, Dow Chemicals, Clariant and so on. The company also faces concentrated sales, as top 3 customers accounted for 44% of standalone sales in 9mFY11 or 40% of its consolidated 9mFY11 sales.  

The company is in the process of establishing a manufacturing plant at Jhagadia (Gujarat) to source key ingredient ethylene oxide as well as set-up a facility in Egypt to penetrate deeper into the Middle East, African and European markets. Besides, it aims to expand capacities at existing manufacturing facilities in India. By FY12, company expects to expand its capacity to 2,70,000 MTPA of organic surfactants and 22,000 MTPA of other specialty chemicals, which will further expand to 2,90,000 MTPA of organic surfactants, 17,000 MTPA of fatty acid esters and 38,000 MTPA of other specialty chemicals by FY13. All the above objects amount to capital expenditure to the tune of approximately Rs. 343 crore, to be financed by a 3:4 mix of debt and equity. Rs. 151 crore debt will be raised from IFC, domestic banks and ECBs while IPO proceeds will meet the equity contribution. 

For FY10, company reported consolidated revenues of Rs. 644 crore and earned PAT of Rs. 38 crore, resulting in net margins of 5.9%. During 9mFY11, revenues rose to Rs. 648 crore, with surfactants accounting for approximately 85% of the sales mix and balance 15% contributed by specialty chemicals such as fatty acid esters and other . PAT for first nine months of FY11 amounted to Rs. 43 crore, resulting in a net margin of 6.6% and 9mFY11 EPS of Rs. 24.14 on equity of Rs. 17.73 crore of Rs. 10 each.

As on 31^st December 2011, company's networth stood at Rs. 187 crore with debt at Rs. 215 crore. Post expansion of manufacturing capacities as listed above, debt level will rise to Rs. 366 crore, excluding provision for additional working capital needs. Post-IPO, equity will expand to Rs. 23.66 crore while net worth will be around Rs. 388 crore, resulting in a moderate debt-equity ratio of 0.94:1. Promoter holding will reduce from 75.97% to 56.34% post-IPO. Balance 24.03% in pre-IPO holding is held by public shareholders.

At the upper end of price band at Rs. 340 per share, company is making fresh issue at PE multiple of 10.5 times based on its FY11 expected earnings, which is on the higher side for a chemicals company operating in mid-single digit margins. The company is undertaking significant capacity expansion over the next 18 months, but an IPO price of Rs. 300 per share would have been reasonable, considering the current lack-lustre state of primary markets and subsequent poor show on listing of several recent IPOs. Even in the secondary market, many identical players are available at a PE of 6 to 9 times. Upper band of Rs. 340 looks to be the expected secondary market price after 3 months, thus offering no incentives to apply in the IPO.