INITIATING COVERAGE 30 SEP 2019 Galaxy Surfactants Surfactants - IC - HDFC sec...volatility in f...

INITIATING COVERAGE 30 SEP 2019

Galaxy Surfactants BUY

Simple yet distinct Galaxy Surfactants (GSL) is a preferred global supplier of surfactants and other specialty chemicals to leading FMCG MNCs, and caters exclusively to their ‘home and personal care’ (HPC) segment. Long and intimate relations with its customers drive GSL’s steady volume growth, steady margins. It has a diversified portfolio of 200+ products selling across 80 countries to 1,700+ customers. Backed by an experienced management, GSL went public in Feb-18 at Rs 1,480/sh. Currently, the stock is flat (vs. the Nifty FMCG Index that has delivered +16% since then) despite the 29.1/24.3% jump in EBITDA/PAT. Given the secular growth opportunity and its capability to generate 20%+ returns on reinvested profits, GSL’s current PER of 19.0/16.6x FY21/22E looks contextually low. A ‘Quasi FMCG’ company: HPC brand owners (FMCG

giants) impose strict quality standards on suppliers. GSL is not merely a contract manufacturer but is also closely involved in the HPC product development process with its customers. This intimate relationship virtually makes GSL a backward integrated facility for a FMCG cos and ensures stickiness of business.

55% business from 10 MNCs: Consumers of HPC products are extremely sensitive on user experience. Product differentiation is chiefly led by surfactants. Naturally, certifications and approvals from buyers are critical for any supplier. GSL currently draws 55% of its business from 10 leading FMCG companies, which together command 42% of global HPC market share.

Steady volume growth: Rise in demand for HPC products implicitly induces growth for GSL. Owing to the inherent nature and universal consumer usage of these products, their demand is largely inelastic. GSL witnessed stronger demand in FY17/18 (12.2/11% YoY)

vs FY19 (8.8%), led by 18.8% YoY growth in the (high margin) specialty category. We expect strong traction to continue in this category driven by strong demand in developed markets. Thus, overall sales volume will grow at 9.6% over FY19-22E to 282,349MT.

RM fluctuations are passed on: Contrary to popular beliefs that MNCs squeeze supplier margins, GSL’s RMC is semi-passed on to customers, insulating its margins. Since the former fix the procurement chain, the volatility in fatty alcohol prices (50% of RMC of performance surfactants) are borne by them. The 10-year gross margin average of 32.1% with a standard deviation of 2.74 amply proves this fact. We expect the same trend to continue over FY20-22E (GM of 32%).

Moderate valuations: GSL’s products are specialised (not commoditised) but lack branding and pricing power. It should trade at a multiple closer to chemical and at a discount to FMCG companies. We value GSL at 22x Sep-20E and initiate with BUY at a TP of Rs 1,834.

Financial Summary (Consolidated) Rs bn FY18 FY19 FY20E FY21E FY22E Revenues 24.34 27.63 30.98 35.40 40.59 Growth % 12.6 13.5 12.1 14.3 14.7 EBITDA 2.88 3.47 3.88 4.43 5.04 EBIDTA Margin (%) 11.8 12.6 12.5 12.5 12.4 EBITDA Growth (%) 6.0 20.7 11.7 14.2 13.8 APAT 1.58 1.91 2.37 2.75 3.16 AEPS (Rs) 44.58 53.87 66.93 77.59 89.10 P/E (x) 33.2 27.4 22.1 19.0 16.6 EV/EBITDA (x) 17.10 14.31 12.92 11.39 10.12 ROE (%) 24.4 23.9 24.3 23.1 21.9 Source: Company, HDFC sec Inst Research

INDUSTRY CHEMICALS CMP (as on 27 Sep 19) Rs 1,478 Target Price Rs 1,834 Nifty 11,512 Sensex 38,823 KEY STOCK DATA Bloomberg GALSURF IN No. of Shares (mn) 35 MCap (Rs bn) / ($ mn) 52/741 6m avg traded value (Rs mn) 17 STOCK PERFORMANCE (%) 52 Week high / low Rs 1,521/872 3M 6M 12M Absolute (%) 18.5 39.8 18.1 Relative (%) 20.4 38.0 11.2 SHAREHOLDING PATTERN (%) Mar-19 Jun-19 Promoters 70.93 70.93 FIs & Local MFs 9.27 10.86 FPIs 3.06 2.81 Public & Others 16.74 15.40 Pledged Shares 0.00 0.00 Source : BSE

