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Optimism Re-iterated

In a recent interaction, the Galaxy management reiterated its volume growth guidance of 6-8% as the company remains confident of post-Covid demand recovery in the speciality care segment while performance segment volumes are expected to be robust due to structural changes. Given the company is at the forefront of innovation and a powerful Oleochemicals portfolio, it is well-positioned for the surge in oleochemicals to replace harmful petrochemicals. Further, its products span the HPC segments from mass to masstige to prestige. Long-term strategic partnerships with global MNCs, local and regional players provide formidable entry barriers, and hence revenue stability and potential to expand its product lines. We continue to remain positive with an ACCUMULATE rating. The downgrade in rating from buy to Accumulate is largely due to the current price movement in the stock.

6-8% long-term volume growth guidance remains intact:

Management reiterated its long-term volume growth guidance of 6-8% as the company remains confident of demand recovery in speciality care segment post-Covid while performance segment volumes are expected to be robust due to structural change in consumer behaviour due to Covid. For speciality care, the major revenue contributor is the rest of the world portfolio while India’s contribution remains ~15%.

New products see recovery:

The company has stated that the performance of new products introduced last year was impacted due to Covid. However, going forward with economies opening up, new products introduced will see a robust uptick. The company expect new products to contribute close to ~7 of revenue as against 4% in FY21.

Capex guidance -Management has highlighted that CAPEX for the speciality care segment has been further delayed by 6 months and the unit will be commercialised by 4QFY22. Delay has been mainly on account of the unavailability of manpower. Further, management has guided for CAPEX of INR 1.5bn p.a. FY22 onwards.

Valuation and outlook:

Galaxy’s customers operate within the consumer-centric personal & home care segments where a number of its products enjoy a strong positioning in the ingredients value chain. Accordingly, it benefits from high growth in the FMCG industry, which is largely unaffected by economic cycles. The lifecycle of its customers is linked to that of customers’ products, which may be several years or even decades in the case of some products.

We believe Galaxy deserves a higher valuation multiple compared to other chemical companies due to its higher return ratios and strong visibility on earnings growth. The company is also relatively less exposed to the general risks faced by chemical companies, such as commodity price fluctuations and cyclicality.

Hence, we assign a PE multiple of 31x (premium to other chemical companies as discussed above) on FY23E earnings of Rs 112 post which we arrive at a target of Rs3, 500, an upside of 11% from current levels. While current and attributed valuations may appear demanding, we strongly believe they are justified given the abovementioned prospects.

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