Higher per unit EBITDA leads profitability
Our BUY recommendation on GALSURF with a TP of INR 1,900 is premised on ((1) 55% revenues come from MNCs, which ensures stickiness of business, (2) EBITDA margins are stable at >12% since fluctuations in RMC are easily passed through to customers, and (3) Strong return ratios (RoE/RoIC of 26.3/24.1% in FY22).
* View on the result: EBITDA/APAT were 31/40% above expectations as vols were 13% higher than anticipated at 58.1kT.
* Despite vol growth, lower RMC result in a muted top-line: In 4Q, revenue jumped 5% QoQ to INR 7bn attributable to (1) 7% jump in overall volumes, (2) Offset by, 3% decline in per unit realisation as RMC declined by 1% (direct pass on to customers). In FY20, despite the 4.4% YoY jump in blended vols, revenue declined by 6% YoY to INR 26bn as per unit realisation dropped by 10% YoY (RMC per tonne decline 15%).
* Dramatic improvement in margins: RMC per unit declined by 15% while realisation declined by 10% only. This has resulted in higher Gross margins to 36.3% (+374/473bps QoQ/YoY). EBITDA margins improved as well to 15.6% (+250/166bps YoY/QoQ).
* Operational performance: FY20 volumes grew 4.4% YoY to 224kT, led by Performance Surfactants (+6% YoY) to 144kT. Specialty care (36% of vol mix) grew 2% YoY to 81kT. Blended vols growth was largely driven by the Africa/Middle East/Turkey (AMET) market +9% YoY (42% of vol mix) followed by 1% jump in vols sold in the Rest of the World (25% of mix).
* Outlook on consolidated EBITDA: We expect EBITDA to dip by 20% YoY in FY21 to INR 3bn dragged by 19% dip in per ton EBITDA to INR 13K and muted volume outlook given supply side restrictions because of Covid-19. In FY22, EBITDA should jump 81%YoY to INR 5bn led by 17/55% increase in blended vols/per unit EBITDA to 260kT/INR 20.6K per ton. This is owing to recovery in global demand and greater stress on personal hygiene.
* View on the consolidated balance sheet: The company’s cash jumped 2.4x YoY to INR 603mn leading to a 5% YoY dip in Net debt to INR 2,593mn. Consequently, Net Debt/Equity and Net Debt/EBITDA reduced to 0.2/0.7x vs. 0.3x/0.8x in FY19. RoE/RoIC remained at a steady 23/19% in FY20 vs. 24/18% in FY19 and 24/17% in FY18.
* Change in estimates: We raise our FY22E EPS estimate by 9% to INR 93.5 in anticipation of faster recovery in demand.
* DCF based valuation: Our TP is INR 1,900 based on Sep-21E cash flows (WACC 10%, Terminal growth rate 3.0%). The stock is trading at 15.8x FY22 EPS
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