Nilesh Ghuge [email protected] +91-22-6171-7342 Divya Singhal [email protected] +91-22-6639-3038

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters

GALAXY SURFACTANTS: INITIATING COVERAGE

Category-Wise Volume Mix Sales Volume Trend

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

Installed Capacity Capital Expenditure Cycle


203

210

243

255

260

91

92

108

108

108

-

50

100

150

200

250

300

FY15

FY16

FY17

FY18

FY19

'000 tonsPerformance Surfactants Specialty Care

Consolidated revenue rose by 13.5%YoY in FY19, led by 23.6%YoY growth in the high margin specialty care category. Volume of this category surged by 18.8%YoY and we expect this trend to continue as its demand is led by new trends in the developed market Volume in the performance surfactants category has grown 3.6%YoY in FY19. We expect growth to remain in the same range in FY20E Capacity augmentation is a continuous process at GSL. Demand is forecasted every year for 3 years hence and, timely and adequate investment is made to expand plant capacities

97

99

115

131

135

140

147

152

26

60

62

67

79

94

111

130

-

20

40

60

80

100

120

140

160

FY15

FY16

FY17

FY18

FY19

FY20

E

FY21

E

FY22

E

'000 tonsPerformance Surfactants Specialty Care

78.8

62.3

65.0

66.1

63.0

59.9

57.0

53.8

21.2

37.7

35.0

33.9

37.0

40.1

43.0

46.2

0102030405060708090

100

FY15

FY16

FY17

FY18

FY19

FY20

E

FY21

E

FY22

E

% Performance Surfactants Specialty Care

0.48 0.45 0.54

1.81

1.28 1.36 1.44

0.0

0.5

1.0

1.5

2.0

FY16

FY17

FY18

FY19

FY20

E

FY21

E

FY22

E

Rs bn Capex (Rs bn)

Page | 2


Margin Trend Revenue/Kg Of External Sales

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research Opex/Kg To Rise Hereon, As 60% Of It Is Variable EBITDA/Kg Is Consistently On A Rise


EBITDA margin is maintained (~12.5%) as majority of RMC is directly passed on to customers PAT margin has jumped with a reduction in the effective tax rate to 25.2%. GSL will not be pressured to pass on the benefits of the cut as it caters to global FMCG giants for whom, quality supersedes price. Thus, it is a big beneficiary of the tax cut Steep fall in crude oil prices in FY16 led to a correction in the RMC, most of which is a derivative of the former. In lack of pricing power, GSL is compelled to pass on the benefit of falling RMC From FY15-18, oplev induced fall in opex/kg. In FY19, opex and opex/kg rose 15.0% and 5.7%YoY, owing to 38.2% YoY jump in freight and forwarding cost and 32.5% rise in miscellaneous opex. We expect opex to rise in tandem with sales volume albeit at slower pace hereon

152

114

122 123129

133138

144

100

110

120

130

140

150

160

FY15

FY16

FY17

FY18

FY19

FY20

E

FY21

E

FY22

E

Revenue (Rs/kg) Linear (Revenue (Rs/kg))

34.3

27.2

24.223.3

24.625.4

26.6

28.9

20

22

24

26

28

30

32

34

36

FY15

FY16

FY17

FY18

FY19

FY20

E

FY21

E

FY22

E

Other Expenses (Rs/kg)

15.5

14.7

15.3

14.6

16.216.6

17.2

17.9

14.0

14.5

15.0

15.5

16.0

16.5

17.0

17.5

18.0

18.5

FY15

FY16

FY17

FY18

FY19

FY20

E

FY21

E

FY22

E

EBITDA (Rs/kg) Linear (EBITDA (Rs/kg))

32.8

36.9

32.4 30.7 31.7 31.7 31.9 32.5

10.213.0 12.6 11.8 12.6 12.5 12.5 12.4

3.6 5.6 6.8 6.5 6.9 7.7 7.8 7.8 0

5

10

15

20

25

30

35

40

FY15

FY16

FY17

FY18

FY19

FY20

E

FY21

E

FY22

E

% Gross EBITDA APAT

Page | 3


Debtor And Creditor Days The Cash Conversion Cycle Will Rise With Volume

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research Break-Up Of Capital Employed Into FA And CA Net Debt And D/E


