Article

Galaxy Surfactants Limited IPO Note

25 Jan 2018 Nikita Bhoota

Issue Opens: January 29, 2018
Issue Closes: January 31, 2018
Face Value: Rs.10
Price Band: Rs.1,470-1,480
Issue Size: ~Rs.937 cr
Public Issue: 63.32 lakh shares (at upper price band)
Bid Lot: 10 Equity shares       
Issue Type: 100% Book Building

% shareholding Pre IPO Post IPO
Promoter 77.0 70.9
Public 23.0 29.1

Source: RHP

Company Background

Galaxy Surfactants Limited (GSL) is one of the leading manufacturers of surfactants and other speciality ingredients for the personal care and home care industries in India. GSL’s customer base includes leading FMCG multinationals and regional & local players (home and personal care industries). Its product portfolio comprises over 200 product grades, marketed to more than 1,700 customers in over 70 countries. GSL’s products are classified under two segments i.e. Performance Surfactants and Speciality Care Products. GSL’s ~64% of consolidated revenue (H1FY18) is through overseas business, whereas ~36% is domestic. GSL’s seven facilities (five in India and two overseas) have total manufacturing capacity of 3.51 lakh MTPA and an overall utilization level of ~60% (FY17).

Objective of the Offer

The offer consists of an offer for sale of ~21.47 lakh shares by the promoter / promoter group and ~41.85 lakh shares by other shareholders, a total of ~63.32 lakh shares aggregating up to ~Rs937cr at the upper end of the price band. The company’s public issue in 2011 was withdrawn due to inappropriate market conditions.

Financials

Consolidated Rs cr. FY16 FY17 FY18E FY19E FY20E
Revenue 1,802 2,161 2,383 2,655 2,929
EBITDA Margin (%) 12.9 12.4 13 13.5 14
Adj. PAT 103 146 172 211 250
EPS (Rs)* 29 41.3 48.6 59.6 70.6
P/E* 51.1 35.9 30.4 24.8 21
P/BV* 11.7 9.2 6.9 5.6 4.7
RONW (%)* 24.9 28.7 25.8 24.9 24.3

Source: Company, 5 Paisa Research; *EPS & Ratios at higher end of the price band, on post IPO shares

Key Points

GSL has emerged as one of the preferred suppliers to leading FMCG companies in the consumer centric personal care and home care segments. The company’s customer base includes FMCG players like Calvinkare, Colgate-Palmolive, Dabur India, Himalaya, P&G, Unilever, Reckitt Benckiser and Jyothy Laboratories. Its customer base has increased from ~1,200 customers in FY13 to ~1,700 customers in FY17, representing a CAGR of 7.8%. Market for home care products in India is expected to touch $4.32bn in FY24E, 7.2% CAGR over FY18E-24E. GSL is well poised to cater to the growing demand and improving scenario for FMCG industry.

GSL has a total manufacturing capacity of ~3.51 lakh MTPA with a utilization level of ~60% in FY17. It has sufficient room for utilizing excess capacity to suffice unique requirements of its existing customers and new clientele (that would be added through company’s marketing and sales initiatives). The improvement in EBITDA margin would result into increased profitability leading to free cash flow generation. This would allow the company to deleverage its balance sheet (D/E ~0.6x as on September 30, 2017).

 Key Risk

GSL generates a significant portion of revenue from limited number of major customers. The company’s top ten customers contributed 58.5%, 54.8% and 53.5% of the total revenues from operations in H1FY18, FY17 and FY16 respectively. Moreover, it does not have long-term contractual agreements with the significant customers and the business is conducted on the basis of purchase orders. Hence, reduction in demand from customers can impact the company’s performance adversely.

GSL is dependent on a single supplier for one of the key raw materials i.e. ethylene oxide. It constituted 6.8% and 7.3% of total cost of materials consumed in H1FY18 and FY17 respectively. This may restrict the company to negotiate sourcing arrangement and pricing of raw material.

Conclusion

At the upper price band, the stock looks moderately expensive at ~36x FY17 EPS. We expect revenue CAGR of 11% with EBITDA margin expansion of ~160bps over FY17-20E (14% EBIDTA margin in FY20E). PAT is expected to witness 20% CAGR over FY17-20E. The stock appears to be attractive at ~25xFY19E and ~21xFY20E (on preliminary estimates). We recommend SUBSCRIBE from long-term perspective.

