Galaxy Surfactants - Buy

Anand Jain / 12 May 2011

Given the fact that the company commands a huge market share of up to 60 per cent and has ambitious plans for capacity expansion, it would make sense to invest in this IPO.

Galaxy Surfactants

Given the fact that the company commands a huge market share of up to 60 per cent and has ambitious plans for capacity expansion, it would make sense to invest in this IPO.
 
  • The company serves all the top companies in the FMCG space and supplies them with the raw materials.
  • The total capex plan of the company is of Rs 340 crore and the company intends to raise Rs 200 crore form the issue.
  • The pricing for the products supplied are fixed on a quarterly basis and the company enjoys long-term relationship with its clients. 
Galaxy Surfactants Ltd (GSL), engaged in the manufacturing of surfactants and specialty chemicals, is tapping the equity market with a price band of Rs 325 – Rs 340 to raise near about Rs 192 to Rs 201 crore. The company serves all the top companies in the FMCG space and supplies them with the raw materials (surfactants and specialty chemicals) required for personal and home care products. The company has all the big brands under its umbrella in both domestic and overseas markets. The clientele includes names like Ayur, CavinKare, Dabur, Emami, IT, Henkel, L’Oreal, Reckitt Benckiser, etc. The surfactants contribute 85 per cent to the topline while the rest is contributed by the speciality chemicals.
 

It is claimed by the company that it enjoys 60 per cent market share for surfactants in the domestic market and has footprints across 70 countries in the world. At present the company has a product portfolio of 66 products. The company has ten patents in the US and 18 patents in India. In addition to this, the company has filed for another eight patents in India and one in Europe. The company presently has three manufacturing units at Tarapur, two manufacturing units at Taloja, Maharashtra and one manufacturing unit in the US. The total capex plan of the company is of Rs 340 crore and the company intends to raise Rs 200 crore form the issue.

 

Product

Capacity (MTPA)

FY08

FY09

FY10

FY11E

FY12E

FY13E

OSAA

Installed Capacity

97,000

1,12,500

1,40,000

1,38,240

2,68,240

2,93,240

(Organic Surface Service Agents)

Available Capacity

91,983

1,06,458

1,18,958

1,38,240

2,29,990

2,89,573

 

Production

71,958

84,093

1,03,101

1,25,112

1,95,856

2,45,786

 

Utilisation (%)

78

79

87

91

85

85

 

 

 

 

 

 

 

 

FA/FAE

Installed Capacity

6,600

6,600

8,500

9,000

9,000

17,000

(Fatty Alkanomides/Fatty Acid Esters)

Available Capacity

6,600

6,600

7,142

8,667

9,000

15,000

 

Production

2,322

2,300

3,382

4,420

8,152

9,607

 

Utilisation (%)

35

35

47

51

91

64

 

 

 

 

 

 

 

 

Other Specialty Chemicals

Installed Capacity

5,500

6,090

6,940

6,990

22,220

38,220

 

Available Capacity

5,500

5,548

6,465

6,948

15,379

32,387

 

Production

3,563

3,296

4,305

5,786

13,421

20,095

 Source: RHP

Utilisation (%)

65

59

67

83

87

62

 


For the balance it has tied up with different financial institutions and has also gone ahead with external commercial borrowings to fund the rest of the capex. The funds to be raised will mainly be utilised for setting up a new manufacturing facility at Jhagadia, Gujarat with a capacity of 77,000 MTPA and also to fund the capital expenditure of its subsidiary GC Egypt where it is installing a capacity of 90,000 MTPA. It is also expanding its capacities in their existing plants at Tarapur and Taloja. The company is adding 2,750 MTPA for other speciality chemicals in Tarapur and 5,000 MTPA for surfactants (OSAA) in Taloja. The total expansion plan is set to be completed by FY13 and the details of that are provided in the table below.
 
As mentioned above, the company enjoys a market share of 60 per cent in the domestic market and the one question that potential investors would be curious about is how is that other players are not entering the space if such a huge share of the pie is being monopolised by just a single company. One thing that needs to be brought to notice is that to supply any one particular product the company has to basically pass through various audit processes and other formalities from its customers and only after that is it able to start regular supplies. Sometimes the approval process may take as long as two years, according to what the management had to say during an analyst meet.
 
The pricing for the products supplied are fixed on a quarterly basis and the company enjoys long-term relationship with its clients. A risk that remains is that the company has high dependence on its top ten clients, contributing up to 65.86 per cent of the total sales for 9MFY11. Another concern that needs to be mentioned is that the company is dependent on only one vendor for one of its raw material called ethylene oxide which constituted 14.33 per cent of the total raw material cost as of December 31, 2010. The only manufacturer is Reliance Industries with whom the company has long-term supply contracts and has agreed to increase the supply as and when the capacities of the company will increase going forward.
 
In July 2009 the company acquired US-based TRI-K for about USD 5 million along with its 100 per cent subsidiary Maybrook Inc. It is into the manufacturing of protein-based ingredients for use in personal care products for hair care and skin care. The acquisition has offered the company technological and in-house manufacturing capabilities for protein-based products, high-end ingredients’ distribution business, customer portfolio and technical marketing set-up for specialty ingredients. Protein-based products find application in premium FMCG products which are witnessing a high growth in developing countries due to lower penetration. The acquisition would also help Galaxy cater to the demand for premium products in the US and neighbouring markets. Most of Galaxy’s customers have a strong presence in the US.
 
Coming to the financial front, for the last five years the company’s topline and bottomline have witnessed a growth of 24 per cent and 63 per cent respectively from FY06 to FY10. For 9MFY11 the sales of the company were Rs 648.03 crore as against Rs 644.26 crore in FY10. The net profit for 9MFY11 was Rs 42.80 crore as against Rs 37.8 crore in FY10. The cash flow from its operating activities has been positive since FY06. The company’s exports constituted almost 57 per cent of the topline for 9MFY11. On the post-issue capital the company is likely to trade at a P/E of 13.47 times and 14.09 times its upper and lower price bands. On another parameter the company is likely to trade at a market cap to sales of 0.89 times to 0.93 times on its respective price bands. Therefore our recommendation to investors is to invest in this IPO with a long-term perspective.
 
 
Issue Information
Rating 49
 
Issue Opens on
13-May-11
 
Issue closes on
19-May-11
 
Issue Size (No. of Shares)
59.30 lakh equity shares
 
Price Band (Rs.)
Rs. 325-340
 
Issue Route
Book Building
 
Promoters
Unnathan Shekhar, Gopalkrishnan Ramkrishnan, Shasshikant R Shanbag and Sudhir D Patil
 
Post issue Equity
2.36 crore equity shares
 
Lead Managers
Motilal Investment Advisors, Centrum Capital
 
Listing
BSE, NSE
 
Retail Portion
20.75 lakh equity shares
 
QIB Portion
29.65 lakh equity shares
 
Non Institutional Portion
8.90 lakh equity shares
 



Financial Performance (`/Cr)
 
9MFY11
FY10
Sales
648.03
644.26
Other Income
2.19
4.30
Expenditure
565.24
563.66
Operating Profit
82.79
80.60
Depriciation
16.60
17.87
Interest
13.75
12.84
Net Profit
42.80
37.88



Share Holding Pattern
Pre Issue
Post Issue
Promoters
75.97
56.92
Others
24.03
18.01
Public
 
25.07
Total
100
100



 

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