3.933.67

3.202.72

2.291.92

1.32

0.9

0.6

0.4

0.30.2

0.1

0.1

0.00.10.20.30.40.50.60.70.80.91.0

0.00.51.01.52.02.53.03.54.04.5

FY16

FY17

FY18

FY19

FY20

E

FY21

E

FY22

E

xRs bn Net debt Net D/E-RHS

High debtor days is not a big concern as 55% of revenue mix is derived from global FMCG companies Most of the RM is imported from Southeast Asian countries. It takes ~60 days from ordering to actual delivery. However GSL gets a 30 day credit. Hence, creditor days are effectively 30 Being a fixed asset light company, more capital is invested in working capital. We expect current assets as a percentage of capital employed to rise from 43.7% in FY19 to 48.2% in FY22E Conservative nature of the management is evident from the fact that net D/E has reduced substantially from 0.9 in FY16 to 0.3 in FY19 Net debt reduction over FY16-FY19 was largely led by reduction in total debt by Rs 1.12bn to Rs 2.98bn. We expect total debt to decline further by Rs 0.53bn over FY20-22E to Rs 2.45bn

71.2

75.3

80.6

68.9

71.2

74.4 76.4

6264666870727476788082

FY16

FY17

FY18

FY19

FY20

E

FY21

E

FY22

E

days Cash conversion days

59.8

54.4

50.0

56.3

55.4

53.5

51.8

40.2

45.6

50.0

43.7

44.6

46.5

48.2

0102030405060708090

100

FY16

FY17

FY18

FY19

FY20

E

FY21

E

FY22

E

%Fixed Assets Current Assets

50.8

58.662.7

56.4 57.5 58.7 59.8

39.0 42.6

49.2

40.4 41.2 40.4 40.4

20253035404550556065

FY16

FY17

FY18

FY19

FY20

E

FY21

E

FY22

E

days Debtor days Creditor days

Page | 4


Key Ratios Net Profit Margin Trend Fixed Asset Turnover Ratio Trend

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research Gross Block/Average Shareholders Fund Return On Equity


We expect APAT margin to expand by 87 bps in FY20E and stay flat thereon, owing to the effective tax rate cut to 25.2% Fixed Asset turnover jumped from 2.4x in FY16 to 2.8x in FY19. It will further expand to 3.1x by FY22E Over the last four years, GSL has reduced GB/Average equity from 1.8x to 1.2x in FY19. For a business that is riding on the performance of FMCG companies, this will mitigate the financial risk. We expect it to further go down to ~1x as future investment will only be through internal accruals The reduction in GB/Average equity has dragged the RoE from 24.9% in FY16 to 23.9% in FY19 despite a 130bps rise in APAT margin and expansion in Fixed Asset turnover ratio RoE will decline to 21.9% by FY22E, as we expect GB/Average equity to decline further to 0.9x

5.6

6.8

6.5

6.9

7.7 7.8 7.8

5.0

5.5

6.0

6.5

7.0

7.5

8.0

FY16

FY17

FY18

FY19

FY20

E

FY21

E

FY22

E

% Net profit margin

1.8

1.6

1.31.2

1.11.0

0.9

0.00.20.40.60.81.01.21.41.61.82.0

FY16

FY17

FY18

FY19

FY20

E

FY21

E

FY22

E

x Gross Block/Average Shareholders fund

24.9

28.8

24.423.9 24.3

23.1

21.9

2021222324252627282930

FY16

FY17

FY18

FY19

FY20

E

FY21

E

FY22

E

% ROE

2.4

2.6

2.8 2.82.9

3.0 3.1

2.0

2.2

2.4

2.6

2.8

3.0

3.2

FY16

FY17

FY18

FY19

FY20

E

FY21

E

FY22

E

x Fixed Asset turnover

Page | 5


Financial performance Return Ratios Operating And Financial Cash Flows

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research Cash Flow Yield Dividend Yield


GSL will generate Operating cash flow (OCF) of Rs 7.28bn over FY20-22E and free cash flow (FCF) of Rs 3.19bn Capital expenditure is an ongoing affair for the company and will stay in the Rs 1.2-1.5bn pa range from FY20-22E. This can comfortably funded through internal accruals Dividend yield for FY19 was 0.6%. We expect it to remain below 1% as management will reinvest the profits into the business which will generate >20% returns rather than distributing it to shareholders

