Galaxy Surfactants - IPO: Invest

The company's track record in executing projects and bright prospects for personal and home-care products are reasons to invest in this offer.



A consistent financial track record, ten-year plus relationships with clients in the Indian FMCG space and bright and stable growth prospects for personal and home-care products, particularly in the Asia Pacific markets, make Galaxy Surfactants (Galaxy) an attractive investment bet even for conservative investors.

The company is offering shares in the price band of Rs 325-340 through a book-built initial public offer (IPO) to raise between Rs 192 and Rs 202 crore. At the higher end of the price band, the stock would discount the company's estimated FY-11 earnings per share (Rs.24), on a fully diluted equity base by 14 times.

This is even without taking into account the volume growth likely from the ongoing capacity expansion projects. That is in line with the PEs of global specialty chemical-makers and lower than those enjoyed by Indian peers such as BASF India (19 times).

Galaxy Surfactants makes 66 different specialty chemicals that fall under the broad categories of organic surface active agents (OSAA), fatty alkanolamides and fatty acid esters (FAs) and other products catering mainly to the home and personal care industry. These products impart key properties such as dirt removal, cleaning, foaming, UV protection and conditioning properties to soaps, shampoos, skin creams, household cleaning and detergent products.

Highly competitive

Exports of these chemicals and forays into the US (through the buyout of an existing business) have made for a diversified revenue base, with half the company's sales coming from Indian clients and the rest from clients in 70 countries spread across the Asia Pacific, American and European markets.

The global market for specialty chemicals is highly competitive, with the users (global consumer giants such as Unilever, P&G, L'Oreal, and so on,) calling the shots on both pricing and margins.

The market is dominated by multinational suppliers such as BASF AG, Clariant, Rhodia and Huntsman Corporation which have research strengths and a vast product portfolio spanning specialty chemicals for the consumer, paper, paints and other industries.

These ingredient-makers, however, wield limited pricing power and may be forced to absorb higher costs from exceptional spikes in input prices.

The variability in Galaxy's margins in years such as 2008-09, suggests that this may be the case in India too. Galaxy's focus on just home and personal care ingredients, where it has long standing supply contracts with Indian units of multinationals, however does endow it with some advantages.

Given that the market for home and personal care products in India is under-penetrated, it offers scope for double digit growth. Galaxy claims a 60 per cent market share in its range of personal care ingredients in the Indian markets, though its global share is less than 1 per cent.

Galaxy's financials over the last five years, however, suggest that it has managed both competitive and input price pressures well. The 33 per cent compounded annual growth in sales over the last three years have come largely from volume growth as the company added steadily to its client list and augmented manufacturing capacities.

Even as operating profit margins have swung between 12 and 14 per cent, net profits have grown at a healthy CAGR of 30 per cent. The company made net profits of Rs.42.7 crore on sales of Rs.682 crore in the nine months ended December 2010.

The company's track record in executing projects, the current utilisation rates of 87 per cent on the key product line of OSAAs and good demand prospects for personal and home-care products are reasons to invest in this IPO.

The offer proceeds are to be deployed mainly in preference shares of a wholly-owned Egyptian subsidiary, which is setting up a Greenfield surfactant unit, a new manufacturing facility at Gujarat and debottlenecking of units at Taloja and Tarapur. Overall capacities are expected to expand by 2.2 times over a two-year span, with the first of the new projects set to go onstream in August 2011. The offer closes on May 19.

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