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Galaxy Surfactants Limited IPO Note

25 Jan 2018 Nikita Bhoota

Issue Opens: January 29, 2018
Issue Closes: January 31, 2018
Face Value: Rs.10
Price Band: Rs.1,470-1,480
Issue Size: ~Rs.937 cr
Public Issue: 63.32 lakh shares (at upper price band)
Bid Lot: 10 Equity shares       
Issue Type: 100% Book Building

% shareholding Pre IPO Post IPO
Promoter 77.0 70.9
Public 23.0 29.1

Source: RHP

Company Background

Galaxy Surfactants Limited (GSL) is one of the leading manufacturers of surfactants and other speciality ingredients for the personal care and home care industries in India. GSL’s customer base includes leading FMCG multinationals and regional & local players (home and personal care industries). Its product portfolio comprises over 200 product grades, marketed to more than 1,700 customers in over 70 countries. GSL’s products are classified under two segments i.e. Performance Surfactants and Speciality Care Products. GSL’s ~64% of consolidated revenue (H1FY18) is through overseas business, whereas ~36% is domestic. GSL’s seven facilities (five in India and two overseas) have total manufacturing capacity of 3.51 lakh MTPA and an overall utilization level of ~60% (FY17).

Objective of the Offer

The offer consists of an offer for sale of ~21.47 lakh shares by the promoter / promoter group and ~41.85 lakh shares by other shareholders, a total of ~63.32 lakh shares aggregating up to ~Rs937cr at the upper end of the price band. The company’s public issue in 2011 was withdrawn due to inappropriate market conditions.

Financials

Consolidated Rs cr. FY16 FY17 FY18E FY19E FY20E
Revenue 1,802 2,161 2,383 2,655 2,929
EBITDA Margin (%) 12.9 12.4 13 13.5 14
Adj. PAT 103 146 172 211 250
EPS (Rs)* 29 41.3 48.6 59.6 70.6
P/E* 51.1 35.9 30.4 24.8 21
P/BV* 11.7 9.2 6.9 5.6 4.7
RONW (%)* 24.9 28.7 25.8 24.9 24.3

Source: Company, 5 Paisa Research; *EPS & Ratios at higher end of the price band, on post IPO shares

Key Points

GSL has emerged as one of the preferred suppliers to leading FMCG companies in the consumer centric personal care and home care segments. The company’s customer base includes FMCG players like Calvinkare, Colgate-Palmolive, Dabur India, Himalaya, P&G, Unilever, Reckitt Benckiser and Jyothy Laboratories. Its customer base has increased from ~1,200 customers in FY13 to ~1,700 customers in FY17, representing a CAGR of 7.8%. Market for home care products in India is expected to touch $4.32bn in FY24E, 7.2% CAGR over FY18E-24E. GSL is well poised to cater to the growing demand and improving scenario for FMCG industry.

GSL has a total manufacturing capacity of ~3.51 lakh MTPA with a utilization level of ~60% in FY17. It has sufficient room for utilizing excess capacity to suffice unique requirements of its existing customers and new clientele (that would be added through company’s marketing and sales initiatives). The improvement in EBITDA margin would result into increased profitability leading to free cash flow generation. This would allow the company to deleverage its balance sheet (D/E ~0.6x as on September 30, 2017).

 Key Risk

GSL generates a significant portion of revenue from limited number of major customers. The company’s top ten customers contributed 58.5%, 54.8% and 53.5% of the total revenues from operations in H1FY18, FY17 and FY16 respectively. Moreover, it does not have long-term contractual agreements with the significant customers and the business is conducted on the basis of purchase orders. Hence, reduction in demand from customers can impact the company’s performance adversely.

GSL is dependent on a single supplier for one of the key raw materials i.e. ethylene oxide. It constituted 6.8% and 7.3% of total cost of materials consumed in H1FY18 and FY17 respectively. This may restrict the company to negotiate sourcing arrangement and pricing of raw material.

Conclusion

At the upper price band, the stock looks moderately expensive at ~36x FY17 EPS. We expect revenue CAGR of 11% with EBITDA margin expansion of ~160bps over FY17-20E (14% EBIDTA margin in FY20E). PAT is expected to witness 20% CAGR over FY17-20E. The stock appears to be attractive at ~25xFY19E and ~21xFY20E (on preliminary estimates). We recommend SUBSCRIBE from long-term perspective.

Research Disclaimer