1.2

1.3

2.8

2.3

2.3

2.7

0.7

0.8

1.0

1.0

1.0

1.3

-

0.5

1.0

1.5

2.0

2.5

3.0

FY17

FY18

FY19

FY20

E

FY21

E

FY22

E

Rs bnOCF FCF

24.9

28.8

24.4 23.9 24.323.1

21.9

13.5

17.2 16.918.0

19.5 19.6 19.6

13.7

17.6 17.1 18.3

19.8 19.7 19.2

10

15

20

25

30

FY16

FY17

FY18

FY19

FY20

E

FY21

E

FY22

E

% ROE ROIC ROCE

2.42.7

5.6

4.5 4.6

5.3

1.5 1.6 1.9 1.9 1.9

2.5

0

1

2

3

4

5

6

FY17

FY18

FY19

FY20

E

FY21

E

FY22

E

% OCF/EV FCFF/EV

0.30.2

0.6

0.7

0.8

0.9

0.00.10.20.30.40.50.60.70.80.91.0

FY17

FY18

FY19

FY20

E

FY21

E

FY22

E

% Dividend Yield

Page | 6


About the company Galaxy Surfactants manufactures surfactants and other

specialty ingredients that find application in finished home and personal care (HPC) products. The HPC segment includes skin care, oral care, hair care, cosmetics, toiletries and detergent products. Currently, GSL’s product portfolio comprises over 200 product grades, which are marketed to more than 1,700 customers in over 80 countries. Their major customers include Cavinkare Private Limited, Colgate-Palmolive (India) Limited, Dabur India Limited, Henkel, Himalaya, L’ORÉAL, Procter & Gamble, Reckitt Benckiser, Ayur Herbals (Private) Limited and Unilever.

The company has five manufacturing facilities in India-three in Taloja (one pilot plant as well) and one each in Tarapur and Jhagadia. Additionally, it has one facility in Suez (Egypt) and one in New Hampshire (USA). The company exports to Africa, Asia Pacific, North and South America and Europe.

Their products are categorized as performance surfactants and specialty care. (1) Performance surfactants: These products include

anionic surfactants (use for cleaning purpose) and non-ionic surfactants (cosmetic and personal care applications). They are used to manufacture shampoos, toothpastes, bath and shower gels, laundry detergents and dishwashing products. This product group depends primarily on lauryl alcohol, which is primarily purchased from South East Asia. This product category ranges over 45 product grades. GSL has 259,835MT (71% of total) of installed capacity for this category as at Mar-19.

(2) Specialty Care Products: This category includes amphoteric surfactants (mild surfactants), cationic surfactants (conditioning, softening aids), UV filters, preservatives, specialty ingredients, transparent bathing bars and proteins. These products can be used for manufacturing shampoos,

skin cleansers and other cosmetic products, hair conditioners, fabric softeners, sunscreens, preservatives and proteins. Specialty care products use fatty acids, phenols, DMAPA (Dimethyl Amido Propyl Amine) and PAA (Para Anisic Aldehyde), which are primarily sourced from India, South East Asia, USA and Europe. This product category comprises 155 product grades. 108,260MT of installed capacity (29% of total) is engaged in the manufacture of specialty care products.

Subsidiaries: GSL has two wholly-owned subsidiaries as enlisted below:

(1) Galaxy Chemicals Inc: This New Hampshire based subsidiary is engaged in the business of liasoning and marketing chemicals for the HPC industry. It also has a 600MT plant capacity for manufacturing specialty care products.

(2) Galaxy Holdings (Mauritius) Limited: This company is primarily involved in the business of making investments in downstream subsidiaries that are engaged in manufacturing /marketing of surfactants for the HPC industry.

a. Galaxy Chemicals Egypt S.A.E.: A wholly owned subsidiary of Galaxy Holdings (Mauritius) Limited, this company is engaged in the manufacture of both category of products.

b. Rainbow Holdings GmbH: Wholly Held by Galaxy Holdings (Mauritius) Limited, Rainbow Holdings is a German company that holds investments in downstream subsidiary companies.

c. TRI-K Industries Inc: It is involved in the (1) Trading and distribution of Cosmetic ingredients and technologies for the global cosmetic and personal care industry, (2)

GSL has to meet its customers’ strict quality standards to maintain good relations with them Below is an extract from Unilever’s CY18 Annual Report “Managing supplier risk is a key role of our Supply Chain function. All suppliers must complete our registration process to assess compliance with the mandatory requirements of our Responsible Sourcing Policy which includes anti-bribery and corruption. We conduct audits and follow up issues identified where necessary. Partner to Win is our approach to building long-term relationships with selected key strategic supplier partners in order to achieve mutual growth. It focuses on five key areas: quality and service, innovation, value, sustainability and capacity and capability. Partner to Win helps us strengthen supplier and customer collaboration and improves operational efficiency”

Page | 7


Manufacture of proteins. 76/24% of its shares are held by Rainbow Holdings/Galaxy Holdings (Mauritius).

