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Performance driven by a better product mix and new age products

* Against the guided EBITDA/kg of INR16-18, GALSURF reported an EBITDA/kg of INR26.8 (61% higher than our estimate, up 48% YoY). The current supply chain disruption has boosted demand, which is sold at a premium and aided the higher-than-usual margin in the past two quarters. Total volumes declined by 4% QoQ and 8% YoY to 55.3tmt (v/s 57.5tmt in 4QFY22).

* The management said global demand continues to witness a cut back, although demand from the Indian market remains stable (expected to gain momentum from 2QFY23 due to festive demand). Signs of a slowdown are also visible in Europe, which adversely affected volumes of Specialty Care Products. Supplyside constraints are improving and usher stability to earnings, with a sustainable EBITDA/kg of INR16-18.

* Its US performance has been robust over the past 18-24 months, with the introduction of new products in the Specialty Care Products segment. Owing to the beat in our estimates, we raise our FY23 EBITDA/EPS estimate by 11%/13%, while also raising our EBITDA/kg margin to INR20 in FY23.

* Fatty alcohol prices declined by 20% QoQ to USD2, 287/mt (up 11% YoY) in 1QFY23 and has stabilized at this level for now. The company’s plant at Tarapur and Jhagadia, which manufacture mild surfactants and non-toxic preservatives, were fully operationalized in 1QFY23 and aided its performance.

* Continued focus on R&D (with an annual expenditure of INR400-500m) and increased wallet share from existing customers islikely to drive volume growth and expand EBITDA margin. Volume grew by ~6% CAGR over the last five years. We build a similar growth over FY22-24 as well. We maintain our Buy rating with a TP of INR4,000, implying a potential upside of 25%.

Lower than expected RM cost drives beat

* Revenue stood in line at INR11.6b, up 40% YoY and 10% QoQ.

* EBITDA grew 36% YoY and 2% QoQ to INR1.5b (30% higher than our estimate).

* Gross margin fell 220bp QoQ to 30.8%, with EBITDAM at 12.8% (est. 9.6%) in 1QFY23.

*  PAT grew 31% YoY and 2% QoQ to INR1b..

Valuation and view – maintain our Buy rating

*  Realization stood at INR210/kg in 1QFY23, with gross margin at INR64.6/kg (up 48% YoY) and EBITDA/kg at INR26.8 (up 48%). Total volume fell 8% YoY to 55.3tmt, with volumes for Performance Surfactants/Specialty Care Products at 35.4tmt/19.8tmt (down 9%/6%).

* Capex guidance stood at INR1.5b each for FY23/FY24, similar to that in FY22. Expansion of products is expected to be across the board, but the focus will mainly be on Specialty Care Products.

* The stock is currently trading at 36x FY24E EPS and 23x FY24E EV/EBITDA. We value the company at 45x FY24 EPS, or INR89, to arrive at our TP of INR4,000. We maintain our Buy rating, with a potential upside of 25%.