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Galaxy Surfactants IPO Review by MLR Securities (Apply)

Review By MLR Securities Private Ltd on May 18, 2011

  • Issue Date: 13th May - 19th May
  • Price Range: INR 325-340
  • Issue Size: INR 114-120 Cr
  • Mcap: INR 769-804 Cr
  • IPO Grading: CRISIL IPO Grade 4
  • Promoters Holding: 57% (Post Issue)
  • BRLM: Motilal Oswal, Invst Advisors, Centrum Cap
  • Listing: BSE, NSE
  • Anchor Investors (@ Rs 340/s): ICICI Pru, Goldman Sachs, India Fund, Arohi Asset Management

Galaxy Surfactants manufactures surfactants and specialty chemicals in India for the personal and home care industry. The company has more than 60% market share in its product range of personal care performance chemicals. Its products cater to the some of the largest global brands in the FMCG sector and find applications in skin care, hair care, oral care, body wash, sun care, household cleaners and fabric care segments. Few of the global customers are Beiersdorf, Ecolab, Henkel, Diversey, L'Oreal, Reckitt Benckiser and Unilever. While the domestic customers include Ayur, CavinKare, Dabur, Emami, ITC, Marico, Procter & Gamble Home Products Limited to name a few.

Unnathan shekhar, Gopalkrishnan Ramakrishnan, Shahsikant Rayappa Shanbhag and Sudhir Datarram Patil are the promoters of the company.

The company presently has three manufacturing units at Tarapur, two manufacturing units at Taloja, Maharashtra and one manufacturing unit in USA which is owned by the company's 100% step-down subsidiary Maybrook Inc. The company has a R&D centre at Navi Mumbai to develop new products, technologies and applications for the Personal and Home Care industry. Galaxy has 18 patents in India and 10 patents in USA. In addition Galaxy has applied for 8 patents in India and 1 patent in Europe.

 

  • The company's product portfolio can be segmented into three major groups - Organic Surface Active Agents (OSAA) covering four basic categories of surfactants (Anionics / Non-ionics / Cationics /Amphoteric); Fatty Alkanolamides and Fatty Acid Esters (FA / FAE) & Other Specialty Chemicals (Preservatives in cosmetics / Sunscreen actives / Mild Surfactants/Polymers /Proteins etc.)
  • The company derives major revenue from OSAA which contributes around 86% to the total sales while other specialty chemicals contribute around 10% to the total sales and Fatty Acids/ Fatty Acid Esters contribute 4.1%. The company has consistently maintained this revenue mix in the last three years.
  • The company derives 52% of the revenues from exports while the rest is from the domestic market. The major offshore markets are APAC with 12% share in the revenues, 16.1% from Americas and Europe and the remaining from the RoW.
  • The company's total sales grew at a CAGR of 19% in the last five years to Rs 644 Cr in FY10 while PAT grew at a CAGR of 43% to Rs 36 Cr in FY10. In 9mFY11, the company posted total income of Rs 682 Cr with a PAT of Rs 43 Cr. The company's EBITDA margin in the range of 12.5%-13% in the last three years with an average net margin of 6%
  • The company's leverage at present is slightly on a higher side with a debt equity level of 1.2:1 which will fall to 0.9:1 inclusive of the additional debt of Rs 150 Cr required for capacity expansion. The company's RoE was at 17% in FY10 which increased to 20% in 9mFY11 (not annualized) on the back of improvement in PAT.

Promoters

The company's promoters have over thirty years of experience in the chemicals industry. Mr Shekhar, managing director, was earlier associated with Hindustan Unilever (HUL) and Lupin Laboratories Ltd. Mr Ramakrishnan and Mr Shanbhag were earlier associated with Colgate Palmolive (India) Ltd, while Mr S. Patil was earlier associated with HUL.

Concerns

  • The company is dependent on few major customers. The company derived 66% of the revenues from the top ten customers in 9mFY11 which has come down from 70% in FY09 and 67% in FY10.
  • Timely execution of projects will remain one of the major concerns for Galaxy.

 


Conclusion / Investment Strategy

Investment Rationale

The company's 60% market share in the domestic market & massive capacity expansion which will lead to volume growth make the issue attractive. Valuations of 13.5-14 times FY11 EPS are at a premium to the specialty chemicals industry average of 11, but we believe its niche product profile justifies the premium. We recommend investors with high risk appetite to Subscribe to the issue for long term time frame.

 

Reviewer recommends Subscribing to the issue.

Review By MLR Securities Private Ltd on May 18, 2011

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