In FY19, GSL expanded its total capacity from 3,63,480 MTPA to 3,68,095 MTPA, involving a total outlay of about Rs 1.69bn. Of this, nearly Rs 1bn of assets have been added to the Gross Block. The overall capacity

utilisation increased from 68% to 72% in FY19, with utilisation in select few product lines exceeding 90%.

While no other company exclusively caters to the HPC segment, global companies that currently manufacture surfactants are BASF Corporation, Clariant Limited, Croda International Plc, Evonik Industries, Solvay S.A., Stepan Company and The Dow Chemical Company.

GSL’s Holding Structure At A Glance

Source: Company, HDFC sec Inst Research

Galaxy Surfactants (GSL)

Galaxy Chemicals (USA)

Galaxy Holdings (Mauritius)

Rainbow Holdings (Germany)

TRI-K Industries (USA)

Galaxy Chemicals (Egypt)

100%

100%

100% 100%

76%

24%

Page | 8


Management profile Unnathan Shekhar – Managing Director

Mr. Unnathan Shekhar has been associated with GSL since May-86. He holds a Bachelors Degree in Chemical Engineering from the University Department of Chemical Technology (UDCT), Mumbai and a PGDM from Indian Institute of Management, Calcutta. He has 30+ years of experience in the chemical manufacturing industry. He looks after the overall management of the company's business and operations.

Ganesh Kamath – Executive Director (Finance) & CFO

Mr. Kasargod Ganesh Kamath joined the company in Sept-04 as a General Manager – Finance and Company Secretary. He is a qualified Company Secretary and Cost Accountant and also holds a Bachelor of Laws (LL.B.) degree from the Mangalore University. He has more than 20 years of experience in the banking and financial sector. He was designated as Vice President – Special Projects at Galaxy Surfactants in 2014 and was taken on the Board in Apr-17. As the Executive Director-Finance & CFO, he looks after Finance, Information Technology and Systems and Corporate Governance Processes.

K. Natarajan – Executive Director & COO

Mr. K. Natarajan has been associated with the company since Apr-93. He holds a Bachelor’s Degree in Commerce from University of Mumbai and is also a qualified Cost Accountant. He completed the Advanced Management Programme from the Harvard Business School in May 2016. He has previously worked with Indian Organic Chemicals Limited as Deputy Manager (Finance). He has headed diverse functions since joining Galaxy Surfactants including Finance, IT, Business Creation, Business Commercial, Global Sourcing and Supply Chain and was designated as Chief of Operations in Dec-09.

Succession Plan

The present MD, Mr U Shekhar is due to retire in 3 years from now. In this scenario, an investor is bound to wonder who his next successor would be. Although the company has not yet zeroed down on any one name, there are high chances that either Mr Natrajan, the current COO of the company or Mr Vaijanath Kulkarni, currently heading the Egypt operations, will be named the next MD.

Page | 9


P/E based Target Price (Sep-20E)

Galaxy is not purely a FMCG company as it lacks brand name and marketing channels. Similarly, it is not purely a chemical company either, at least in the current form of business, as it is a preferred supplier to leading global and domestic FMCG companies. GSL does have room for higher upside than chemical stocks. It becomes important to look at GSL’s valuation against consumer and chemical stocks as extreme benchmarks. It would be incorrect to conclude that the market is already pricing in Galaxy as a consumer company. We

believe that it should trade at a discount to consumer and at a premium to chemical companies.

Particulars (Rs/share) FY21E FY22E

EPS 77.59 89.10

Weighted average EPS 83.35

Valuation multiple (x) 22

Target price 1,834 Source: Company, HDFC Sec Inst Research

FMCG Companies

MCap (Rs bn)

CMP (Rs) RECO TP

(Rs) EPS (Rs/sh) P/E (x) P/BV (x) ROE (%)

