IGI Logo

Transient impact from multiple factors

Galaxy Surfactants’ (GSL) Q2FY22 volumes declined 6.7% YoY due to its inability to supply though underlying demand was steady due to multiple factors including unavailability of key raw material EO, logistic issues and sharp rise in cost, and raw material inflation. This has led to a decline in gross profit / kg by 4.4% YoY to Rs39.6; higher freight cost and lower volumes have impacted EBITDA / kg by 37.5% YoY to Rs12. The company sees volatility persisting for the next two quarters, but remains confident of bouncing back with normalisation of situation. It has reiterated EBITDA per kg guidance of Rs16-18/kg. We see GSL having strong customer backing built over time, and present situation as transient in nature. We have cut our EPS estimates for FY22E by 20.5% due to near-term headwinds, but only 6.6% for FY23. We cut target price to Rs2,875 (from Rs3,076) valuing the stock at 30x FY23E EPS. Maintain HOLD.

* Sales volumes dipped 6.7% YoY. GSL’s revenue rose 22% YoY to Rs8.8bn driven by 30.8% growth in realisation to Rs149 per kg (on RM inflation) while volume declined 6.7% to 58.8kte from supply-chain disruption and non-availability of EO (ethylene oxide). India volume was flat YoY while RoW and AMET volumes down 7.1% and 13.3%, which were severely impacted from logistic issues, unavailability of raw material and volatility in LA and EO prices. Performance product volumes dipped 8.2% YoY and specialty care volumes were down 3.7% YoY. It attributed lower volume CAGR mainly to supply-chain bottlenecks, which it believes may continue for next 2 quarters. The company has seen demand remaining stable, which was the only silver lining.

* Gross profit per kg was Rs39.6, down 4.4% YoY (down 9.6% QoQ). Gross profit dipped 10.8% YoY to Rs2.3bn; gross profit margin was 26.5% (down 520bps QoQ), which is more optical due to higher raw material prices and dip in gross profit per kg on lag in price hike implementation. The key raw material has seen very sharp volatility in prices which has impacted margins. Other expenses rose 27.4% YoY to Rs1.1bn on higher freight cost. EBITDA per kg was Rs12, impacted from lower spreads and higher operating cost despite decline in volumes. The company has maintained its EBITDA guidance at Rs16-18/kg despite near-term dip in margins. Net profit declined 48.7% YoY to Rs419mn due to higher tax rate on geographical mix change.

* Conference call highlights. 1) Demand has been intact, but the company’s inability to supply on time due to logistics issue hurt volumes and wallet share. It remains confident of bouncing back with normalisation of situation; 2) sharp volatility in raw material prices will hurt margins particularly major fall in prices of LA; 3) EO problem has been resolved in past 45 days; 4) top 5 products contributed to 60-65% of revenue; 5) company expects commissioning of specialty chemicals plants at Jhagadia (mild surfactants and phenoxyethanol) should support volume growth in next calendar year; and 6) it believes the situation is transient with no structural impact on its business.

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer