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Risk of gross profit/kg normalisation

Galaxy Surfactants’ (GSL) Q4FY21 gross profit/kg was strong at Rs45 (up 10.6%), but we see this tapering in coming quarters. EBITDA/kg of Rs18.6/kg was impacted from higher cost inflation (which are unsustainable). Net profit continues to grow strong at 25% YoY. We see risk of normalisation in gross profit/kg capping the net profit growth in FY22. We remain excited about new green product launches which will help GSL strengthen its market position in specialty care products. We are incrementally seeing tier-1 customers emphasising reduction in carbon footprint; GSL seems prepared for this transition, in our view. Despite strong performance in Q4FY21, we are broadly retaining our EPS estimates as we factor gross profit normalisation in FY22. However, we upgrade our target price to Rs3,102 (from Rs2,583) as we raise our P/E multiple to 30x (from 25x); we downgrade our rating to HOLD (from Buy) on the recent rally in stock price and like muted FY22 earnings.

Specialty chemical volumes rose 10.5% YoY.

GSL revenue rose 19.3% YoY to Rs7.8bn driven by 10% growth in realisation to Rs124/kg and 8.4% volume growth to 63kte. India volume grew slower at 5.8% YoY, AMET was strong at 13.4% and RoW stable at 3.8%, which was impacted from logistic issues. Performance product volumes rose 7.4% YoY and specialty care volumes up 10.5% YoY despite low growth in RoW.

Gross profit/kg was Rs45.4, up 10.6%.

Gross profit rose 20% YoY to Rs2.9bn and benefited from rise in LA prices (inventory gains, in our view). Gross profit/kg has been very strong at Rs45.4, and the company hinted it may taper down in the next few quarters. We see this benefit mostly accruing from subsidiaries (Egypt and Tri-K), and GSL hinted partially gross profit benefited from rise in specialty care mix in Egypt. EBITDA grew slower at 14.4% YoY to Rs1.2bn; EBITDA/kg was at Rs18.6, up 5.5% YoY. Rise in operating cost by 24% was due to one-time bonus to employees and higher freight cost, which are unsustainable. Net profit grew 25.3% YoY to Rs787mn. The company has maintained its EBITDA/kg guidance of Rs16-18/kg.

Conference call highlights.

1) RoW volumes were hurt from logistics issues. Company expects volume growth to pick-up.

2) Indian volumes slowing down to 5.8% YoY is not an indication of any slowdown, but just quarterly volatility.

3) company does not see much risk in passing on RM inflation as demand remains stable, and it would be tough only if demand starts getting impacted;

4) it also does not see much risk of shift to petrochemical-based surfactants on relatively sharper rise in LA prices;

5) India business had 15% revenue from specialty care products; specialty care majority revenues come from RoW. Egypt is seeing a rise in specialty contribution;

6) Galaxy margins were impacted from withdrawal of export incentives (MEIS scheme) and no alternative benefit is announced yet; and

7) Galaxy sees its capex plans delayed by six months. It plans to incur annual capex of Rs1.5bn.

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