FY18 FY19 FY20E FY21E FY18 FY19 FY20E FY21E FY18 FY19 FY20E FY21E FY18 FY19 FY20E FY21E Hindustan Unilever 4,343.54 2,011 NEU 1,960 23.8 28.1 35.0 42.4 84.6 71.4 57.5 47.5 59.7 55.2 11.4 10.8 73.2 80.3 31.4 23.4 Dabur India 787.57 447 BUY 497 7.8 8.2 9.6 11.5 57.6 54.6 46.7 38.8 13.8 13.5 11.9 10.3 25.9 25.0 27.1 28.5 Colgate Palmolive 420.51 1,545 NEU 1,412 25.0 27.6 34.0 39.1 61.7 56.1 45.5 39.5 27.6 28.2 22.3 18.9 48.7 49.8 54.8 51.7 Emami 145.35 320 BUY 464 11.3 11.0 13.0 15.0 28.3 29.0 24.6 21.4 7.2 7.0 6.7 6.5 27.2 24.4 27.8 30.8 Source: Company, HDFC Sec Inst Research Chemical Companies#

MCap (Rs bn)

CMP (Rs)

EPS (Rs/sh) P/E (x) P/BV (x) ROE (%) FY16 FY17 FY18 FY19 FY16 FY17 FY18 FY19 FY16 FY17 FY18 FY19 FY16 FY17 FY18 FY19

SRF 158.85 2,751 74.9 89.7 80.4 111.7 36.7 30.7 34.2 24.6 5.7 5.0 4.4 3.8 17.0 17.3 13.7 16.7 Tata Chemicals 151.97 597 30.3 39.0 95.5 45.4 19.7 15.3 6.3 13.1 2.3 2.0 1.4 1.3 12.4 13.5 25.6 9.9 Aarti Industries 141.74 1,646 30.8 38.5 41.0 56.7 53.4 42.8 40.1 29.0 12.1 9.9 8.4 5.4 23.9 25.3 22.6 23.4 Godrej Industries 139.02 413 4.8 7.6 10.0 17.5 86.0 54.3 41.3 23.6 4.6 5.2 4.2 3.2 5.2 9.0 11.2 15.4 Atul 119.69 4,035 92.4 108.9 93.2 147.0 43.7 37.1 43.3 27.5 7.4 6.0 5.3 4.4 20.7 18.0 13.1 17.6 Sudarshan Chemical 25.99 376 10.1 14.6 12.2 19.5 37.2 25.8 30.8 19.3 8.3 6.8 5.9 4.6 24.3 29.2 20.6 26.8 Bodal Chemicals 10.18 83.3 7.9 12.2 10.7 11.7 10.5 6.8 7.8 7.1 3.9 2.5 1.5 1.3 44.0 44.5 23.1 18.8 Source: Bloomberg, Company, HDFC Sec Inst Research| #Companies not under our formal coverage

We assign valuation multiple of 22x Sept-20E EPS and arrive at a target price of Rs 1,834 Valuation multiple for GSL should be higher than chemical and lower than FMCG companies, given the nature of its products

Page | 10


Peer Set Comparison#

MCap (Rs bn)

CMP (Rs) RECO TP

(Rs) EPS (Rs/sh) P/E (x) P/BV (x) ROE (%)

FY18 FY19 FY20E FY21E FY18 FY19 FY20E FY21E FY18 FY19 FY20E FY21E FY18 FY19 FY20E FY21E Vinati Organics 114.85 2,235 NEU 2,237 28.0 55.0 73.3 85.7 79.8 40.7 30.5 26.1 14.4 10.9 8.1 6.3 19.5 30.6 30.5 27.1 Galaxy Surfactants 52.40 1,478 BUY 1,834 53.9 66.9 77.6 89.1 27.4 22.1 19.0 16.6 6.0 4.9 4.0 3.3 23.9 24.3 23.1 21.9 Navin Fluorine International Ltd 37.23 754 BUY 834 36.4 30.2 36.8 40.7 20.7 25.0 20.5 18.5 3.8 3.5 3.1 2.8 19.8 14.5 16.0 15.9

Alkyl Amines 17.70 868 BUY 1,280 31.5 41.1 45.5 59.5 27.6 21.1 19.1 14.6 6.0 4.8 4.1 3.4 23.7 25.3 23.2 25.2 Balaji Amines 11.36 351 BUY 459 34.8 35.4 34.5 40.4 10.1 9.9 10.2 8.7 2.3 1.9 1.6 1.3 23.2 19.4 15.3 15.4 Source: Company, HDFC Sec Inst Research | #Companies under our formal coverage |

Assumptions % FY16 FY17 FY18 FY19 FY20E FY21E FY22E Growth assumptions Rev/ton -6.9 7.1 1.7 4.1 2.8 3.8 4.5 RM/ton -14.0 20.1 0.8 3.0 2.6 3.5 3.5 Power and fuel cost -7.3 5.9 14.6 23.0 15.0 16.0 17.0 Employee cost 12.4 -2.0 3.2 12.7 6.0 6.0 6.0 Other expenses -1.9 -0.2 8.2 15.0 15.0 20.0 25.0 Other income 65.8 78.0 -3.0 6.7 5.0 5.0 5.0 Volume growth Performance Surfactants 1.6 16.8 13.2 3.6 3.5 4.8 3.5

Specialty Care 6.3 4.0 7.6 18.8 18.0 18.0 18.0 Total 3.3 12.0 11.2 8.8 8.9 10.1 9.7 Margins Gross 36.9 32.4 30.7 31.7 31.7 31.9 32.5 EBITDA 13.0 12.6 11.8 12.6 12.5 12.5 12.4 APAT 5.6 6.8 6.5 6.9 7.7 7.8 7.8 Source: Company, HDFC Sec Inst Research

Recent channel checks with relevant HPC product dealers suggested that the market fear of the FMCG slowdown is overrated We assume that volume will grow in a range of 9-10% per annum in FY20-22E

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Income Statement (Consolidated) (Rs bn) FY18 FY19 FY20E FY21E FY22E Revenues 24.34 27.63 30.98 35.40 40.59 Growth % 12.6 13.5 12.1 14.3 14.7 Raw Material 16.86 18.87 21.16 24.11 27.38 Employee Cost 1.46 1.65 1.75 1.85 1.96 Other Expenses 3.14 3.65 4.19 5.01 6.20 EBITDA 2.88 3.47 3.88 4.43 5.04 EBIDTA Margin (%) 11.8 12.6 12.5 12.5 12.4 EBITDA Growth % 6.0 20.7 11.7 14.2 13.8 Depreciation 0.49 0.51 0.57 0.63 0.70 EBIT 2.39 2.96 3.31 3.80 4.34 Other Income (Including EO Items) 0.10 0.11 0.11 0.12 0.13

Interest 0.31 0.30 0.25 0.25 0.25 PBT 2.19 2.77 3.17 3.68 4.22 Tax 0.61 0.86 0.80 0.93 1.06 RPAT 1.58 1.91 2.37 2.75 3.16 EO (Loss) / Profit (Net Of Tax) - - - - - APAT 1.58 1.91 2.37 2.75 3.16 APAT Growth (%) 7.1 20.9 24.2 15.9 14.8 AEPS (Rs) 44.6 53.9 66.9 77.6 89.1 AEPS Growth % 7.1 20.9 24.2 15.9 14.8


Balance Sheet (Consolidated) (Rs bn) FY18 FY19 FY20E FY21E FY22E SOURCES OF FUNDS Share Capital 0.35 0.35 0.35 0.35 0.35 Reserves And Surplus 6.83 8.41 10.42 12.74 15.40 Total Equity 7.19 8.77 10.77 13.09 15.76 Long-term Debt 0.72 0.89 0.69 0.65 0.65 Short-term Debt 2.76 2.09 1.82 1.80 1.80 Total Debt 3.48 2.98 2.51 2.45 2.45 Deferred Tax Liability 0.28 0.32 0.35 0.39 0.43 Long-term Provision and others 0.07 0.11 0.12 0.13 0.14 TOTAL SOURCES OF FUNDS 11.02 12.18 13.75 16.05 18.77 APPLICATION OF FUNDS Net Block 4.47 5.19 5.46 6.12 6.78 Capital WIP 0.25 0.83 1.28 1.35 1.43 LT Loans And Advances and others 0.65 0.69 0.76 0.84 0.94 Total Non-current Investments - - - - - Inventories 3.46 3.51 4.02 4.58 5.20 Debtors 4.18 4.27 4.88 5.69 6.65 Cash and Cash Equivalent 0.28 0.26 0.22 0.53 1.12 Other Current Assets 1.27 0.94 1.10 1.31 1.58 Total Current Assets 9.19 8.97 10.22 12.11 14.55 Creditors 3.28 3.06 3.50 3.92 4.49 Other Current Liabilities & Provns 0.26 0.45 0.46 0.45 0.44 Total Current Liabilities 3.54 3.50 3.96 4.37 4.93 Net Current Assets 5.65 5.47 6.26 7.74 9.62 TOTAL APPLICATION OF FUNDS 11.02 12.18 13.75 16.05 18.77


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Cash Flow Statement (Consolidated) (Rs bn) FY18 FY19 FY20E FY21E FY22E Reported PBT 2.19 2.77 3.17 3.68 4.22 Non-operating & EO Items (0.10) (0.11) (0.11) (0.12) (0.13) Interest Expenses 0.31 0.30 0.25 0.25 0.25 Depreciation 0.49 0.51 0.57 0.63 0.70 Working Capital Change (0.92) 0.16 (0.83) (1.17) (1.28) Tax Paid (0.61) (0.86) (0.80) (0.93) (1.06) OPERATING CASH FLOW ( a ) 1.35 2.78 2.25 2.33 2.69 Capex (0.54) (1.81) (1.28) (1.36) (1.44) Free Cash Flow (FCF) 0.81 0.97 0.97 0.97 1.26 Investments - - - - - Non-operating Income 0.10 0.11 0.11 0.12 0.13 Others 0.00 0.08 0.04 0.04 0.05 INVESTING CASH FLOW ( b ) (0.44) (1.62) (1.13) (1.20) (1.27) Debt Issuance/(Repaid) (0.45) (0.50) (0.47) (0.06) - Interest Expenses (0.31) (0.30) (0.25) (0.25) (0.25) FCFE 0.05 0.17 0.24 0.66 1.01 Share Capital Issuance - - - - - Change in General Reserve (0.13) (0.30) (0.37) (0.43) (0.49) Dividend (0.02) (0.08) (0.07) (0.08) (0.10) Others (0.90) (1.18) (1.16) (0.82) (0.84) FINANCING CASH FLOW ( c ) 0.01 (0.02) (0.04) 0.31 0.59 Net cash flow (a+b+c) 0.01 (0.02) (0.04) 0.31 0.59 Closing Cash & Equivalents 0.28 0.26 0.22 0.53 1.12


Key Ratios

FY18 FY19 FY20E FY21E FY22E PROFITABILITY % EBITDA Margin 11.8 12.6 12.5 12.5 12.4 EBIT Margin 9.8 10.7 10.7 10.7 10.7 APAT Margin 6.5 6.9 7.7 7.8 7.8 RoE 24.4 23.9 24.3 23.1 21.9 RoIC 16.9 18.0 19.5 19.6 19.6 RoCE 17.1 18.3 19.8 19.7 19.2 EFFICIENCY Tax Rate % 27.8 31.0 25.2 25.2 25.2 Fixed Asset Turnover (x) 2.8 2.8 2.9 3.0 3.1 Inventory (days) 52 46 47 47 47 Debtor (days) 63 56 58 59 60 Other Current Assets (days) 19 12 13 14 14 Payables (days) 49 40 41 40 40 Other Current Liab & Provns (days) 4 6 5 5 4 Cash Conversion Cycle (days) 81 69 71 74 76 Net Debt/EBITDA (x) 1.1 0.8 0.6 0.4 0.3 Net D/E 0.4 0.3 0.2 0.1 0.1 Interest Coverage 7.8 9.9 13.1 15.4 17.6 PER SHARE DATA (Rs) EPS 44.6 53.9 66.9 77.6 89.1 CEPS 58.3 68.3 83.0 95.3 108.9 Dividend 3.6 8.4 10.4 12.1 13.9 Book Value 202.8 247.3 303.8 369.3 444.5 VALUATION P/E (x) 33.2 27.4 22.1 19.0 16.6 P/Cash EPS (x) 25.4 21.6 17.8 15.5 13.6 P/BV (x) 7.3 6.0 4.9 4.0 3.3 EV/EBITDA (x) 17.1 14.3 12.9 11.4 10.1 EV/Revenue (x) 2.0 1.8 1.6 1.4 1.3 Dividend Yield (%) 0.2 0.6 0.7 0.8 0.9 OCF/EV (%) 2.7 5.6 4.5 4.6 5.3 FCFF/EV (%) 1.6 1.9 1.9 1.9 2.5 FCFE/M Cap (%) 1.5 1.8 1.8 1.8 2.4


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Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

Date CMP Reco Target 30-Sep-19 1,478 BUY 1,834

RECOMMENDATION HISTORY

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Galaxy Surfactants TP

HDFC securities Institutional Equities Unit No. 1602, 16th Floor, Tower A, Peninsula Business Park, Senapati Bapat Marg, Lower Parel, Mumbai - 400 013 Board : +91-22-6171 7330 www.hdfcsec.com

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INITIATING COVERAGE 30 SEP 2019 Galaxy Surfactants Surfactants - IC - HDFC sec...volatility in f...

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